WASHINGTON–Two freshman members of Congress today introduced legislation that would allow for high-risk states to pool their catastrophic risk resources and make use of the private market.

Reps. Ron Klein, D-Fla., and Tim Mahoney, D-Fla., introduced the legislation to help stabilize the catastrophic insurance market without adding to taxpayers' burden. The bill, known as the Homeowners Defense Act of 2007, has the support of 35 members of Congress, representing 20 states, they said.

Under the proposed legislation, states would be allowed to pool their catastrophic risk together, and then transfer it to the private market through the use of catastrophe bonds or the purchase of reinsurance. Additionally, the bill would establish a National Homeowners Insurance Stabilization Program to provide low-interest federal loans to states impacted by severe natural disasters.

“Our innovative plan gives states the option to participate in the plan by allowing their state-sponsored insurance funds to voluntarily pool their catastrophic risk with one another,” said Rep. Klein. “Private markets–not your tax dollars–would take on the risk through catastrophe bonds and reinsurance contracts. Through our legislation, homeowners throughout Florida and the United States will have more access to insurance, which we believe will ultimately result in lower insurance rates.”

Rep. Mahoney, noting that the legislation has the support of House Financial Services Committee Chairman Barney Frank, D-Mass., said the legislation would help Americans protect their biggest single asset–their home–without creating a financial catastrophe for Congress in the aftermath of a natural disaster.

“This legislation would encourage responsible development and risk mitigation while ensuring the American taxpayer will never have to fund a bailout in the event of a natural catastrophe,” he said.

Admiral James M. Loy, former deputy secretary of homeland security and commandant of the U.S. Coast Guard, as well as current co-chair of ProtectingAmerica.org, said the bill seems to meet many of the needs for a program to be effective.

“It addresses the need for mitigation and other preventive programs before catastrophe strikes, and provides an essential financial backstop to the states that participate in the program so that our families can repair, rebuild and recover following a natural catastrophe,” he said. “This bill has the potential to save homeowners billions of dollars ontheir annual homeowners insurance premiums and will provide taxpayers throughout the country with a substantial savings by minimizing the current taxpayer subsidies demanded by our current catastrophe response program.”

Support for the measure also came from the Independent Insurance Agents and Brokers of America (IIABA).

Charles Symington, senior vice president for government affairs and federal relations for the group, said the IIABA was “very pleased” with the bill's introduction as a means of providing a solution to the issue that looks beyond only those states hardest hit in recent years.

“Natural disasters are a national problem that requires a national solution, and we applaud the leadership shown by these members in advancing solutions to this problem,” he said.

Others in the insurance industry advise caution. June Holmes, interim chief executive officer of the Property and Casualty Insurers Association of America, said PCI supports the idea of a federal mechanism addressing catastrophic risk in concept but noted that the devil is in the details.

“We have supported the concept of a federal liquidity mechanism for a while and are pleased to see its inclusion in this bill,” she said. “We believe such a program would establish an important financial protection in the event of a major catastrophe. However, there are several details of the catastrophic loan provisions that we will need to evaluate, discuss and examine.”

Ms. Holmes said the proposed risk transfer mechanism that would allow states to make use of the private market also should be examined thoroughly to ensure those mechanisms would work as intended.

“This idea deserves further study,” she said. “However, the key to setting up such a program is in the details, and we will need further time to examine the merits of such a program and discuss it with our members.”

Marc Racicot, president of the American Insurance Association (AIA), expressed concerns about the potential problems of increasing the federal government's involvement in the insurance business.

Although noting that the AIA shares the goal of better spreading catastrophic risk, Mr. Racicot added that the association has “genuine reservations about the need to add an additional layer of government involvement in the private property protection system of this country and the individual states given the private capital market's increasing appetite for spreading natural catastrophe risk.”