Federal Reinsurance Backstop for Catastrophes: APCIA Says No Thanks

Federal lawmakers introduced a bill to create a federal natural catastrophe backstop recently, reacting to insurers’ issues with growing private reinsurance costs. But a trade group for carriers suggested that a federal remedy could create more problems.

“Federal solutions to a state-regulated industry should be carefully considered, as evidenced by the fact that federal taxpayers are currently at risk from $20.525 billion debt already owed by the National Flood Insurance Program,” said Nat Wienecke, senior vice president of federal government relations of the American Property Casualty Insurance Association (APCIA) in a media statement released in opposition to the bill on Friday.

The bill in question, called the Incorporating National Support for Unprecedented Risks and Emergencies Act (INSURE), was introduced in the U.S. House of Representatives on Wednesday by Rep. Adam Schiff, D-Calif. Details of the Act reveal that the new scheme would actually wind down the National Flood Insurance Program at a future date, as the Act aims for the proposed federal reinsurance mechanism to cover an array of cat perils, including wind, wildfire, severe convective storms, flood and earthquake.

“This legislation would create a federal catastrophic reinsurance program to insulate consumers from unrestrained cost increases by offering insurers a transparent, fairly priced public reinsurance alternative for the worst climate-driven catastrophes,” Schiff said in a media statement published on the day the bill was introduced, announcing the intention “to stabilize the home insurance market while ensuring vulnerable communities are not excluded from coverage.

Schiff specifically noted the troubles plaguing his constituents in the California insurance market—shrinking home insurance options and rising costs of insurance—in a media statement two days later. “When major home insurers State Farm and Allstate announced last year they would stop writing new policies in California, both cited the cost of reinsurance—which acts as insurance for insurance companies, allowing them to shift some liability—as a reason for their exit,” the statement said.

Lower reinsurance rates would accomplish the goal of providing lower insurance rates for consumers, he reasoned.

Relief wouldn’t be immediate, however, as the Act directs the Secretary of the Treasury to set up the federal property cat reinsurance program “not later than four years after the date of enactment.” And the reinsurance program wouldn’t be phased in for wildfires and severe convective storms until six years after the date of enactment. (Other phase in periods are four years for flood, five years for wind and hurricane, and eight years for earthquake, with earthquake cover subject to a feasibility study.)

According to language of the INSURE Act, in order to be eligible for the proposed federal reinsurance program, a residential or commercial property insurer must offer all-perils property coverage and engage in “a loss prevention partnership” with policyholders, under which insurers and policyholders will invest in catastrophe loss mitigation and prevention.

The Federal catastrophe reinsurance program would cap eligible insurers’ liability above a threshold developed by the Secretary and an advisory committee of experts. In determining the threshold, the Treasury Secretary will consider both “the amount necessary to meaningfully reduce” participating insurers’ costs and private reinsurance market capacity necessary to “promote stable and competitive markets for catastrophe reinsurance.” The threshold “shall be an amount not greater than 40 percent of the probable maximum loss of an individual participating insurer” for each cat peril in the program, the language of the Act says.

Insurers are also expected to make significant investments aimed at decreasing losses, and this is another factor that the Secretary and advisers will consider in setting the threshold. (Activities included in a list of qualifying loss prevention partnerships include insurers covering the costs of loss reduction measures, in whole or in part, and insurers making coverage “contingent upon the implementation of a loss prevention activity by a potential insured party.” Activities that don’t qualify are premium discounts to policyholders for loss prevention “absent an investment by the participating insurer,” or an insurer simply providing information about loss prevention.

Premiums paid by participating insurers, based on their expected average annual losses and program administration costs, would be put into a “Federal Catastrophe Reinsurance Fund.” Bonds would be issued to fund any shortfalls if the fund balance isn’t sufficient to pay obligations to participating insurers.

“We are still analyzing the legislation,” stated APCIA’s Wienecke. “We appreciate the interest of Representative Schiff in addressing the insurance availability and affordability challenges in many areas of the country. However, the combination of climate change, accumulation of homes in hazard-prone regions, significant increases in labor and materials costs due to inflation, legal system abuse, and outdated regulatory systems cannot be overcome by a broad federal program that could potentially be more expensive for vulnerable policyholders and put families at even greater risk of losing access to the coverage they need.”

One section of the Act describes the creation of a grant program that will provide grants to states to promote loss prevention and an authorization of tens of billions of dollars per year to be appropriate to the Secretary to support the program—$50 billion in 2026, increasing to $70 billion in 2030. The state grants are meant to incentivize insurers, policyholders and state and local governments to fund activities that will reduce insurer losses, and to push states to mandate that insurers offer all-perils coverage. Among other provisions, this section notes that grants benefiting low and moderate income consumers and businesses will be prioritized. (Grants could also be used to relocate low income consumers from uninsurable properties, a later section notes.)

In a final section of the Act, there is language about states and the National Association of Insurance Commissioners working with Treasury to set up a pilot program on all-perils multiyear policies—with terms of five years or more.

APCIA reported that the legislation is co-sponsored by Representatives Zoe Lofgren, D-Calif., Rashida Tlaib, D-Mich., Julia Browley, D-Calif., Kevin Mullin, D-Calif., Andrea Salinas, D-Oregon, and Val Hoyle, D-Oregon.

According to media statements from Schiff’s office, the INSURE Act is supported by various consumer groups: the Center for Economic Justice, Consumer Action, Consumers Council of Missouri, Consumer Federation of America, Consumer Federation of California, Consumer Watchdog, Delaware Community Reinvestment Action Council, Georgia Watch, Oregon Consumer Justice, Real Reform Louisiana, Strategic Action for a Just Economy, Texas Appleseed, Texas Watch, and United Policyholders.

A section of the Act also addresses new data requirements for participating insurers, so that the Office of Financial Research and the Federal Insurance Office in collaboration with state insurance regulators can improve market monitoring. The Treasury Secretary will contract with “a statistical agent via a competitive bidding process” to collect and review the necessary data.