WASHINGTON (June 3, 2013) – The R Street Institute today warned that legislation set to be reintroduced by Sen. Bill Nelson, D-Fla.,  would encourage development in risky and environmentally sensitive regions and stick taxpayers with the bill for disasters currently covered by private insurance companies.

Nelson recently announced that he plans this week to introduce the Homeowners’ Defense Act of 2013, an updated version of legislation he has sponsored in several recent sessions of Congress. The bill would call on the U.S. Treasury to make loans available to ensure the solvency of state-run reinsurance programs such as the Florida Hurricane Catastrophe Fund.

“This legislation is built on a faulty premise: that the federal government is needed to spread the risk of catastrophes and provide incentives to transfer risk to the private capital and reinsurance markets,” R Street Senior Fellow R.J. Lehmann said. “In reality, private reinsurance markets actually have excess capacity for catastrophic risk, and the capital markets’ appetite can be seen by the record issuance this year of catastrophe bonds.”

Lehmann added that displacing private markets with government-run reinsurance entities, whether at the state or federal level, violates the basic insurance principle that risks should be spread as broadly as possible. Because government-run reinsurers concentrate risks within a single state or a single country, they must either charge higher premiums to account for this greater risk-load, or else offload the risk onto other taxpayers.

“We’ve already seen what happens when the federal government gets involved in property insurance; the answer is the National Flood Insurance Program, which has $30 billion in debt it will never be able to repay,” Lehmann said.

Nelson said he plans to combine this year’s version of the bill with legislation to create a National Hurricane Research Initiative. The combined bill would therefore be referred to the Senate Commerce Committee, on which Nelson sits. The Senate Banking Committee has jurisdiction over the insurance portions of the bill.

Featured Publications