The Homeowners Defense Act (H.R. 3355) is a dangerous step
toward a federal government subsidy of property insurance coverage
for natural disasters. The bill would also make it easier for
individual states to create unrealistic disaster insurance
programs, with underpriced policies, by creating a federal loan
fund to cover losses suffered by those programs. Congress should
reject attempts to place the risk of property losses due to natural
disasters on the federal government.
The bill would establish a consortium of state-sponsored natural
disaster insurance funds that would be able to issue bonds to
jointly finance these programs. Though there is nothing wrong with
this and states are already empowered to create such consortiums,
H.R. 3355 would grant this consortium a federal charter that would
make it appear that the bonds issued by the group have a federal
guarantee, when in fact, no such guarantee would exist. This false
federal imprimatur could increase pressure for a federal bailout
following any disaster.
What is worse, the legislation would also create a direct
federal loan program to provide federal "bridge loans" to cover
losses to state reinsurance programs when natural disaster claims
exceed the state funds' assets. As experience with the federal
flood insurance program shows, once those federal loans reach a
significant level, there will be an immediate attempt to get the
government to forgive them. In essence, then, the bridge loan
program is nothing les than a back-door approach to having the
federal government assume much of the risk for property losses
caused by hurricanes and similar disasters.
A number of states, Florida being among the worst, have reacted
to increasing property insurance rates by setting up state property
insurance and reinsurance systems. In many cases, these state
systems provide coverage at artificially low rates that are more
influenced by short-term political considerations than actuarial
estimates of risk. The Homeowners Defense Act would make it easier
for states with the most unrealistic insurance rates to pool their
risks with more responsible states and issue bonds that reflect the
overall pool risk level rather than their own higher risk. This
would allow them to issue bonds at lower interest rates than they
would be able to otherwise.
State governments are free to develop irresponsible property
insurance programs as long as they and their citizens understand
that they must bear the consequences. H.R. 3355, however, creates a
way for those states to make taxpayers in other states share in
those inevitable losses. This bad policy should be avoided.
John is Senior Research Fellow in Retirement Security and
Financial Institutions in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.