Special Interest Double-Talk Attempts to Scuttle Homeowner and Taxpayer Protections

Aug. 22, 2008

WASHINGTON , Aug. 22 /PRNewswire-USNewswire/ -- A report that contradicts previous findings regarding the benefits of establishing a national catastrophe backstop was strongly criticized by the nation's leading coalition of first responders, insurers, large and small businesses and more than 15,000 individuals who are concerned about preparing and protecting American families and taxpayers from massive natural catastrophes like earthquakes and hurricanes.

"The report issued today by Americans for Smart Natural Catastrophe Policy makes erroneous assumptions, misreads the specific aspects of pending legislation and comes to conclusions that are designed to serve the needs of the interests that fund this organization, and not the American taxpayer," said David A. Smith , a director of ProtectingAmerica.org.

"While the consultants who prepared the report would like readers to believe that the status quo of demanding ever higher insurance rates and hoping for the best is the solution to the concerns of the 6-in-10 American families that live in areas vulnerable to massive hurricanes and earthquakes, that system, like their report, is fundamentally flawed," Smith said.

"The House of Representatives, by an overwhelming 258-155 margin, considered this kind of rhetorical gimmickry, saw it for what it was, and in a bipartisan show of support for American taxpayers and families, approved the national catastrophe fund legislation, HR 3355," he added.

"HR 3355 is an integrated solution that creates a partnership between primary insurers, reinsurers, state governments and the National government. It will increase capacity, eliminate subsidies in the current system and offer coverage at lower costs to consumers than today's system," Smith said.

Contrary to the reinsurance-funded report, HR 3355, the Homeowners' Defense Act of 2007, in conjunction with state catastrophe funds, would:

-- Save American homeowners, as determined by the international actuarial firm Milliman, Inc., more than $11 billion each year, on their homeowners insurance premiums; -- End the taxpayer subsidies that require homeowners in non-vulnerable areas to pay for uninsured and under-insured losses following every major disaster; -- Require participating states to take significant and substantial steps to improve mitigation, education and preparation in areas where hurricanes, earthquakes or other events may strike.

Among the panoply of flawed premises, miscalculations and misunderstandings, are the following immediate facts and observations:

-- The analysis provided in the report is centered on the National Flood Insurance Program, and not at all on HR 3355 although the authors cynically imply that the conclusions apply to the national catastrophe backstop that would be established in HR 3355. -- The analysis assumes that a catastrophe plan will charge inadequate rates, HR 3355 specifically requires rates to be actuarially sound -- The analysis in future years is fatally flawed because it does not recognize the accumulation surplus from years where there are no events to help pay for future events. -- Insurers of last resort, "FAIR plans," or other similar residual market mechanisms could not pass their debt off to the nation's taxpayers. HR 3355 specifically establishes standards for state catastrophe funds to participate in the national backstop. -- Private markets cannot handle the huge timing risk associated with the unpredictable, low-frequency events. That is why private markets have been dysfunctional in this area. The disintegration of the global reinsurance market after Hurricane Andrew (which led to the necessary introduction of the Florida Hurricane Catastrophe Fund), the triple digit rate increases after 2004 and 2005 from reinsurers, accompanied by a rationing of capital that left many primary companies undercovered and undercapitalized (so that 3 of the top 10 insurers in Florida were rendered insolvent after the 2005 storms), and the lack of capacity for catastrophic risks in the reinsurance and capital markets, despite much hoping and wishing for it to be otherwise. It never will be. -- Federal programs as designed in HR 3355 require actuarially sound premiums, and do not require after-the-fact transfer of risk. With the right mechanisms in place to handle the timing risk gap, no subsidies are necessary. The federal appropriations for Katrina certainly did result in taxpayer subsidies, but that's because there was no formal federal program in place. -- All responsible proposals (including HR 3355 and the FL programs) include mitigation funding as a critical part of the solution, and require risk-based premiums. -- While the private market may have enough capital on paper, it will never be allocated to this sector in sufficient amounts. The painfully slow growth and still-tiny size of the cat bond market illustrates this point well. -- It is also misleading to look at total reinsurance industry capital and say that of course there's enough to go around. Let's not forget the fundamental uninsurability of catastrophic events, which is acknowledged even by those academics who still wistfully hope for a private market solution. -- As noted by J. David Cummins, a Wharton professor, in the Federal Reserve Bank of St. Louis Review, July/August 2006, "the capital numbers overstate the capacity of global reinsurers, ... . because most of the equity capital is committed to support coverage in high-frequency lines of business."

About ProtectingAmerica.org

ProtectingAmerica.org was formed in 2005 and is a non-profit organization consisting of emergency management officials, first responders, disaster relief experts, insurers and others. Its members include the American Red Cross, the International Association of Fire Fighters, more than 300 other organizations and businesses and more than 15,000 individuals from across the nation.

The non-partisan organization is chaired by James lee Witt and Admiral James M. Loy . Mr. Witt served for eight years as the director of the Federal Emergency Management Agency. Admiral Loy was formerly the deputy secretary of the US Department of Homeland Security and formerly served as commandant of the United States Coast Guard.

At the core of ProtectingAmerica.org's mission is the establishment of a comprehensive, integrated national catastrophe management solution that will better prepare and protect American families, communities, consumers and the American economy from catastrophe. Among its efforts to support this mission, ProtectingAmerica.org is working to increase public awareness and consumer education; advocate for better coordination with local, state and federal mitigation and recovery efforts, and strengthen emergency response and financial mechanisms to rebuild after a major catastrophe.

SOURCE ProtectingAmerica.org

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