NU Online News Service

WASHINGTON --The Bush Administration would oppose legislation establishing a federal catastrophe fund, a top administration official told the Senate Banking Committee today.

Edward Lazear, chairman of the Council of Economic Advisors, told the Senate panel that the administration "opposes legislation to create a new federal program to backstop catastrophe insurance," and that it also opposes expanding the current scope of the National Flood Insurance Program.

If enacted, Mr. Lazear said the administration believes a federal catastrophe backstop, dealing either with state funds or directly with insurers, would undermine the private market and could encourage the type of development that has increased the catastrophe risk problem.

"National catastrophe risk insurance would displace private insurance and undermine the economic incentives to mitigate risk," he said. "It would force all taxpayers nationwide to subsidize insurance rates for the benefit of a relatively small group of people in high-risk areas. This would be both costly and unfair to taxpayers."

Supporters of a federal catastrophe program argued, however, that taxpayers are already bearing the brunt of costs in the wake of a major storm, noting the billions of taxpayer dollars that have been spent on recovery in New Orleans and along the Gulf of Mexico coast.

"The long and the short of what is facing us is that the big one is coming," said Sen. Bill Nelson, D-Fla., who appeared before the committee as a witness.

He added that Hurricane Katrina, which inflicted billions in losses, was only a Category 3 storm, so a category 4 or 5 storm--or an earthquake in San Francisco or Memphis--could have far more of an impact. "And when the big one hits," he added, "just like with Katrina, the federal government is going to pick up the tab."

Sen. Mel Martinez, R-Fla., said that the question facing policymakers was not if a major storm would strike the U.S., but when. "We dodged a bullet last year," he said, "but asking for another year without a major hurricane is like betting against the house."

A major storm could overwhelm the insurance market, according to James Loy, a former Coast Guard admiral and current national co-chair of ProtectingAmerica.org, a coalition that is promoting a national catastrophe fund program that would back up qualified state catastrophe funds.

A replay of the 1906 San Francisco earthquake this year, he said, could cause as much as $400 billion in damages, and the "Long Island Express" hurricane that struck in 1938 would cost over $100 billion in today's world.

Under the ProtectingAmerica.org proposal, he said, insurers would provide catastrophe funds at the state level. "Much like the 401(k) retirement savings program, these CAT funds would grow tax-free, thus able to generate higher levels of reserves to provide greater levels of coverage in a shorter time frame."

Florida Gov. Charlie Crist testified to lawmakers, arguing that a federal catastrophe fund would be a better use of taxpayer money because it would work on a proactive basis to help mitigate against damages, and it would also ease the overall burden on taxpayers nationwide.

Gov. Crist noted estimates that the Great Lakes and Plains states will contribute roughly $26 billion in Katrina-related programs. "However, these tax dollars are not risk based, and they will leave little legacy that guarantees relief for the next natural catastrophe, regardless of where it strikes."

Witnesses representing the insurance industry criticized the national cat fund proposal and argued that Florida's fund does not provide the relief for taxpayers that it claims.

The Florida fund operates by selling reinsurance backed by the state at a reduced price to primary companies. In the event that it pays out for losses beyond its reserves after a major event, noted Robert Hartwig, president of the Insurance Information Institute, he said the fund would largely cover its expenses through assessments on policyholders. "Most of the savings are illusory," said Dr. Hartwig.

Dr. Hartwig said an occurrence equal to the 1926 hurricane that struck Miami would result in a $40 billion assessment against policyholders across the state.

Frank Nutter, president of the Reinsurance Association of America, said that the assessments would affect all policyholders in the state under a law passed by the state legislature in an emergency session in January.

"Policyholders from all lines of insurance, including those at low risk to catastrophes, are being required to insure insurance companies" he complained.

Representatives of primary insurance companies appearing before the panel urged lawmakers to take a cautious approach in crafting policy, and to especially avoid needless punitive measures resulting from some of the well-publicized problems in the wake of Katrina.

"The reality is that there are no quick fixes," said American Insurance Association President Marc Racicot, commenting on the affordability and availability issues affecting the Gulf Coast region and elsewhere.