Insurance debate rages in Florida as hurricane season approaches

by Artemis on May 29, 2009

It’s now three days until the official start of the Atlantic hurricane season and the season has got off to an early start with the formation of the first tropical depression yesterday. For Florida policymakers this means it’s time for another try at getting some new legislation in place to provide a means to increase the financial backstop available to homeowners in the State. There are two opposing sides to this current battle.

U.S. Rep. Ron Klein has reintroduced the Homeowners Defence Act which calls for the Treasury Department to become the reinsurer of last resort during massive catastrophes which have roughly half a percent of occurring. Washington would be liable for up to $200b but each Klein says the premiums paid by homeowners would cover those costs. This would free up taxpayers from having to pay for emergency spending sparked by large storms. The legislation would also allow each State to issue catastrophe bonds of up to $20b, imagine how this could impact the insurance linked securities investment market and how it could affect pricing of transactions.

The opposing side says that an approach like the above would undermine the private insurance market, encourage coastal building at a time when they feel it is better to put money into ensuring buildings will stand up to storms and take the focus off investment in coastal defences.

There has to be a happy medium here. Some kind of public-private risk transfer partnership would seem to be the ideal solution to increase the affordability of insurance for homeowners, share the risk with the government (rather than putting the full emphasis on them) and encourage the use of risk transfer instruments such as cat bonds (perhaps a mini-cat bond) by property insurers by making it easier and cheaper for them to access the market while the government could act as a swap counterparty.

So there are options available but at this point in time no-one seems to have an answer that will please everyone. It’s now thought the the Homeowners Defence Act could actually get passed by the Senate as it has gained some support and it’s believed President Obama may support it. Whichever option get’s through it is essential that homeowners premiums are top priority followed by the need to keep the private market involved (a government backstop only solution will just be a modernised cat fund). We still prefer a public-private solution to spread the risk and encourage the government to utilise the kind of risk transfer tools which are really suited to this situation.

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