Making homeowners’ insurance affordable in coastal areas is a problem that continues to plague both legislators and homeowners. In Florida, where the risk from windstorms is the highest, the issue is magnified even more.
The state run-insurer Citizens Property Insurance Corp. and state-run reinsurer, the Florida Hurricane Catastrophe Fund, have grown substantially over the last decade, leaving the risk from a major hurricane on the shoulders of taxpayers. While everyone agrees reforms are needed to reduce the burdens on Citizens and the Cat Fund, some argue that the federal government should play a role in controlling and covering insurance claims along the coast.
Proponents of an increased role for the federal government have lined up in support of several bills that would create a national catastrophe fund. Under these proposals, the federal government would set up a variety of mechanisms intended to reduce the cost of homeowners’ insurance and the reinsurance that insurers buy to shield themselves from catastrophes. The new measures largely would attempt to “backstop” both private insurers and state-run insurance programs by inserting the federal government into the insurance and reinsurance markets
These proposals have support from some large insurance companies and elected officials in coastal states, who say it will go a long way toward solving major problems with insurance affordability and accessibility. A variety of environmental, free market, taxpayer, insurance, and reinsurance groups have lined up in opposition to the bill, saying it would cost taxpayers billions of dollars and do significant damage to the environment.
Two letters on the national catastrophe fund proposals have run in the Miami Herald over the last few weeks. The first, written by Bradley S. Brewster, the executive director of ProtectingAmerica.org supports the creation of a national catastrophe fund, arguing that a privately financed national cat fund would provide more protection at a lower cost than state-run Citizens.
The best solution is to build a privately financed national catastrophe fund at the federal level as part of a comprehensive catastrophe management program that includes robust participation from the private market and voluntary participation by state and regional programs meeting strict financial standards of actuarial soundness.
This comprehensive and integrated public-private partnership would maximize both the private and public sectors, and pre-fund to deal with the financial costs of large-scale natural catastrophes. The national backstop would provide more protection at lower cost to Floridians, provide coverage for events that exceed the capacity of Florida’s Citizens Insurance Company and the Florida Cat Fund and incentivize private capital to re-enter the market.
This approach would leverage private sector dollars to strengthen America’s financial and preparedness infrastructure rather than relying on taxpayer-funded bailouts to deal with mega catastrophes.
A second letter, opposing a national cat fund, was written by Jay Liles of the Florida Wildlife Federation. Liles contends that creating a national cat fund would create several new problems. A national cat fund would encourage environmentally and financially hazardous construction along the coast, place additional insurance risk on the shoulders of taxpayers, and make Florida’s hurricane risk a national problem.
The Florida Wildlife Federation has long supported reform of Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund in order to rein in financial and environmental risks associated with these government-run insurance programs. However, we oppose the solution of a national catastrophe fund offered in the letter.
As Floridians, our organization and members as well as many other groups throughout the state realize the risks associated with a national program. Such a fund would continue to incentivize coastal development in the most hazardous areas of East and Gulf Coast states, expose taxpayers to tremendous liability, provide private parties with public subsidies and destroy coastal wetlands and dunes that are buffers to help reduce inland storm damage and provide important fish and wildlife habitats.
A national catastrophe fund would do little to alleviate the problems we have in Florida. Instead, it would create a national problem that affects all Americans.
The Florida Wildlife Federation’s concerns are justified; a national catastrophe fund would result in billions of taxpayer dollars being thrown at a system that is not only costly, but also unlikely to cover the losses incurred after a major storm.
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.
The current system in many coastal states encourages risky home-building in exposed coastal areas and aggressive business practices by insurers now absolved of a risk under the guaranteed government subsidies. Policies issued by state-run insurance companies like Citizens 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.
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.