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Insurers oppose debt guarantee of state catastrophe cover

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WASHINGTON—Insurer and reinsurer groups reiterated their opposition Wednesday to a bill that would have the federal government guarantee debt issued by eligible state catastrophe insurance programs that cover homeowners insurance.

Two House Financial Services Committee subcommittees held a joint hearing Wednesday on the Homeowners’ Defense Act of 2009. Among other things, the bill that was introduced last May would create a National Catastrophe Risk Consortium to maintain an inventory of catastrophe risk obligations held by state reinsurance funds, state residual insurance market entities and state-sponsored natural catastrophe insurance providers. It then would issue securities linked to catastrophe risks insured or reinsured through the consortium’s members.

The U.S. Treasury Department would guarantee the debt.

Proponents of the measure hold that it would help guarantee affordable homeowner coverage in catastrophe-prone areas. It would provide no direct benefit to commercial policyholders.

Insurance industry groups consider the measure, which has been introduced previously, as unnecessary. The bill would replace much of the “private sector risk-bearing capacity with debt guarantees and federal reinsurance to prop up state government funds; it will replace—not augment—private reinsurance and securitizations,” wrote Bradley Kading, president of the Assn. of Bermuda Insurers & Reinsurers, in a letter sent Tuesday to all members of the Financial Services Committee.

“If Congress enacts legislation that encourages coastal states to adopt and enforce stronger building codes, and to curtail further development of ecologically sensitive coastal areas, it can slow the growth in coastal catastrophe risk exposure,” Kathy Mitchell, federal affairs director for the National Assn. of Mutual Insurance Cos., said in written testimony submitted at Wednesday’s hearing.

“On the other hand, if Congress enacts legislation such as the Homeowners’ Defense Act, it will reduce the incentive for coastal states to adopt risk mitigation and avoidance policies by creating mechanisms for spreading coastal zone catastrophe risk to insurance policyholders and taxpayers in other states,” Ms. Mitchell wrote.

“Importantly, the bill does not require a state program to charge risk-based premiums, maintain adequate reserves, establish a solid private-market reinsurance program or manage its finances to an acceptable level of risk,” Leigh Ann Pusey, president of the American Insurance Assn., said in a letter sent to the leadership of the two subcommittees.