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Build at your own risk: Not everyone wants cheap insurance for catastrophes

Legislation is on the horizon that would establish a federal consortium to allow individual states to pool catastrophic insurance risk. But not everyone wants to see it sail further.

hurricaneSupporters of the Homeowners Defense Act claim that the proposed legislation will cut home insurance rates and provide federal backup for catastrophes like earthquakes and hurricanes. The consortium would serve as a pipeline for issuing federal guarantee bonds and reinsurance to state insurance programs. But the legislation, which has yet to come to a vote before the U.S. House of Representatives, has opposition from an unusual coalition: insurers, tax rights groups and environmentalists.

Its primary sponsor, U.S. Rep. Ron Klein (D-Fla.), says that the Homeowners Defense Act addresses a growing crisis in the availability and affordability of home insurance. More than 30 states have some type of residual market insurance plan and assume a growing burden of insuring people who can't buy insurance in the private market, his office says. In Florida, for instance, the state-managed Citizens Property Insurance Corp., which offers home insurance to residents who can't buy coverage through a private company, is now the largest home insurer in the state. The Florida Hurricane Catastrophe Fund, another state-managed program, helps private insurers manage hurricane exposure.

The legislation, which has been around in one form or another the last few years, passed out of the House Financial Services Committee in March. A vote before the U.S. House has yet to be scheduled.

Bill splits home insurance industry

The legislation has the support of the National Association of Insurance Commissioners (NAIC) and ProtectingAmerica.org, co-chaired by James Lee Witt, former director of the Federal Emergency Management Agency and Admiral James Loy, former deputy secretary of the Department of Homeland Security. Members of ProtectingAmerica.org include the American Red Cross, numerous cities, Allstate and State Farm, first-responder organizations and others.

"This bill responds to the looming threats that our families and our nation face from hurricanes along the Gulf and Atlantic coasts as well as from replays of the devastating earthquakes that have rocked the Midwest and the West Coast," Witt said earlier this year. "The potential for massive natural catastrophes in America is enormous. Nearly six in 10 American families now reside in areas that have been rocked by earthquakes or stuck by major hurricanes."

The group says the legislation would provide a crucial financial backstop to replace the current system in which multibillion-dollar taxpayer bailouts follow catastrophes, such as Hurricane Katrina.

But opponents have dubbed the legislation a "beach house bailout" and say it would encourage development in sensitive, coastal areas by subsidizing home insurance rates and transferring risk to taxpayers.

A coalition of opponents called SmarterSafer.org includes the Reinsurance Association of America, Taxpayers for Common Sense, Liberty Mutual Group, International Code Council and a slew of environmental groups, such as the Sierra Club, the National Wildlife Federation, American Rivers and others.

"Our concerns are largely motivated by the effects that climate scientists are predicting for Florida," said Ed Hopkins, director of environmental quality for Sierra Club. "Sea levels have been rising, and climate change is going to cause them to rise at higher rates. We ought to be protecting areas rather than subsidizing risky coastal development."

What the legislation means

The legislation proposes to do the following:

  • Establish a "National Catastrophe Risk Consortium" that states could join to pool catastrophic risk from events like tornadoes, hurricanes and earthquakes. The consortium would serve as a pipeline for issuing federal guarantee bonds and reinsurance to states. 
  • Provide federal  guarantees for bonds issued by state insurance programs to help pay natural disaster claims.  States would have to meet certain conditions to qualify for the guarantee, including establishing actuarial sound rates and providing a credible plan to repay the bonds. Federal  funds would be used if the state programs defaulted.
  • Create a  federally operated fund to write reinsurance policies for catastrophes. Reinsurance is purchased by insurance companies to cover losses from catastrophic risk.
  • Establish a federal grant program to prevent and mitigate losses by raising awareness of risks and helping homeowners strengthen their homes.

The National Catastrophe Risk Consortium could be established without legislation, says Donald Griffin, vice president of personal lines at the Property Casualty Insurers Association of America. But the bond guarantee program and the federal reinsurance program would put federal taxpayers at risk, he says. The federal government, for instance, would have to repay bonds if the state programs defaulted. Reinsurance is handled better in the private global market, he says, where risk is pooled among companies from all over the world.

"We believe these insurance products in states are not appropriately priced to begin with," Griffin says. "The risk of the reinsurance fund being politicized to keep costs below the private market would be too great."

The Congressional Budget Office estimates the program would cost roughly $1.7 billion to implement from 2011 to 2015. But opponents say potential liabilities go into the hundreds of billions.

Greater safety or taxpayer risk?

evacuation routeProponents say the new program would create greater security. Scientists say that there’s a 99 percent chance that a 6.7 magnitude earthquake will hit California in the next 30 years --- yet only 12 percent of the state's residents have earthquake insurance. This insurance is expensive and has high deductibles. The new legislation would enable the California Earthquake Authority, which provides 70 percent of the state's earthquake insurance, to lower rates and deductibles, authority’s CEO Glenn Pomeroy told the House Committee on Financial Services.

Proponents say the program would create greater security. Scientists say that there’s a 99 percent chance that a 6.7 magnitude earthquake will hit California in the next 30 years, yet just 12 percent of the state's population has earthquake insurance. This insurance is expensive and carries high deductibles. The new program would enable the California Earthquake Authority, which provides 70 percent of the state's earthquake insurance, to lower rates and deductibles, authority CEO Glenn Pomeroy told the House Committee on Financial Services.

"As a result we believe many more Californians would insure their homes against the potential catastrophe -- and certain occurrence -- of large, damaging earthquakes in our state," he said.

Peter J. McDonough, spokesperson for ProtectingAmerica.org, calls the "beach house bailout" label from opponents a "cynical red herring."

"These kinds of storms are not isolated to beachfronts; they are hurricanes that wipe out entire states," he says. "The kind of events that would be covered bring with them such enormous devastation that they result in federal disaster declarations that can include multiple states. ... It is in many ways offensive to suggest that major hurricanes and earthquakes only affect people who move to vulnerable areas out of choice and that those individuals are among the most wealthy members of society."

McDonough says a 2009 study found that people living in areas prone to natural catastrophes tended to have lower incomes and home values.

He scoffs at opponents who argue that making home insurance more affordable would prompt people to move into environmentally sensitive coastal areas.

"Does anyone really think that a savings of less than $50 per month would provide an incentive for someone to purchase a newly constructed home that may cost between several hundred thousand dollars and a million dollars or more? While we agree that better land use is an essential element in a comprehensive catastrophe protection program, the opponents completely ignore that fact that 57 percent of the American population already lives in areas that are prone to earthquakes and hurricanes."

 The legislation requires approval from both arms of the U.S. Congress. A 2007 version of the legislation won approval in the House but failed in the Senate.

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