The Beachhouse Bailout is back. And this time, its authors are making a desperate pitch to appeal to the Heartland. (The region, not the Institute; Even they aren’t that dumb.)
Coming up on the 200th anniversary of the Feb. 7, 1812 New Madrid earthquake , former FEMA Director James Lee Witt and former Coast Guard Commandant Admiral James Loy implore lawmakers in an op-ed published by The Tennessean about the need to “pre-fund to deal with the financial costs of large-scale natural catastrophes.”
No one could argue with that priority. But we already have a fairly robust financial market that does exactly that. It’s called insurance.
Of course, Loy and Witt already know that. They are the co-executive directors of ProtectingAmerica.org, the Allstate-funded group that, for the past half-dozen years, has lobbied extensively to create a federal bailout fund for state-sponsored catastrophe funds and residual market entities. Heretofore, the public debate has focused primarily on states that face significant hurricane risk; in particular, Florida, which sponsors both the only general purpose state-run reinsurance facility in the country and the nation’s largest state-run primary property insurer.
But having failed to convince Iowa farmers and West Virginia miners that they should bear the windstorm risk of Palm Beach mansions, the cat fund backers are flipping the script with some new talking points. They now describe their plan as “voluntary” for those states that opt-in, as requiring no taxpayer support and as offering broad benefits to homeowners across the country. Hence, the appeal to the Southern and Midwestern states along the New Madrid Fault.
Our solution would build a privately funded national catastrophe fund for those states or regions that chose to participate. It would be publicly administered, operate on a tax-exempt and nonprofit basis, and private insurance companies would pay into the fund. No taxpayer money would be used.
In a period of high deficits and growing concern over our debt, fiscal responsibility demands that we prepare for events we know are inevitable. This proactive approach would protect disaster victims, taxpayers and the fragile economy.
There are, of course, several problems with the assertions put forward here. Among them is that, if the plan were truly voluntary, there is nothing to stop states that wished to band together and cross-insure one another’s cat funds and residual markets from doing so now. Nothing, that is, except that only the states with the very highest risks – Florida, California, Louisiana, Texas – would ever have any interest in doing so. And even among these states, when similar proposals have been floated in the past, they’ve gone over like a lead balloon (in large part, because not even the very biggest states, Texas and California, have any interest in taking on Florida windstorm risks.)
The reason federal legislation is needed is because the “public-private partnership” needs a federal guarantee. Indeed, that is the whole point of the exercise. And that puts the lie to the claim that “no taxpayer money would be used.”
Is it conceptually possible to structure a federal guarantee fund in which all contingencies were properly prefunded and the taxpayer would never be asked to pick up the tab? Certainly, in a world where men were angels. But the overwhelming majority of existing state-run insurance entities aren’t properly funded NOW. Why would we expect them, and the politicians who craft their capital structures, to become MORE fiscally prudent and responsible once the safety net of a federal guarantee was firmly in place?
As to the need for more expansive earthquake insurance coverage, there is no question that Americans are underinsured for earthquakes. This is certainly true in California, where take-up rates run only about 10%, and it appears to be true in the New Madrid Zone, Alaska, Washington state and other areas of seismic activity. Heck, last year even saw a fairly significant earthquake strike Washington, D.C.
But the primary blame for this lack of attention to earthquake risks lays squarely at the feet of the government-sponsored enterprises, Fannie Mae and Freddie Mac. If the GSEs required that conforming mortgage loans carry sufficient earthquake protection, as they do now for windstorm, fire and flood risks, then take-up would skyrocket overnight, and the GSEs themselves would also have much better security in the loans they buy and package.
The private market is eager to take on catastrophe risk, including earthquake risk. This fact is plainly evidenced by the California Earthquake Authority’s new $150 million catastrophe bond issued through its Embarcadero Re facility.
The CEA is already publicly administered, operated on a tax-exempt and nonprofit basis, and private insurance companies pay into the fund. And with these sorts of cat bonds, or with the private reinsurance it purchases, taxpayer money really isn’t used.If all this is possible without a federal backstop in the state that faces the greatest earthquake risks, then why would any other state ever need one?