EDITORIAL: Relief for Florida, nation
Palm Beach Post Editorial
Tuesday, May 26, 2009
As a senator, Barack Obama cosponsored legislation to create a national catastrophe insurance program. With luck, he will have a chance to sign the legislation.
Last week, U.S. Rep. Ron Klein, D-Boca Raton, filed House Resolution 2555, the new version of his Homeowners Defense Act that died in the last Congress because after passing the House it died in the Senate. Rep. Klein has made changes – some at President Obama’s suggestion – but the concept is the same, and so is the goal: to stabilize the property insurance market in Florida and other catastrophe-prone states and protect taxpayers.
How it would work
Catastrophe-prone states like Florida would join a government-run consortium to pool their risk.
The consortium would sell government-backed bonds to private insurers to pay damage claims.
The bill would create a not-for-profit consortium of states that, like Florida, have reinsurance funds for national disasters that private insurance won’t cover at a realistic price. That consortium could sell bonds, backed by the federal government, to private investors for damage claims after catastrophes. States would repay the bondholders.
Had such a system been in place after Hurricane Katrina, Rep. Klein notes, the federal government would not have had to spend $160 billion that won’t come back. "Right now," he said, "every taxpayer is on the hook." That argument should help to persuade senators who don’t see their states needing such a program. Only states in the consortium would pay.
But more and more states are being abandoned by insurers seeking to minimize their risk. Thirty-four states, Rep. Klein says, would qualify for membership in the risk pool. He has cosponsors from 20 states, where residents worry about more than hurricanes: earthquakes, wildfires, tsunamis, mudslides and tornadoes. "This is not just a Florida issue anymore," Rep. Klein said. One cosponsor is Rep. Tom Rooney, R-Tequesta. Last fall, he defeated Tim Mahoney, who worked on the first version with Rep. Klein.
For Florida, the benefit would be lower insurance premiums. Currently, the state Office of Insurance Regulation requires that private insurers be able to pay claims for a one-in-100-year storm. More, though, are pricing policies based on a one-in-200 or 250-year storm, the worst-worst case scenario. Rep. Klein calls it the sort of "game playing" he saw during his years in the state House and Senate.
To cover those bets, insurers must buy much more private reinsurance, which is sold globally. That extra cost drives premiums much higher. If Rep. Klein’s bill becomes law, the federal program would remove the need for that added private coverage.
Naturally, the main opponents of Rep. Klein’s bill are reinsurance companies. One myth they circulate is that the program would encourage building in high-risk areas. In fact, the bill requires states to decrease risk, and President Obama asked Rep. Klein to toughen that section.
John McCain brayed that national catastrophe insurance would cost $200 billion. In fact, Rep. Klein estimates that it would cost $25 million over four or five years to set up. The idea is to cost the Treasury nothing else, and to help homeowners in Florida and elsewhere. A national problem needs a national solution.