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MYTH #1: The federal government should insure natural catastrophes because the private insurance market does not have the financial resources to cover disasters such as Hurricane Katrina.

REALITY: The private insurance industry has insured wind and earthquake risks, including the unprecedented losses of the 2005 hurricane season.

• Of the top 10 most costly world insurance losses from 1970-2005, three are 2005 natural catastrophes (Hurricanes Katrina, Rita and Wilma) that occurred in the U.S.

Despite record insured catastrophe losses that year of $72.7 billion (Hurricane Katrina alone cost insurers $40.6 billion), the insurance industry was profitable. Although the combined ratio for homeowners insurance averaged 111.8 from 1990 to 2006 (meaning insurers paid out [in claims and expense] an average of $1.12 for every dollar taken for premiums), homeowners insurers averaged a rate of return of 3.3 percent through 2006.

• Although reinsurershave paid more than 60% of all the losses from Hurricanes Katrina, Rita and Wilma, the capital markets greatly enhanced reinsurance catastrophe capacity following these catastrophes.

Since late fall 2005, an additional $43 billion of new capital entered the reinsurance business to support and underwrite U.S. natural catastrophe risk, including $12 to 15 billion of new securities for catastrophe risk issued by the capital markets.

• Reinsurers, utilizing their global resources, play an essential role in the U.S. economy and help protect America by spreading the risk and impact of natural disasters among different market segments.
• For the unparalleled 2005 hurricane losses, U.S. insurers retained 38.9% of the loss, Bermuda reinsurers 24%, US reinsurers 11.5%, European reinsurers 12.6% and Lloyds 12.3%.

• History proves the private sector has insured catastrophic natural disasters and, if market dynamics are allowed to work, has plentiful capacity to do so in the future.

History proves the private sector has insured catastrophic natural disasters and, if market dynamics are allowed to work, has plentiful capacity to do so in the future. In June 2007 report, Bernstein Research estimated that the world reinsurance capacity was at least $2 trillion in 2006 and likely much more.

MYTH #2: As taxpayers, we all pay for natural catastrophes already through federal programs such as FEMA, so we might as well have government catastrophe insurance funds.

REALITY: Insurers pay the vast majority of homeowners’ catastrophe losses. The bulk of government disaster assistance from FEMA goes to public infrastructure and local governments, not individuals.

• After disasters, insurance payments and federal allocations have different purposes. The bulk of federal spending covers emergency response, public infrastructure, aid to local governments and cleanup.

In contrast, only a portion of insurance payments goes to temporary living expenses, and the majority is used for long-term recovery and reconstruction.

• A comparison of FEMA and private market insurance payments for U.S. hurricanes from 1994 through 2006 shows insurers paid out more than $100 billion while FEMA paid a little more than $33.1 billion in relief to public entities and only $16.3 billion to individuals.

• Additionally,a comparison of FEMA and private market insurance payments for U.S. earthquakes from 1994 through 2006 reveals insurers paid out $17.3 billion while FEMA paid out $205 million in relief to public entities and about $86 million to individuals.

• A graphic analysis of federal funding related to Hurricane Katrina compared to private insurance further illustrates where government funds are actually spent.

MYTH #3: Providing after-the-fact disaster relief and creating government catastrophe funds are the only options available to government in dealing with the financial impact of natural catastrophes on consumers.

REALITY: A number of states have implemented a variety of proactive programs to address their unique natural catastrophe exposures and assist their citizens. In Congress, proactive bills are pending that direct federal assistance to consumers in the coastal regions.

• Consumer Catastrophe Savings Account

The account may be established by a policyholder for residential property to cover insurance deductibles under insurance polices for the taxpayer’s residence that covers rising floodwaters or catastrophic windstorm events.

• Consumer Tax Credits for Low-Income Households

The 2007 South Carolina legislature passed a measure giving a credit against the state income tax for excess premium paid for homeowners insurance if the premium paid exceeded 5% of the taxpayer’s adjusted gross income.

• Consumer Tax Credit for Mitigation Expenses

South Carolina’s 2007 General Assembly enacted a measure giving individuals a credit against costs incurred to retrofit a residence to make it more resistant to catastrophic windstorm events.

• Consumer Matching Grant Mitigation Programs

Florida and South Carolina created programs last year to provide financial grants to homeowners to help retrofit their properties to make them less vulnerable to hurricane damage. 

Both states required the grants to be matched on a dollar-for-dollar basis for a total of $10,000 for the mitigation project, but in South Carolina low income homeowners are eligible for grant up to $5,000 with no matching amount required.

• Premium Discount for Mitigation Measures

During 2007, Louisiana, Mississippi and Connecticut adopted insurance premium discounts for insureds who make structural improvements to minimize damage from natural disasters.

• Insurer Incentives to Increase Consumer Market Choices

Louisiana’s 2007 legislature approved a measure, supported by Governor Blanco and Commissioner Donelon, which created a multi-million dollar matching grant program to encourage more insurance companies to do business in the state.  

Mississippi and South Carolina enacted bills in 2007 that encourage insurers to write more coverage in coastal areas by providing credits against premium taxes paid to the state.

• Federal Assistance Focused on Consumers versus Insurance Companies

In January 2009, Rep. Gus Bilirakis (R-FL) introduced the Hurricane and Tornado Mitigation Investment Act, H.R. 308, which amends the IRS code to provide a credit against tax for hurricane and tornado mitigation expenditures.

MYTH #4: Creating government reinsurance catastrophe funds, like Florida’s fund, is a good way to help consumers lower their homeowners’ insurance costs.

REALITY: Florida’s reinsurance catastrophe fund benefits insurance companies by giving them taxpayer-backed reinsurance while providing little relief to consumers for the cost of homeowners insurance.

• Florida is only the state catastrophe fund writing reinsurance. In effect, it makes consumers the reinsurers for insurers. The state fund offers insurers inexpensive reinsurance premiums up front, enabling insurers to off load substantial risk onto consumers. When a hurricane occurs that depletes the fund’s cash reserves (as in 2004 and 2005), the fund issues bonds. The insurance companies who bought the state’s cheap reinsurance do not pay the bond debt. The debt is paid by taxing Florida policyholders of other lines of insurance, such as automobile insurance and commercial insurance, including municipalities, daycare centers, school districts and small businesses via assessments.
• State catastrophe funds concentrate risk instead of spreading risk, a fundamental principle of insurance. The Florida fund has $1.8 trillion of insured values (Florida now retains nearly two-thirds of the reinsured property catastrophe risk within its borders). Instead of spreading that risk globally, the Florida fund concentrates that risk within the state and shifts the catastrophe costs from the private insurers to insurance-buying consumers including those not covered by the fund itself. The reality is low-risk policyholders pay for high-risk policyholders.
• Government funds, like Florida’s fund, do not reduce the vulnerability of people to natural catastrophes and are not a proactive, disaster planning approach. These funds are a political response to an economic issue. The funds do not reflect risk, but create incentives for additional development in high-risk areas and diminish incentives for storm proofing further exacerbating the problem.
• Experience with state catastrophe funds shows they are susceptible to the political suppression of rates. The Florida fund is facing an $18 billion potential shortfall in 2009, and due to the current financial markets, the state is unable to borrow the money needed to covers its liability. Two key financial rating agencies, A.M. Best and Demotech, stated Florida legislators must shore up the fund before the June hurricane season or they will be forced to downgrade the financial ratings of dozens of insurance companies that rely on the state’s cat fund which could trigger banks to invalidate mortgages that require qualified insurance coverage.

MYTH #5: The federal government can help states lower the cost of homeowners insurance by adding wind coverage to the national flood insurance program and providing the states with government reinsurance and low interest loans.

REALITY: Government proposals that transfer risk from insurers to taxpayers won’t reduce the risk or cost, but will diminish the private market and encourage further development in hazardous areas leading to increased risk and cost in the future.

• Spreading the riskof natural catastrophes to the private sector, rather than using debt to finance risk in federal and state insurance programs, is the best long-term solution to addressing catastrophe exposures and cost issues. 

Most states, in fact, embrace this same goal of reducing the size of their state wind programs and residual market mechanisms.  The growth in residual markets in a state often reflects a market that is not permitted to properly spread risk or which does reflect a premium based on risk exposure.

• A federal fundthat sells reinsurance to state catastrophe funds concentrates all of the risk associated with natural disaster in government.  A private market diversifies this risk, spreading it globally. 

For example, for the 2005 hurricane losses, insurers retained 39% of the loss, Bermuda reinsurers 29%, US reinsurers 9%, European reinsurers 13% and Lloyds 9%.

• There is no assurance that a federal reinsurance program or low interest loans for the states will result in more affordable or available homeowners insurance. The experience of Florida is that cheap reinsurance has not resulted in greater private sector insurance.

• The National Flood Insurance Program, NFIP, is a program already struggling with an inadequate cash flow and $17.5 billion in debt.  Adding wind coverage to the NFIP will only increase the financial strains on the program and lower the overall amount of coverage available. Participation in the plan has also been an ongoing challenge.

• According to theFederal Emergency Management Agency, FEMA, only about 49 percent of single-family homes in special flood hazard areas nationwide are covered by NFIP.

After Katrina, the number of flood insurance policies sold in the Gulf States did increase by 21.6 percent.  Unfortunately, the number of flood policies not renewed since Katrina is surprisingly high – 23% in Alabama, 32% in Florida, 17% in Louisiana, 19% in Mississippi and 25% in Texas.