Rep. Wilson’s terrible, horrible, no good, very bad idea
Let’s begin, for example, with Rep. Wilson’s first sentence, where she claims that floods in New York City subway stations and earthquakes in Washington, D.C. are unusual events that were “once seemingly out of science fiction.” In fact, New York’s subways have flooded periodically since they opened and were hit by hurricanes as early as 1938. Mild earthquakes, likewise, have periodically hit the Washington, D.C. area since at least 1758.
Wilson also misstates the amount of the Sandy relief bill she voted for in Congress (it was nearly $51 billion, not $17 billion as Wilson says) and the percentage of California homeowners who lack earthquake insurance (it’s actually 90 percent, not the 80 percent she cites.)
Given her enormous number of errors, it’s not surprising the bill Wilson has introduced, something called the Homeowners’ Defense Act, is hugely misguided. The bill, as Wilson describes it, would create a “national consortium for state-sponsored insurance funds to voluntarily bundle their catastrophe risk with one another” and then transfer it to the private sector. This, she says would “put an end to costly bailouts for regions struck by natural disasters.”
This seems harmless enough at first blush and, if it were accurate, it would be harmless. But it’s inaccurate in at least three ways.
First, and perhaps most importantly, the bill will not save a penny of currently allocated federal money. Except after Hurricane Katrina, the federal government has never paid any significant amount of money to rebuild private homes damaged by hurricanes. The billions of dollars that will flow to Sandy-impacted areas pay for infrastructure repairs, police overtime, and a few new mitigation projects — but not the types of home repairs that state insurance pools cover. Thus, the bill creates a brand new federal responsibility that we didn’t have before. Its existence wouldn’t have reduced Sandy spending in any way.
Second, the private market already does what Wilson says her bill will do. Through private reinsurers and reinsurance brokers, states that want to already can purchase reinsurance that pools their risks not only with those of other states but also with events that happen in entirely separate parts of the world. Through private reinsurance contracts, the risks of hurricanes hitting Virginia are already pooled with events like cyclones in Australia and industrial accidents in Japan. Because these events are very unlikely to happen at the same time, private companies can balance one type of risk against another. All other things being equal, broader pools result in lower overall rates. By consolidating risk in the United States, a national consortium of the sort Wilson proposes would have to charge higher rates than the private sector in order to break even in the long run.
This gets to the final problem with the proposal. No matter what types of safeguards Wilson’s bill puts in place, taxpayers ultimately will end up on the hook for millions of private homes in disaster-prone areas. The most similar existing program to what Wilson proposes, the National Flood Insurance Program, was intended to break even in the long run when it started in 1968. Today, once it finishes paying all claims from hurricane Sandy, the NFIP will owe nearly $30 billion to the U.S. Treasury, an amount it has no ability to ever pay back.
Rep. Wilson’s bill is a truly awful idea. Congress has no reason to allow it to move forward.