Magazine article Risk Management

Nat Cat '08

Magazine article Risk Management

Nat Cat '08

Article excerpt


As the nation reeled from the combined damage of the 2004 and 2005 hurricane seasons, the idea of a national natural catastrophe fund (an analog to the National Flood Insurance Program or the Terrorism Risk and Insurance Act) became a hot topic, especially in the storm-prone state of Florida. Thus was born H.R. 3355, better known as the Homeowners' Defense Act of 2007. In essence, the bill would create a federally funded risk consortium that would inventory catastrophe risk across the country. It would also create a National Homeowner's Insurance Stabilization Program to provide loans to qualifying state reinsurance programs. These programs would be activated to pay for the damages caused by a major natural catastrophe, but the likeliest application of the fund would be to pay for hurricane damage in coastal areas. Therein lies the controversy.

H.R. 3355 has already passed in the House, 258-155, in a clearly partisan vote. Generally speaking, Democrats voted for it and Republicans voted against it. Now that the bill is before the Senate, it has become a presidential campaign issue, as both Senators Obama and McCain have not only weighed in on the topic of a national natural catastrophe fund, but they have used each other's comments as fodder for additional attacks.

In January, McCain went on record criticizing the notion of a national natural catastrophe fund, noting that private insurance, disaster preparedness and FEMA were all the best tools for addressing the risk. McCain later refined his comments to say that he was in favor of regional risk pools where states at risk could combine their disaster recovery resources.

In June, Obama went after McCain for that stance, noting that regional solutions merely concentrated the challenges of risk financing, whereas a national natural catastrophe fund spread the financial burden--the cost of risk--across a much broader body, thereby making it more affordable.

Despite the campaign stumping, the main sentiments of contention are over fairness. Is it fair for those who live far from the water to have to help pay to repair the homes of those who choose to live where hurricanes land? Or worse, to pay for those who have already rebuilt their homes and return to the same area so they might court disaster once more?

It is a common enough debate, and perhaps one that overlooks the fact that taxpayers have helped fund disaster recovery all across the country at one time or another. It also overlooks the fact that many states with high coastal risk have a GDP that contributes substantially to the national economy, so the issue is more complicated than what can be summed up in a sound bite.

For the moment, the Homeowner's Defense Act of 2007 is in limbo, before a Senate that has not yet voted on it and is not likely to do so any time soon. That said, the issue of disaster risk finance remains a politically charged one, especially to industry groups that have a stake in the matter. The American Insurance Association (AIA), which represents the property/casualty industry, has opposed the bill on the grounds that a national natural catastrophe fund would lead to "heavy-handed pricing or other regulatory requirements" that would worsen, not improve, market challenges. The AIA, not surprisingly, supports the notion that any insurance availability problems in coastal areas ought to be addressed by the industry itself, not government.

Americans for Smart Natural Catastrophe Policy, a largely conservative group comprised of GOP-affiliated organizations and a few insurance organizations (Allianz, the Association of Bermuda Insurers and Reinsurers and the Reinsurance Association of America) also oppose the bill. …

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