We need a national catastrophe fund
By JEB BUSH
Published October 21, 2005
There is a growing problem in this country regarding the availability and affordability of property insurance after major disasters. The time has come to consider creating a national catastrophe fund to deal with this issue. No region of the United States is immune from disasters - whether they come in the form of hurricanes, tornadoes, wildfires, earthquakes, snowstorms or terrorist events - and the economic stresses wrought by these disasters often have a national impact.
Creating a national catastrophe fund would allow us to share the risk created by major disasters across the country. It would strengthen and stabilize the insurance market and provide an opportunity for our federal government to enhance our preparedness and protect our economy for years to come. Insurance often is the engine that restarts local economies by helping people rebuild quickly.
Events like Hurricane Katrina can overwhelm the private insurance market's ability to pay claims, and they can limit the market's ability to continue to provide needed coverage. Money for such a fund would come from a portion of property insurance premiums insurance companies already collect. This money should then grow tax-free, creating a national pool for extreme catastrophic losses and providing an additional level of policyholder protection. Allowing insurance companies to pool their resources and spread the risk for all catastrophic events across the industry on a nationwide basis would strengthen the system. Without such a fund to provide a stable and affordable market for insurance companies, new capital will not enter the insurance market, forcing higher and higher premiums and availability problems. A national catastrophe fund would provide the financial capacity to cope with the economic consequences of catastrophic risk and give affected regions the ability to recover more quickly. It would serve as a last line of defense, or additional level of protection, to allow insurance companies to continue to insure citizens in high-risk areas at more affordable rates.
In addition, a national catastrophe fund could serve as a catalyst for Washington to create conditions that would raise standards for disaster preparedness and recovery. For example, the federal government could say in order to participate in a national catastrophe fund, states must adopt strong building codes, have robust, well-planned emergency response capabilities, and establish their own regional or state catastrophe funds.
We've worked hard in Florida to meet these requirements and develop a culture of preparedness. This has helped us prepare for and recover from seven hurricanes and three tropical storms in the past 14 months, with another, Hurricane Wilma, on the way. We have an emergency management team second to none. We have the strongest building codes in the country, which has saved hundreds of millions of dollars in the last 10 years. We also have a state catastrophe fund, without which Florida would have no private insurance right now in our state. After Hurricane Andrew in 1992, the private reinsurance industry abandoned Florida. In response to this void, Florida established the Florida Hurricane Catastrophe Fund, which requires insurance companies to purchase reinsurance from the fund for protection against major disasters. After last year's hurricanes, insurance companies received more than $3.6-billion from the Catastrophe Fund, stabilizing the Florida market and cushioning the impact of $21-billion in insurers' losses from the 2004 hurricane season by pooling the catastrophic risk of hurricanes in Florida.
By providing reliable, affordable protection against catastrophic losses to insurers doing business in Florida, only one company went bankrupt from the most devastating hurricane season in our state's history. In contrast, after Hurricane Andrew, at least nine insurers were rendered insolvent as claims mounted. Others left the market altogether.
A national catastrophe fund could have a similar positive outcome across the nation. We have an opportunity to minimize risk nationwide and ensure our economy is able to absorb losses from large-scale disasters, as well as provide a more efficient, cost-effective way to prepare for these disasters. Rep. Mark Foley, Rep. Ginny Brown-Waite and other members of the Florida delegation have sponsored legislation addressing catastrophic losses. They have good ideas and Congress should look at them. More disasters are inevitable, and while Americans cannot prevent all catastrophes, we can, and should, better prepare and protect America from their consequences.
- Jeb Bush is governor of Florida.