The threat of monster hurricanes and mile-wide twisters is rekindling efforts to create a large federal program that would underwrite natural disasters in vulnerable areas where damage might exceed $150 billion.
Lawmakers in both chambers of Congress have introduced legislation designed to create a public reinsurance program that makes Washington the last stop for paying damages during mega-weather events in states along the nation's extensive shorelines.
A report provided to ClimateWire seeks to strengthen the case for Washington's expanded role in catastrophe financing by finding that coastal homeowners could save $11.5 billion annually on insurance if a House bill is adopted making the U.S. Treasury a reinsurance provider.
The savings would be the result of lower reinsurance prices, offered by the government instead of private reinsurers, and made available to companies and states along storm-rattled coasts. Insurers often buy reinsurance as a backup to ease exposure to potential losses.
That should have a trickle-down effect of lowering the cost of homeowners insurance while encouraging companies to expand policies in areas that have seen declines in private coverage, said James Lee Witt, who ran the Federal Emergency Management Agency under President Clinton and is now co-director of ProtectingAmerica.org.
"It's going to save billions of dollars over the long haul, and people are going to be more protected," Witt said yesterday. "And if they have the [homeowners] coverage, then they're gonna recover much faster and that community's gonna recover much faster."
Advocates have been searching for ways to restructure disaster financing for years, with the hope of reducing taxpayers' cost of providing direct aid after a catastrophe. Making the federal government a reinsurance provider puts the matter on more of a business footing, its supporters say. Instead of throwing open the federal Treasury in the wake of a storm, the plan requires states to pay premiums before an event. In return, the government will supply states with a certain amount of cash in the form of an insurance claim when they're damaged.
That can reduce the financial burden on taxpayers, Witt asserted.
A 'clearly maladaptive' approach?
But the program is fiercely opposed by many environmentalists and conservatives, who believe it could magnify federal spending rather than reduce it. Claims that a national catastrophe fund -- as the reinsurance program is often called -- would cut disaster aid are just wrong, said Eli Lehrer, president of the R Street Institute and an expert on insurance.
He says disaster aid is predominantly used to rebuild public infrastructure, pay for rescue efforts, and cover the overtime of police and fire personnel -- none of which is insured. So the government would be taking on more costs, not fewer, by agreeing to also underwrite insurable losses, Lehrer said.
Another notion is that the program's cheaper insurance rates -- which critics fear would be politically suppressed below the true level of risk -- could encourage increased building along the nation's already fast-growing coastlines. That might increase disaster spending if more people were encouraged to move within reach of ocean storms, opponents of the plan say.
"This is clearly maladaptive with regard to climate change," Lehrer said. "Sea-level rise, the possibility of more intense storms, all of these things are real considerations. The bigger consideration is the fact that these areas are hurricane-prone regardless. You could reduce carbon emissions to zero tomorrow, and the wisdom of subsidizing people to live near the coast would still be nonexistent."
The House bill, named the "Homeowners and Taxpayers Protection Act," was introduced by Rep. Albio Sires (D-N.J.) earlier this year. He said in a statement that the plan is needed because the "increased prevalence of natural disasters has reminded us of the weaknesses in our methods of planning for and responding to natural catastrophes, specifically the strain that such disasters place on our economy and the federal budget."
The report supporting his bill, contracted by ProtectingAmerica, which helped develop the legislation, describes a weakening private insurance market in coastal states where companies are hesitant to underwrite homes because of stormier conditions that increasingly threaten built-up shore areas. The gap is being filled by public insurance pools, called residual markets, which could stress state finances when storms strike.
"That actually creates problems for the state itself, because now they have these huge potential losses from catastrophes in their residual markets, and none of them are very well capitalized," said David Chernick, an actuary who co-authored the report. "If and when there's a big event, each of those state governments are gonna have a huge problem on its hands figuring out how they're gonna pay for their losses."
The plan could lessen those impacts by allowing states to shift some of their biggest risks to the federal government. Washington would cover only the biggest storms or earthquakes, up to a 1-in-600-year event, while state reinsurance funds would cover smaller events. Chernick said a 1-in-500-year hurricane could tap the federal program for $138 billion.
If states suffer more damage than what's covered by the federal reinsurance contract that they purchased from Washington, the Treasury would cover the difference, a step that would add to the federal debt until the states pay it back. Supporters say there are built-in safeguards to prevent states from reneging, like Treasury's ability to increase their premiums for 30 or even 100 years until the debt is paid.
But others wonder how long it would be until there is pressure from coastal lawmakers to forgive the debt, particularly if a state is struck by multiple hurricanes in a short period of time. Lawmakers repeatedly compared the program to the National Flood Insurance Program, which is about $27 billion in debt without provisions, like those in the proposed legislation, requiring repayment.
The wild card: a new catastrophe
Some people worry that in the face of a new, damaging storm, Congress might panic and pass whatever is pending as a kind of political Band-Aid.
"We need to do a lot of work on our flood insurance program," Sen. Jeff Flake (R-Ariz.) said when asked about reinsurance legislation. "Taxpayers have been on the hook far too much. If the only way that you can get people to build in certain areas is to offer a huge federal backstop, then perhaps we shouldn't build in some of those areas."
The last time major disaster legislation found widespread approval was in 2007, after Hurricane Katrina. That bill, the Homeowners' Defense Act, was passed by the House and would have created a federal program to reinsure states against huge natural catastrophes. Sen. Bill Nelson (D-Fla.) recently introduced a bill that's similar to that past legislation and Sires' measure.
Asked whether efforts to pass federal reinsurance programs depend on the presence of a big storm, Sen. Richard Shelby (R-Ala.) said, "Probably."
"Sometimes it takes a catastrophe to do anything," he added. "But we ought to be careful and thoughtful of what we launch, because it seems if it's a government program, it grows and grows and it's always bigger than initially stated."
The House plan calls for something that nearly everyone seems to support: more funding to strengthen homes and buy properties from willing sellers in high-risk places. Despite its popularity, though, funding mitigation efforts are a contentious issue in a time of high deficits. The House bill finds its own funding stream by using a slice of premiums to harden homes, purchase hurricane shutters and pursue other damage-reduction efforts.
Still, Rep. Earl Blumenauer (D-Ore.) says a federal reinsurance program would do more harm than good by sending a signal that it's safe to live along dangerous coastlines.
"It's moving in the wrong direction," he said. "The only solution is going to be stronger building codes, more careful land use and ultimately moving people out of harm's way."