Anticipated Hurricanes Fuel Stormy Insurance Debate

The New York Times

Evan Lehmann

It’s almost hurricane season, and a storm is brewing over the federal government’s role in protecting states during climate catastrophes.

One side wants Washington to dive into the insurance market to stabilize rising prices of homeowner policies as the number of catastrophes worldwide is growing. The other says that will encourage more coastal development, and is pressing for tougher building standards that can harden existing homes during heavy-hitting storms.

U.S. Rep. Ron Klein (D-Fla.) reintroduced the Homeowners Defense Act, which would make the Treasury Department a reinsurer during massive events that have a half a percent chance of occurring in any given year.

Washington would be liable for up to $200 billion under the measure. But Klein says premiums paid into the fund would cover those costs and free taxpayers from financial burdens, like emergency spending, sparked by natural calamities.

“Isn’t it better to have an obligation to pay the federal government?” he said in an interview.

For lesser — and more frequent — storms, the federal government would co-sign loans incurred by states with public insurance programs. The debt would be used to pay damage claims, and the states would pay the private lenders back by charging fees to policyholders.

The legislation would allow each state vulnerable to hurricanes to issue bonds with a federal guarantee of $20 billion. California and other earthquake-prone states could each borrow up to $5 billion with Washington’s backing. One concern among opponents is that the first big hurricane of this season could prod Congress to pass it.

‘Very bad idea’

Klein hopes the bill will squeeze through the Senate, where it died during the last Congress, now that President Obama is in office.

“He has indicated that he supports the concept,” Klein said of Obama, with whom Klein spoke about six weeks ago.

But there’s fierce opposition. An odd coalition of conservative groups and environmentalists is vowing to defeat this bill, or any that injects the government into the insurance arena.

The Competitive Enterprise Institute believes the bill would undermine the private insurance market and burden taxpayers with huge new costs. The Sierra Club, meanwhile, says the bill would subsidize insurance rates, thus encouraging coastal development while reducing natural defenses against rising seas and stronger storms.

“This is very bad idea that we can talk people out of,” said Eli Lehrer, a senior fellow at the Competitive Enterprise Institute, who said Obama offered “vague” support of the bill while campaigning for president.

Instead, the coalition is supporting a bill introduced by Rep. Bennie Thompson (D-Miss.) that would authorize the Federal Emergency Management Agency to issue $200 million annually for five years to strengthen vulnerable homes.

Klein draws on Fla. insurance model

Thompson’s bill doesn’t have any co-sponsors. Klein, meanwhile, has mustered 43 supporters, including lawmakers from Midwestern states that have traditionally balked at the idea of sending insurance premiums to Florida for hurricane cleanup.

Klein’s legislation easily passed the House in the last Congress. But the Senate did not act, facing a veto threat from the administration of former President George W. Bush.

The Florida lawmaker added a new section this year that strengthens home mitigation, like bolstering building codes and land-use regulations. But the provision is much smaller than Thompson’s plan. It would provide $15 million annually for five years to strengthen homes.

“It is kind of an afterthought,” Ed Hopkins of the Sierra Club said of Klein’s mitigation plan.

Klein dismisses the criticism and says the provision is the result of his talk with Obama.

“He suggested that we need to do as much as we can to encourage mitigation and reduce exposure,” Klein said.

His opponents, he says, are wrong to say the bill provides subsidies — and, in turn, encouragement to develop still more vulnerable coastlines.

But one of the most contentious aspects of the legislation is its requirement for states to establish publicly run reinsurance funds. Florida has the largest of those programs, and it is widely considered overexposed to loss and underfunded.

Critics, including many state insurance regulators, say Florida’s example is an argument against the use of those funds.