Last year when we considered this issue, I cautioned that federal reinsurance should not be viewed as the only option for reforming the market for natural disaster insurance. This year, I am happy to say that we have an alternative: I have been able to work with Rep. Rick Hill who has a background in insurance and has taken the lead in formulating marketbased solutions to address this important issue. We will soon be introducing the Policyholder Disaster Protection Act of 1999 along with several members of the House Ways and Means Committee.
Congress should, of course, recognize Constitutional restraints and not interfere in state regulation of insurance. The Homeowners' Insurance Availability Act of 1999 would spend some of the oft-touted budget "surplus" and would fail to address underlying regulatory and tax policies that have limited the amount of coverage that can be offered and underwritten by natural disaster insurers in the private market.
The cause of much of the problem is the initial government intervention in the private market. Congress should resist the impulse to relieve states from the consequences of their own misguided regulation. Florida, for example, restricts the premium rates that insurers may charge for homeowners insurance. While intended to benefit consumers living in disasterprone areas, this type of governmental rate regulation often discourages insurers from offering greater coverage to potential policyholders. The Homeowners' insurance Availability Act would only help states disguise some of the consequences of such adverse regulatory policies.
Subsidizing insurance in high risk areas would have unintended consequences both environmental and human. High risk areas are often in environmentally fragile areas which would be put in greater environmental jeopardy under this bill than under a free market. The human toll could be great: since people judge the risks they will take using insurance rates as a guide, the distortion of this pricing system would have the effect of encouraging families to remain in or move to high risk areas and add a marginal disincentive to move to or remain in lower risk areas; thus, when the next natural disaster hits, more people will be put in danger and the casualties will likely be higher.The Policyholder Disaster Protection Act would correct Federal tax policies that have ignored the nature of disasters as long-term risks. Currently, all insurer income in excess or' annual expenses is considered profit and is subject to federal income tax. This undermines the ability of insurers to set aside money for that very rainy day when a hurricane causes unusually costly damages. The Policyholder Disaster Protection Act would encourage preevent, tax- deferred catastrophe reserves for future disasters intended to give incentives to property-casualty insurers to increase their capability to manage catastrophic losses. This improved tax treatment would allow private insurers to accumulate reserves more quickly. and enhance private insurers' capacity to pay for the costs of natural disasters. Such reserves would also allow a greater share of natural disaster risks in catastrophe-prone areas to remain with the private insurance sector, instead of shifting those risks to other taxpayers.
In addition, greater private disaster reserves could lead to lower insurance premiums and a more consistent supply of insurance coverage in disaster-prone areas. Consumers would benefit most under such an approach with lower costs and greater availability. For the private sector to function best, the government cannot restrict the tools necessary to maintain and accumulate the funds needed to pay for natural disaster risks. Tax-deductible reserves are just this sort of tool.
Several studies have addressed the issue of disaster reserves. These include "Tax Deductible, Pre-Event Catastrophe Reserves," authored by Ross J. Davidson Jr. and published in the Winter 1996 edition of the Journal of Insurance Regulation, a publication of the National Association of Insurance Commissioners; and "Insuring Against Natural Disasters: Possibilities for Market-Based Reform," by Catherine
England and Jeffrey R. Yousey, by the Competitive Enterprise Institute.
The Policyholder Disaster Protection Act would, in the end, be the best way to address the problems currently facing homeowners in disaster-prone areas. To improve the private market for disaster insurance, one must alleviate or eliminate the governmental regulatory intervention distorting the conditions under which private insurers must operate. The Homeowners' Insurance Availability Act goes in the wrong direction. Such a new federal regulatory intervention would only distort the market further and exacerbate the problems presented by natural disasters.