Seeking a national catastrophe consortium
Q & A WITH RON KLEIN
U.S. Rep. Ron Klein’s national catastrophe fund bill could win broader support in Washington, D.C., especially now that it has the backing of the Obama administration.
BY BEATRICE E. GARCIA
When it comes to calamity created by Mother Nature, Floridians know it can wreck homes, businesses and the state’s insurance market.
U.S. Rep. Ron Klein, D-Boca Raton, believes legislation he introduced three weeks ago in the U.S. House will help restore order in the insurance market and keep insurance prices affordable.
His bill would create a national catastrophe consortium to help states spread their risk from natural disasters such as hurricanes, earthquakes, mudslides and tornadoes.
By pooling their risk, state-sponsored catastrophe funds — about 30 of them nationwide — could sell catastrophe bonds or buy reinsurance to cover potential future losses under the proposed legislation. Such moves would greatly lessen or entirely eliminate the need for assessments on policyholders, Klein argues.
The Klein bill would also provide a federal guarantee for any debt states would have to issue to help pay for losses from a major disaster.
In Florida, many lawmakers in the central and northern areas of the state see these surcharges as an unfair hurricane tax on residents.
A similar bill proposed by Klein last year was approved by the U.S. House of Representatives, but it stumbled in the Senate despite having then Sens. Barack Obama and Hillary Clinton as co-sponsors. But President George W. Bush opposed that measure.
The current bill has already drawn some critics, including various environmental groups and the American Insurance Association.
Last month during a visit to South Florida, Klein discussed his bill with The Miami Herald.
Q: Florida homeowners are well aware of the upheavals in the insurance markets caused by natural disasters. Why would other states be interested in the Homeowners Defense Act of 2009?
A: This used to be a Florida-only problem, but it has become a nationwide problem. That’s why we were successful in getting support throughout the U.S. — Democrats and Republicans — because they were having their own experiences with insurance companies pulling back from their market or seeing doubling, tripling, quadrupling of insurance premiums.
Q: Does the federal government play a role in this legislation?
A: The bill provides a federal backstop.
We have taken a proposal that was brought to Washington by Gov. Crist and [Insurance Commissioner] Kevin McCarty and creates a federal guarantee. If any state has to borrow money, the federal government will provide a guarantee for those bonds. It’s nice and simple and easy to explain. I think it will be successful.
Q: What was President Bush’s objection to your bill last year?
A: He felt the market would correct itself. We tried to get some Republican colleagues to talk to [Bush] to tell him that in some parts of the country, the market is failing and you have companies pulling out.
In Florida, our largest underwriter of homeowners coverage is Citizens Property Insurance, the state-run company. It’s the worst position to be in.
We would prefer to have private companies competing against each other on price, scope of coverage and service. Yet, we have companies pulling out, like State Farm.
[State Farm Insurance of Florida announced in January that it would no longer sell property insurance in Florida because it was unprofitable for the company. The insurer is negotiating with regulators for approval of its withdrawal plan.]
Q: Do you think this bill would get State Farm Insurance of Florida to reconsider its decision to stop writing property insurance in Florida?
A: It could. Generally speaking, it would create a lot more opportunities for private companies because the highest end of their risk would be blended with other states that want to participate and spread the risk. It’s the simple concept in insurance — spread the risk.
Q: How many states do you think would participate in the National Catastrophe Risk Consortium that would be created by this law?
A: Based on research we did last year and this year, somewhere between 25 and 30 states would participate. In order to be eligible, states have to have their natural disaster fund.
Q: Does your plan put the federal government in the business of reinsurance?
A: No, not all. There’s no kind of appropriation. All we’re doing is setting up the consortium. The federal government is not involved in the back end. It’s setting up the facilitation for these states to blend their risk. Then the consortium can sell bonds to the private sector or purchase reinsurance.
Q: Some consumer groups say that your bill will deter mitigation and maintain the status quo. Is that a fair concern?
A: I’ve heard that from environmental groups. I am very sensitive and receptive to their point. Their concern is that you need to do what you can to reduce the exposure. That means no building in areas where the risk is greater. Florida has already changed its building codes.
Q: The American Insurance Association is also against the bill.
A: This bill is about insurance companies doing what they are supposed to do, not cherry-picking customers on risk they don’t want. If you want to sell insurance in Florida and make money in Florida, you have to set the right price, spread the risk and then it works. We’re saying that this is business, but you have to be fair.
Q: Any chance of a companion bill in the U.S. Senate?
A: Yes, Sen. Bill Nelson has already filed a combination [of these measures] in different bills.