National Catastrophe Fund is not the Answer

by Matthew Glans on September 6, 2011

The recent hurricane activity along the Atlantic coastline has led to another resurrection of a bad public policy idea that never seems to go away, the national catastrophe fund. Under a National Catastrophe Fund, the brunt of the financial burden posed by a major storm would be borne by safer homeowners living in inland areas, transferring risk through the fund backed up by taxpayer dollars.

A national catastrophe fund would result in millions of taxpayer dollars being thrown at a system that is not only costly for taxpayers, but also unlikely to cover the losses incurred after a major storm.

In a new editorial, recently published in the South Florida Sun Sentinel, Eli Lehrer, national director of the Center on Finance, Insurance and Real Estate at the Heartland Institute, and Joshua Saks, senior legislative representative of the Water Resources Campaigns at the National Wildlife Federation argue that the creation of a national catastrophe fund would only compound our current problems.

“Rather than subsidizing insurance for coastal residents, the federal government needs to work to mitigate destruction from natural catastrophes by preserving natural areas that would reduce storm surge and give flood waters room to settle, budget ahead for necessary public infrastructure repairs, and make good plans to provide human services to those displaced by major catastrophes.”

The current system in many coastal states encourages risky homebuilding in exposed and environmentally sensitive coastal areas. Policies issued by state-run insurance companies like Florida’s Citizens Property Insurance Corporation represent significant unfunded liabilities on the states. These liabilities create the potential for fiscal collapse in the event of a significant storm, necessitating tax increases or service cuts to cover costs. Lehrer and Saks argue that a national catastrophe fund could spread these problems nationwide.

“A national CAT fund would put the federal government — and thus, all taxpayers — on the hook for rebuilding private homes. This is something that the federal government has not generally done historically and should not do in the future. Plus, federal monies are better spent by mitigating damage before a disaster rather than paying to rebuild afterward.

Given the nation’s current fiscal troubles, indeed, a massive federal homeowners’ insurance program is the last thing America needs. That is why this new spending program is opposed not just by “mistaken Midwesterners” but by more than 100 environmental groups, taxpayer advocates, emergency management organizations, insurers and housing groups.”

Government-backed reinsurance funds have not worked well at the state level; creating a national catastrophe fund is the wrong approach to stabilizing coastal insurance markets. Lehrer and Saks’ article, responding to a Sun Sentinel editorial, “CAT fund is last thing we need,” can be found online at:,0,6144190.story

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