By Frank Nutter, president of the Reinsurance Association of America – 08/26/11 01:33 PM ET
The East Coast earthquake and the impending approach of Hurricane Irene are stark reminders that natural disasters can occur at any time and suggest a thoughtful approach is needed to protect human life, property and the American taxpayer. The time has come for the U.S. Congress to focus on preparing for disasters before they strike and let private sector insurers pick up the tab after catastrophic events for homeowners and businesses so lives and tax dollars can better be saved.
Government funding of immediate needs associated with a disaster are still necessary to protect lives, for evacuation and rebuilding public infrastructure. However, those living in areas susceptible to natural catastrophes currently pay for most rebuilding of homes and private buildings through insurance coverage at rates reflecting their unique exposure to natural events, and this should continue. There are some – including ProtectingAmerica.org – who have called for a costly big-government approach that would require the federal government to pick up billions in these insured losses.
This “solution” transfers catastrophe risk from those who live in risk-prone areas to all taxpayers. Under this scenario, government would take on catastrophic risk where they do not have it – from insurers and their policyholders in those areas. Federal taxpayers would still pay for immediate response needs, but also for tens of billions of dollars that are now covered by the private sector, creating a federal backstop akin to Fannie Mae and Freddie Mac.
The Homeowners Defense Act, which was last considered by Congress in 2007, would result in a similar government backstop for private insurance costs, displacing the private market and making the federal government the largest insurance company in the nation. Congress has shown no interest in this budget busting legislation since then, as the American people have grown weary of such bailouts.
Like homeowners in disaster-prone areas, the government should plan ahead for natural disasters, just as insurers do in the private sector. This approach should include buying protection from the private sector for severe but infrequent losses in the National Flood Insurance Program and encouraging mitigation to save lives and lower the cost of rebuilding.
A national disaster mitigation strategy would protect the American taxpayer and save lives. When communities and homes are stronger, there is less damage, disaster assistance, clean up, displacement and rebuilding after a storm. For every $1 spent on mitigation, $4 is saved because less clean up and rebuilding is necessary after a disaster. In addition, mitigation measures have saved more than 200 lives between 1993 and 2003 and prevented 4,700 injuries over 50 years.
The Virginia quake that shook the East Coast is an example of how building codes and construction techniques worked. There are few claims and little private home or commercial structure damage from the quake. The lesson learned is that it is better to prevent losses than fund them.
Public policies should also encourage and provide incentives for making housing, including affordable housing, better able to withstand nature’s wrath. A national strategy should help people living in disaster-prone areas take pro-active steps to protect their property, not encourage further development in high-risk, environmentally-sensitive locales.
It is time for a sensible plan that prepares for disasters. When Mother Nature’s wrath strikes, government has a responsibility for infrastructure, disaster assistance and recovery, but not for private property losses. Taxpayers can pick up urgent needs after disasters; however, the government’s balance sheet doesn’t need billions of dollars in insured losses that can be covered by the private sector.