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Taxpayers May Face Hurricane Tab

By ELIZABETH WILLIAMSON

May 31, 2008; Page A1

WASHINGTON -- As hurricane season begins, Democrats in Congress want to nationalize a chunk of the insurance business that covers major storm-damage claims.

The proposal -- backed by giant insurers Allstate Corp. and State Farm Mutual Automobile Insurance Co., as well as Florida lawmakers -- focuses on "reinsurance," the policies bought by insurers themselves to protect against catastrophic losses. The proposal envisions a taxpayer-financed reinsurance program covering all 50 states, which would essentially backstop the giant insurers in case of disaster.

The program could save homeowners roughly $500 apiece in annual premiums in Florida, according to an advocacy group backed by Allstate and State Farm, the largest writers of property insurance in the U.S.

But environmentalists and other critics -- including the American Insurance Association, a major trade group -- say lower premiums would more likely spur irresponsible coastal development, already a big factor in insurance costs. The program could also shift costs to taxpayers in states with fewer natural-disaster risks.

"This bill makes it a little bit too easy for the state to go to the federal government for a bailout," said Eric Goldberg, associate general counsel at the American Insurance Association, an insurers' trade group.

The legislation passed the House with bipartisan support, 258-155, late last year, despite a presidential veto threat. Although a Senate vote is unlikely this year, proponents are trying to make it a litmus-test issue in the presidential race. The two Democratic contenders, Sen. Hillary Clinton of New York and Sen. Barack Obama of Illinois, in their recent visits to Florida -- a key swing state -- have both voiced support for the plan.

Big winners would be coastal states, particularly Florida, where more than half of the nation's hurricane risk is centered. Currently, property-insurance rates in Florida are among the highest in the nation. Florida also has a struggling state reinsurance fund that would be helped by a federal program.

To gin up national attention for the program, Allstate and State Farm have teamed up with the American Red Cross in an advocacy group, ProtectingAmerica.org, pushing for better emergency preparedness, providing disaster news and education to prevent lawsuits. The group also pushes for the federal program.

Red Cross says it didn't lobby for the federal bill, and doesn't take a position on it. Its interest in ProtectingAmerica is solely to encourage preparedness, it says.

The proposed plan is roughly analogous to the National Flood Insurance Program, which has been criticized for encouraging construction in risky floodplains. Nevertheless, in recent weeks the Senate voted to renew the flood-insurance program, and also to forgive $17 billion in debt incurred after Hurricane Katrina.

Critics cite that debt forgiveness as an example of how states with little or no hurricane risk can end up footing the bill for damage in flood-prone areas. "For years, federal flood-insurance backers told us the program was financially sound, but the storms of 2005 left it $17 billion in the hole," said Steve Ellis of nonpartisan budget watchdog Taxpayers for Common Sense.

Even some analysts hired by lobbyists for the federal program acknowledge it has its risks. "If you charge something less than the private-market cost for homeowners' insurance, that creates a potential incentive to increase exposure on the coast" -- in other words, to build in risky or flood-prone areas -- said David Chernick of Milliman Inc., an actuarial firm hired by ProtectingAmerica.

ProtectingAmerica spokesman Pete McDonough disputed that the program encourages developing in risky areas. "To think that $50 a month [in insurance savings] would be an economic incentive to live in an otherwise risky area seems foolish to me."

Florida's status as a presidential swing state has helped the plan win support from Sens. Clinton and Obama. Sen, Clinton is one of the bill's co-authors, along with Democratic Sen. Bill Nelson of Florida.

Florida Democrats' effort to make a federal disaster fund a big issue in this year's presidential race was one reason the state moved up its primary election to January from March, defying party rules. (That move is partly what's behind the current, heated battle between the Democratic candidates over how to count Florida's delegates in the nominating race.)

Florida lawmakers and Republican Gov. Charlie Crist are pushing hard for the federal program. Florida is currently the only state with its own reinsurance fund. That fund, created in 1992 after Hurricane Andrew, has lowered insurance costs for state residents, but would be stretched by a big hurricane this year. The federal program would assist the state's fund while also providing political cover for state politicians, some of whom say claims from a major storm this year could trigger the largest tax increase in state history.

"I'm calling on the voters in both parties to demand that the nominee of their party publicly support a national disaster fund," said Florida state Sen. Steven Geller, an uncommitted Democratic superdelegate. "If they won't, vote for the other party."

Republican presidential candidate Sen. John McCain, who badly wants to win Florida, is resisting calls to back the program. "This is a very large federal program," and the only state currently in a position to benefit is Florida, said Douglas Holtz-Eakin, Mr. McCain's policy director.

Sen. Clinton received $1.5 million from individuals in the insurance industry during the 2008 campaign cycle. She received $10,000 from Allstate employees, and $12,550 from State Farm, according to the Center for Responsive Politics. Mr. Obama received $960,000 from individuals in the industry. Employees from Allstate and State Farm, both based in Mr. Obama's home state, gave him $25,000 and $35,600, respectively.

Mr. McCain, who opposed the federal catastrophe plan, received $690,000 from individuals in the insurance industry, $9,000 from Allstate employees and $21,000 from employees of State Farm.

The proposal envisions the creation of funds like Florida's in all 50 states. These reinsurance funds would collect premiums from companies like Allstate, who would benefit because they would be paying less than in the private reinsurance market. That savings would get passed on to homeowners. Then, if a state got hit with a particularly severe disaster, whether hurricane, earthquake, tornadoes or other crisis, federal loans and state-backed reinsurance could step in to cover big losses.

In order to draw congressional support from states with somewhat less disaster risk, the federal program is designed to kick in for events that don't necessarily approach the catastrophic level of, say, a Hurricane Katrina. In tiny Delaware, for example, federal payouts could begin after yearly losses of less than $300 million. Katrina-related losses in Louisiana, by comparison, topped $20 billion.

It has the potential to "squeeze out" a big chunk of the private reinsurance market, said Brad Kading, president of the Association of Bermuda Insurers and Reinsurers, which opposes the legislation.

Congressional backers cite support from ProtectingAmerica.org, the group created by Allstate. State Farm and Allstate provide the bulk of its funding.

The group's co-chairs are Adm. James Loy, former deputy secretary of the Department of Homeland Security and retired commandant of the U.S. Coast Guard, and James Lee Witt, a former director of the Federal Emergency Management Agency.

Messrs. Witt and Loy are both paid lobbyists for ProtectingAmerica. That information doesn't appear on the group's Web site. Allstate managing counsel Edward Collins is ProtectingAmerica's national director.

"We don't list any lobbyists that work for ProtectingAmerica," said Mr. McDonough. "I don't see any need to even disclose that beyond what the law requires."

The group touts a partnership with the American Red Cross. In the two years before the Red Cross signed on as a coalition member in 2007, the Allstate Foundation gave more than $160,000 to the Red Cross and its chapters, according to tax records.

Marc DeCourcey, Red Cross senior director of federal relations and partnerships, said the organization signed on because ProtectingAmerica has run extensive national advertising campaigns stressing emergency preparedness. Ads direct readers to the Red Cross Web site, which offers survival tips, solicits donations and sells disaster kits.

"We have not advocated or lobbied on behalf of the federal bill at all," he said.

I am aware I used "redux" incorrectly in the title.

Why would you give the insurance for free? If the government ran a reasonably priced insurance company it could easily pay for itself and only in very, very rare cases would it even need to tap into tax dollars.

Unless the actuaries screw up.

Yeah, if they're paid as poorly as I am, they'll probably fuck up.

Why have insurance in the first place? The government is in the business of bail outs. Everyone deserves the home of their dreams right?

Could you give an example or two of such a government program? This is nothing but the government trying to keep insurance companies from the reality to policy holders that hurricanes do massive damage to some areas regularly and it's bad business to offer policies in those locations. So the government will let those companies keep collecting premiums only to walk anyway and let the government pick up the tab when something catastrophic happens, and do it in the name of "the right to equal access to insurance" of those people who choose to live in those areas.

Just cuz I can't think of an example doesn't mean we can't do it.

is it somehow imperative that people live in flood plains and hurricane areas?

If so, perhaps it is worth the risk to go it without insurance and or government bailouts?

If they do it this way why wouldn't everyone move to the freaking coast? You lose your property due to a hurricane and it gets rebuilt no questions asked... so basically as a property owner...you assume no risk at all?

That's a little too protectorate for me.. I'm ok with helping people out ONCE.

I'm not ok with rebuilding houses constantly in flood prone, hurricane prone areas...

I'd say the critics are dead on accurate on this thing.

What this seems to be about more than anything is getting State Farm and Allstate off the hook a hell of a lot faster by getting the state to pay for the losses they don't want to pay for....so bottom line All State and State Farm want to use the police power of government to help push out thier competition...and then rake in the profits because they reduce thier risk by a ton too.

After any disaster, one of the following is true:

(a) Property owners bear the entire cost of reconstruction.
(b) Somebody bails out property owners.

They get insurance in order to push the risk of building onto the insurance company, and the insurance company gives them a quote that essentially says "this is how much you have to pay us to take on the risk." Nobody should bail out the insurance companies for risk they willingly accepted, and nobody should bail out homeowners who didn't want to pay the fair price to have someone else take on the risk. As long as there are no bailouts, our current system is just fine, and people will be able to reasonably evaluate how much risk they're willing to take on.

The only wrench that can be thrown in there is insurance companies who are initially willing to offer policies in an area and decide later that they won't, but people should also understand when buying a property that risk evaluation, and therefore insurability, can change over time.

Don't cap what the insurance companies can charge and this should not be a problem. The only problem will be for people who can't afford the risk of bearing the replacement cost themselves and who have built an affordability model based on certain insurance rates.

Right, but people should recognize when buying a property that insurability changes. That's a second, more long-term risk.

Yes, but not everyone can afford to move if their rates become to high or coverage is no longer available.

If you're paying hazard insurance, you probably made a concious decision to move there in the first place. Homeless people and renters generally don't have to worry about hazard insurance.

Lets be serious. They can afford to move. They may howver take a loss on the property if they have to sell that will leave them not being able to purchase again. That's a far cry from moving not being affordable.