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ARC: HOW INSURERS, BROKERS AND RISK MANAGERS CAN BE BETTER PREPARED FOR A NATURAL DISASTER

Insurers, reinsurers oppose national catastrophe fund for homeowners

Commercial insurer and reinsurer organizations oppose a bill that would establish a national catastrophe fund to protect homeowners.

The Homeowners and Taxpayers Protection Act of 2013 would establish a public-private partnership and include a privately funded national catastrophe fund designed to respond to large-scale natural catastrophes, according to an analysis on the website of sponsor Rep. Albio Sires, D-N.J.

“It would require prefunding — exclusively private-sector financing — for catastrophe losses to construct a backstop of accessible funds for when such devastating events occur,” Rep. Sires' website said in the analysis. “As a result, this legislation would drive down the cost of insuring all Americans, including those who live in areas with major catastrophe risk and encourage many more homeowners to be covered.”

According to the text of the bill, “The private insurance market alone does not have sufficient capacity to efficiently address the timing risk presented by major natural catastrophes, and there is no guarantee that the level of capacity that does exist will continue to be available from one year to the next or that consumers have the resources to adjust to significant price swings in the cost of the capital for available capacity.”

A supporter of the bill who introduced similar catastrophe fund legislation in previous congresses said the frequency of large catastrophes has increased.

“It's no longer a one-in-100-year event,” said former Rep. Ron Klein, D-Fla., now a partner at Holland & Knight L.L.P.'s Fort Lauderdale, Fla., office. “You're having Sandys and large hurricanes. The insurance companies are not willing to sell insurance to homeowners.”

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There needs to be a “backstop when you have one of these big natural disasters,” Mr. Klein said.

“We need to recognize that citizens living in areas most likely to be affected by natural catastrophes are disproportionately those that can least afford it,” retired Adm. James Loy, co-chair of ProtectingAmerica.org., said in a statement. “This isn't a beach house issue or a summer vacation issue; this is an issue of fiscal responsibility that concerns primary residence homeowners across America. We need a policy to help get more people insured, to prefund for these events, and to reduce the enormous costs of recovery after a catastrophe.”

But insurers and others disagree with the bill's necessity and premise.

“The bill is another attempt at risk transfer from the private sector to federal taxpayers, individuals and businesses with lower cat risk,” said Frank Nutter, president of the Reinsurance Association of America in Washington. “A federally created fund creates a federal obligation even if not specifically stated — ŕ la Fannie Mae and Freddie Mac.”

The fund would involve the secretaries of federal agencies and “millions of federal dollars as startup seed money. The reinsurance sector is robust in capital and capacity notwithstanding recent major disasters,” Mr. Nutter said in arguing the legislation is not necessary.

The program would “theoretically be voluntary, in the sense that any state can choose to join,” said R.J. Lehmann, a senior fellow at the Washington-based R Street Institute. Like the RAA, R Street belongs to SmarterSafer.org, a coalition of insurance, environmental and free-market-oriented groups that oppose the bill.

“Everybody's on the hook as long as the Treasury is the backstop,” Mr. Lehmann said. “They could structure it as a fee only on homeowners, but if they do so, it because less attractive for homeowners.”

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