Study Finds Economic Costs of Federal Cat Legislation Burdensome

Natural catastrophe legislation passed by the U.S. House of Representatives and pending in the U.S. Senate would create a multi-billion dollar burden on taxpayers in at least 20 states, according to a new study released yesterday.

The federal legislation would require the U.S. Treasury to provide loans to “qualified reinsurance programs” at the state level for natural disasters, and create a new Federal Natural Disaster Reinsurance Fund to provide direct Federal reinsurance to states for most of their insured losses. But authors of the study, say the pending legislation would place large costs on taxpayers and would displace private insurance and reinsurance arrangements that have worked well through previous hurricane seasons

The study, released by Sonecon LLC and authored by Sonecon chairman Robert Shapiro and Aparna Mathur of the American Enterprise Institute, also looks at the effect of legislation passed by the House but rejected by the Senate, which would expand the National Flood Insurance Program (NFIP) to cover damage from winds during hurricanes.

Release of the Shapiro-Mathur economic study comes in advance of the expected convening of a Congressional conference committee to resolve differences between the Senate and the House over whether to add wind coverage to the already financially insolvent NFIP, which is $18 billion in debt. The House voted in 2007 to add wind coverage to the NFIP. This spring, the U.S. Senate rejected such wind coverage by a margin of 74-19.

“The findings from this report are alarming, especially in light of clear evidence that climate change is increasing the likelihood of larger and more frequent storms,” said David Conrad, senior water resources specialist at the National Wildlife Federation, a member organization of Americans for Smart Natural Catastrophe Policy. “The time is now for Congress to weigh not only the enormous financial burden that this fatally flowed legislation would place on taxpayers, but also to consider the fact that these bills would likely encourage irresponsible building and rebuilding in destruction’s path, and carelessly putting fragile oceanfront ecosystems in jeopardy.”

Following its rejection of adding wind coverage to the NFIP, the Senate adopted a proposal to create a national commission of experts to study natural catastrophe insurance policy and the fiscal and environmental effects of the various major legislative proposals. Findings by research firm Towers Perrin predicted losses up to $200 billion if a federal program replaces private sector catastrophic wind insurance.

“We shouldn’t displace productive private insurance and reinsurance industries with expensive, unworkable government programs,” said Eli Lehrer, senior fellow with the Competitive Enterprise Institute, another member organization of Americans for Smart Natural Catastrophe Policy. “The House and Senate conferees on the National Flood Insurance program should take a very careful look at this groundbreaking study. Above all else, we need to create an insurance environment that preserves the environment and encourages safe, effective building. A national catastrophe policy commission could play an important role pointing the way towards a better system for managing catastrophes.”

The study points out that the federal proposals seem to be aimed at assisting Florida, which despite its being prone to frequent and severe hurricane damage, has applied rate controls and regulations that have deterred many private insurers from expanding their coverage in the state. Florida legislators also have established a subsidized state reinsurance system for natural disasters that has largely displaced private reinsurance. This program is currently the only “qualified reinsurance program” that would meet the terms of the proposed new Federal loans.

Economic Losses
The study estimates that if a hurricane season comparable to 2005 occurs again, the economic losses that would be covered by the Federal government under those legislative proposals would reach $140 billion to $161 billion in 2009, $197 billion to $230 billion in 2013, and $278 billion to $332 billion in 2017, depending on the approach used to set insurance premiums for state programs.

These losses, the study explains, would very likely be borne by Federal taxpayers.

Providing estimates based on the share of Federal revenues provided by each state, the Shapiro-Mathur study finds that if hurricanes comparable to those of 2005 strike again in 2009, taxpayers in at least 20 states would significant tax burdens. These include burdens of at least $19 billion for Californians, $11 billion for New Yorkers, $7 billion for Illinoisans, $6 billion for Pennsylvanians and taxpayers in New Jersey, $5 billion for those in Ohio, $4 billion each for taxpayers of Massachusetts, Michigan and Virginia, and at least $3 billion for taxpayers in Connecticut, Indiana, Maryland, Minnesota, North Carolina and Washington.

The study further concludes that the congressional proposals under consideration would displace much of the private capital currently deployed by insurance and reinsurance companies for such natural disasters and, in their place, create the large financial transfers estimated above from the taxpayers in most states to some businesses and residents in the Gulf states, especially Florida and Louisiana.

The authors further conclude that these measures are unnecessary, because the current private insurance and reinsurance sectors have the capacity to handle even the very large claims arising from unusually serious natural catastrophes.

The study notes that despite the huge claims arising from the 2005 hurricane season, private insurers covered those claims easily and the capacity of the insurance and reinsurance industries continues to expand.

While the study was supported by grants from the Reinsurance Association of America, and the Association of Bermuda Insurers and Reinsurers, the RAA and ABIR say the views and analysis are solely those of the authors.

To access the Shapiro-Mathur study, visit http://www.sonecon.com/docs/studies/Report_on_the_Effects_of_Proposed_Hurricane_Legislation-Shapiro-Mathur-August_2008.pdf.

Sources: Americans for Smart Natural Catastrophe Policy, RAA