House Approves Creation of a Federal Disaster Insurance Program

By JOSEPH B. TREASTER, NY Times
Published: November 9, 2007



The House of Representatives approved legislation yesterday that would put the federal government into the home insurance business to deal with natural disasters like hurricanes and the recent wildfires in California.

The legislation, which passed on a vote of 258 to 155, would require the federal government to lend billions of dollars to states to help pay for damage to homes and businesses. The measure now goes to the Senate, where it has the backing of Senators Hillary Rodham Clinton of New York and Bill Nelson in Florida.

The Bush administration has said it would veto the plan because it takes potential business away from private insurers and potentially exposes the government “to steep losses in certain years.”

But support in the Senate is growing to help people whose homes are vulnerable to natural disasters. Senator Chris Dodd, Democrat of Connecticut, who has signaled that he backs the bill approved by the House, introduced two other bills yesterday to help homeowners cope with hurricanes. One would provide a tax credit to offset the rising cost of coverage. The other would provide federal money for people to strengthen their homes against storms and floods.
In the last month, the House has voted to extend the insurance subsidy program that was created after Sept. 11, 2001, to pay for up to $100 billion in damage in a terrorist attack. The bill is now before the Senate. The administration dropped its opposition to the terrorism insurance bill after legislators required insurance companies to pay a larger share of the losses from an attack.

In opposing the home insurance bill, the Office of Management and Budget said federal subsidies would reduce the pressure on homeowners to pay to fortify their homes and would take tax money from people all over the country to pay for losses by others living in risky areas.
The bill does not establish a specific threshold for when government loans would begin to flow. It would make individual states eligible for assistance once they were facing disaster costs that exceed 1.5 times the amount of premiums collected from homeowners and businesses in the previous year. In 2006, the insurers collected $13 billion in premiums in Florida. So damage would have to be about $20 billion to activate the federal loans. Hurricane Andrew, in 1992, caused more than $20 billion in damage in today’s dollars. Insured losses in Hurricane Katrina ran to more than $41 billion.

“When a state is overwhelmed by a mega-event, it seems fair that there’s a line of credit,” said Ben McKay, the head of the Washington office for the Property Casualty Insurers Association of America. But many insurers opposed the legislation. Marc Racicot, the president of the American Insurance Association, said the legislation would “interfere with the private market.”
The legislation also lays out a plan for states to create insurance funds, as Florida and some other states have already done. It also would allow them to collectively sell bonds, widely known as catastrophe bonds, that would provide more capital to pay disaster losses and thus, in theory, make home insurance more widely available and less costly. There is no direct cost to the government in the bond program, but the Office of Management and Budget contended that the legislation would create an implicit guarantee of federal backing for the bonds.
Representatives Ron Klein and Tim Mahoney, Democrats of Florida who are authors of the legislation, have argued that government backing would be required for only the worst disasters. They also argue that a reduction in the potential losses for private insurance companies would lead the companies to offer more coverage at lower prices.
Support for the bill has picked up as people in Florida struggle with insurance prices that routinely run into the thousands of dollars for an average house.

Some Congressional reluctance evaporated as the fires in California destroyed 2,000 homes and underscored the argument of proponents that home insurance was not only a coastal issue.
The National Association of Realtors is among the strong supporters of the legislation. It says “the inability to obtain affordable insurance is a serious threat to the real estate market.”
J. Robert Hunter, the director of insurance at the Consumer Federation of America, said he favored creation of a group of state insurance funds that would help spread the risk of paying for natural disasters.

But he said he was concerned that the legislation neither required homeowners to take measures to protect their homes nor required states and companies to set rates that accurately reflect the risk of damage. “If rates are too low, people will build on barrier islands,” he said.