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Politics

Federal insurance fund hits steep obstacle

The Bush administration says a U.S. spread-the-risk solution could invite more disaster.

By WES ALLISON
Published April 12, 2007

WASHINGTON - A Florida-driven effort to seek a federal answer to rising property insurance rates hit its first major snag Wednesday.

At a hearing of the Senate committee that oversees insurance, President Bush's top economic adviser said that the administration opposed the creation of a federal catastrophic insurance fund, which Florida lawmakers have been touting, and that allowing the government to meddle in the insurance market could spell disaster.

Earlier, the committee heard Florida Gov. Charlie Crist and Florida's U.S. senators, Bill Nelson and Mel Martinez, tout such a fund, which would help insurers pay claims from major disasters.

"National catastrophic risk insurance would displace private insurance and undermine the economic incentives to mitigate risk," said Edward Lazear, chairman of the president's Council of Economic Advisers. "It would force taxpayers nationwide to subsidize insurance rates for the benefit of a relatively small group of people in high-risk areas."

Sen. Christopher Dodd, D-Conn., chairman of the Banking, Housing and Urban Affairs Committee, said he was open to a national fund, though he warned of unintended consequences, such as national building codes.

He and the committee's top Republican, Sen. Richard Shelby of Alabama, also endorsed a plan by Nelson and Martinez to create a commission of experts to suggest solutions to the problem.

Nelson said the commission could help build consensus where there now is little. Two major insurers, Allstate and State Farm, support a privately funded catastrophic fund, but the industry generally does not. Neither does the reinsurance industry, which sells insurance to insurers to help them cover their losses.

As proposed by Nelson and Martinez, the national "cat" fund would be funded through insurance premiums. In the event of a major hurricane, earthquake or other disaster, the money would go to state funds, like Florida's, which then would sell it as reinsurance to insurers.

The idea is that a federal backstop would spread the risk, stabilize the market, keep rates lower, and keep more insurers writing policies in high-risk states.

Shelby said he worried it would concentrate risk in state funds and undermine the market by selling below-rate reinsurance that might be politically popular but fiscally irresponsible.

But Congress is feeling pressure from home and business owners whose rates are climbing while insurance profits do the same.

"They have been going after our people. They made over $60-billion in profits last year," Crist said. "I'm all for making a profit, but I am not for profiteering on the backs of our citizens."

[Last modified April 11, 2007, 22:51:49]