If a hurricane blows away your Boca Raton beach house, AllState — one of the largest providers of homeowners’ insurance in Florida — hopes taxpayers will guarantee your policy so it won’t have to.
AllState is funding Protecting America, a coalition of companies and government and community organizations that is supporting the Homeowners Defense Act introduced by Rep. Ron Klein and awaiting committee review on Capitol Hill. Half of Protecting America’s board members have ties to the two largest private insurers — State Farm and AllState — in Florida.
Klein, who represents a district stretching from West Palm Beach to Boca Raton, has championed the legislation as an alternative to the emergency supplemental aid Congress often passes in the wake of a Katrina-scale disasters.
“Although it has become clear in recent weeks that big offshore insurance companies who oppose this bill will say anything to protect their profits, I am here to set the record straight. I believe strongly in the power of the free market, and we have no intent to subvert it or eliminate the insurance industry,” said Klein in testimony before the House Financial Services Committee.
Yet Klein’s legislation provides a guarantee backed by federal credit. The history of Florida’s state-run insurance program, which has nearly $500 billion in liabilities and is running a deficit, suggests the picture of government guarantees is not rosy. State insurance will reportedly face a $14 billion shortfall if a major hurricane hits.
Opponents say the Homeowners Defense Act creates incentives for real-estate developers to take on risky projects while creating liabilities for the federal government. Supplementals, goes the argument, are a one-time expense, while a federal guarantee program would lead to higher overall disaster clean-up costs.
Americans for Tax Reform said in a statement that the bill will, “insert the federal government into previously private insurance and reinsurance marketplaces at enormous costs to taxpayers. The bill … offers federal guarantee of state bonds related to catastrophes. In the long term, such ‘backstop’ measures will result in wasteful spending, larger deficits, and, eventually, higher taxes.”
“We’re trying to take some cost out of the market so that insurance companies don’t have to pay such super-high rates in reinsurance,” argued Peter McDonough, a spokesman for Protecting America. Insurance companies take out “reinsurance” on their own policies as an additional layer of protection, which can account for as much as 30 percent of their costs. McDonough said under the new program insurance companies would be required to pass savings onto consumers.
The bill has created unusual alliance between taxpayer rights groups like the Heartland Institute and the National Wildlife Foundation, which have bonded together in opposition to the bill. The groups oppose the legislation for different — fiscal and environmental — reasons, but the gist is the same – both groups believe the legislation would create strong incentives for people to develop homes in risky and environmentally sensitive areas, requiring subsidies to maintain low insurance rates.
Opponents say a national pool of high-risk states won’t work for the same reasons Florida’s state-level catastrophe fund doesn’t. Private sector reinsurers are usually large international companies that spread risk over a diverse area — hedging against earthquakes in Tokyo to floods in the U.K. Supporters say that private market can better pool this risk on a large scale, and that if the government has to provide this kind of protection on a national level, it will raise costs and require subsidies in the future.
“Our experience is that when insurance is priced below a rate that truly reflects the risk, it acts as an incentive for building and developing in these sensitive coastal areas. This increases total disaster costs — and taxpayers of course end up paying in the end,” said David Conrad of the National Wildlife Foundation.
“The states that are going to voluntarily join this are going to be the states with the greatest risk, they’re going to want the guarantee of a federal bailout. They’re going to create a massively high risk pool for reinsurance,” said Michelle Minton, an insurance policy analyst at the Competitive Enterprise Institute. “Allowing states to have these public option reinsurance pools allows them to continue on this dangerous trajectory they’ve been on.”
Rates in Florida were getting so high that in 2002 the state created the Citizens Property Insurance Company as an insurer of last resort. This public insurance was not supposed to compete with private insurers, but recent legislative changes have allowed it to expand and compete with the private market — and it has steadily been gained market share and recently become the single biggest provider.
“The rates should be prohibitively high in these risky areas,” said Minton. “Why should other taxpayers provide subsidies to those who want to live on the beach? It’s become an entitlement now for those people who want to live on the beach. Even though they can’t afford it, they demand that someone give them insurance at a reasonable rate. In a normal insurance situation the folks who live inland would have a discount, but insurers don’t have a way to gauge true risk,” she said.
“When you have an institutional guarantee, you’re more likely to encourage risky behavior. What we’re lamenting is that the guarantee of protection will prevent people from thinking logically and taking responsibility,” said Minton. “If it wasn’t for the state-run insurance, which has so much of the market, they wouldn’t need a federal bailout at all.”
Contact Aleksandra at: ak[at]dailycaller[dot]com.