Sometime before Memorial Day, the United States Senate will consider several proposals to put taxpayers on the hook for "national catastrophe insurance" liabilities that could easily top $100 billion. The proposed legislation, intended mostly to reduce soaring homeowners insurance premiums along the Atlantic seaboard, would damage the environment while likely failing to keep consumers’ insurance costs down. It’s a terrible idea.
Government-backed catastrophe insurance, also known as "backstopping," would transform the U.S. Treasury into the insurer of last resort for nearly every disaster-prone home in the country. Two proposals that have passed the House of Representatives would expand an already troubled National Flood Insurance Program (NFIP) to cover wind damage and allow the federal government to sell reinsurance to private companies.
In either case, the federal government would set premiums and, in return, provide policy holders and insurance companies with coverage against certain events (hurricanes and perhaps earthquakes) and specific levels of insurance claims. Following a disaster, the government would pay insurers which, in turn, would pay their policy holders.
Many private companies already sell reinsurance that works this way, but proponents of the legislation argue that tax exemptions, economies of scale, creditworthiness, and the implicit promise of a bailout would let the feds charge less. Since lower prices would reduce costs to insurers, proponents argue, savings would trickle down to consumers. Because the programs could break even over time, the theory goes, all this wouldn’t cost taxpayers a dime.
TO SEE WHY THIS wouldn’t work, one needs only to look at the flood program that covers nearly all residential flood damage. Although Congress intended NFIP to support itself, it regularly borrows money from the U.S. Treasury (it currently owes almost $18 billion), charges prices that don’t cover its costs, and, as a result, fails at its supposed objective of discouraging building in flood-prone areas.
State-government sponsored reinsurance efforts have also failed dismally. Florida’s existing hurricane catastrophe fund program imposes a potentially crippling liability of around $30 billion on the state’s taxpayers and hasn’t even reduced consumers’ rates.
Because private reinsurers already avoid most taxes and manage their risks more broadly than the government could (they work internationally while the government’s risk necessarily focuses on the United States), a federal program probably can’t charge sufficient rates and still deliver savings.
Instead, politicians would likely deliver rate cuts the same way they have with flood insurance: by forcing the program to set premiums below actual costs. Given that Florida’s program imposes a $30 billion liability, a national program would probably put taxpayers on the hook for $100 billion or more.
This implicit subsidy would make it practical for developers to build in currently wild or lightly developed coastal areas where conventional private companies won’t write policies. That’s why groups like the National Wildlife Foundation, Friends of the Earth, and Sierra Club have spoken out against it.
There’s no guarantee that most consumers would see rates go down in any case: Most insurers actually filed for rate increases after the state of Florida massively expanded its own catastrophe fund program.
ALTHOUGH RISING homeowners insurance premiums are mostly a problem for coastal states which should try to solve the problem themselves, the federal government does have a role to play. Efforts to end state setting of homeowners insurance rates — the practice in 49 states — provide the best long-term solution.
Over time, risk-based insurance rates alone would force property owners to either make their homes more disaster-resistant or move out of dangerous areas. To facilitate the transition, however, federal efforts should focus on programs that help people help themselves through disaster mitigation. In addition, Congress might even consider direct insurance premium assistance targeted towards incumbent homeowners of modest means.
A massive new reinsurance subsidy program, however, will endanger both the nation’s fiscal health and its environment. When the Senators consider the misguided proposal for federal reinsurance, they should do the smart thing — reject it.