Every few years, after a major hurricane strike or other disaster, there are renewed calls for Congress to establish a national catastrophe fund to provide a safety net for property insurers and cheaper coverage for homeowners. A recent Tampa Bay Times editorial on the topic is thus just the latest in a long series.
While well-intentioned, a national catastrophe fund would actually be a solution in search of a problem, and would increase both insurance rates and taxpayer liabilities.
Proponents argue that a national catastrophe fund could sell reinsurance coverage to insurance companies for less and extend those savings to consumers, while saving taxpayer money. In reality, however, a national catastrophe fund would actually have to charge more to break even, because its risks would be concentrated within the United States. In contrast, private reinsurers diversify their risks globally by, for example, pooling Florida’s hurricane risk with Japanese earthquake risk.
Therefore, a national catastrophe fund would either have to charge more to offer comparable coverage; or worse: risk massive taxpayer bailouts after politicians artificially suppress its rates due to political pressure.
Indeed, reforms are needed. The Tampa Bay Times is right to highlight that Florida historically has paid more into the National Flood Insurance Program (NFIP) than it has received in payouts, although Hurricane Irma is likely to change the ratio somewhat. Congress should therefore encourage private alternatives to the NFIP by allowing federally backed mortgage lenders to recognize private flood coverage. Without clarity from federal lending regulators, some mortgage lenders are hesitant to recognize anything but policies underwritten by the NFIP.
Secondly, Congress should enact disaster mitigation programs, including funding to buy out properties with repeat flood losses, grants to fortify the properties of low-income policyholders and a moratorium on NFIP coverage for new construction in extremely high-risk areas.
For years, the NFIP has encouraged irresponsible development in high-risk areas through suppressed rates. This is why the program is $25 billion in debt, a total that could double when all the claims from Harvey, Irma, Maria and Nate are added up. Another massive federal program will only make matters worse and cost both taxpayers and policyholders more in the long run.
Image by Sergey Nivens