Something for everybody (to hate): Rep. Wilson’s beach house bailout
Although cloaked in the language of “private” mechanisms, the proposed bill — which Wilson Chief of Staff Kim Bowman, in a note to her colleagues, said that her boss would drop this week — is nothing more than a government effort to provide hugely subsidized insurance to beach home owners, beach-front real estate developers and other people who want subsidies to live in disaster-prone areas. Essentially, it sets up a “private” insurance-writing consortium on the model of Fannie Mae to “backstop” private insurance (mostly for hurricanes) around the country; makes the Treasury lend money to states that suffer from natural catastrophes; and provides additional loan guarantees to the state-run earthquake insurer in California and a similar hurricane-related reinsurance entity in Florida. The bill’s supporters say that all of these mechanisms would break even in the long run and reduce property insurance rates for people living in disaster-prone areas.
Attractive as this sounds, it can’t possibly work because it so seriously violates the risk-pooling principles at the heart of insurance. Quite simply, insurance everywhere works by pooling together similar risks. While only a handful of insurers are truly global in scope, almost all of them spread their risk around the world by buying “reinsurance” (insurance for insurance companies) that allows them to pool the risk of a hurricane in Florida with, for example, the risk of flooding in the United Kingdom and a cyclone in Australia. Since these events will almost never happen at the same time, reinsurers can profit by earning premiums for one type of risk even as they pay out huge claims for another. All other things being equal, a broader pool lowers premiums.
But, by consolidating risk in the United States, Wilson’s bill does the exact opposite of good insurance practice. To simply break even in the long run, its new mechanisms will have to charge more than the private sector and thus, nobody would have any reason to do business with them. The most likely outcome, however, is that it will charge less than it needs to break even and thus end up leaving taxpayers with the bill. The most similar effort that now exists, the National Flood Insurance Program, began with similar promises of responsibility but was was recently the recipient of a $9.7 billion bailout and will owe taxpayers around $30 billion once it finishes paying all claims for super-storm Sandy. And taxpayers are hugely unlikely to get any of that money back.
And, through these profligate subsidies, the proposed programs would do immense environmental damage by providing huge incentives to build in the most disaster-prone areas the country. The only winners, it’s likely, will be real estate developers who own-disaster-prone land and insurance companies that would like to shed responsibility for actually taking on risk.
But the bill still has some degree of serious support. In 2007, a version actually passed the House of Representatives 286-155 with co-sponsors that included not only liberals given to big government solutions for every problem but also well-known conservatives like then-House member (and likely 2016 GOP candidate for president) Bobby Jindal. The opposition, consolidated around the group smartersafer.org was equally diverse and brought together bedfellows as unlikely as the Competitive Enterprise Institute and the Sierra Club.
Quite simply, Rep. Wilson’s Homeowners Defense Act is a terrible idea. It would damage the environment while costing taxpayers billions. It needs to be stopped. Now.