A year of punishing natural disasters has revived a drive to create a federal catastrophe program to back up private insurance.
Officials in disaster-prone states such as Florida, Louisiana and California, along with some insurance providers, want state and federal governments to collect a percentage of premiums and cover claims exceeding what the industry can pay.
But opponents question the benefits of such a system for calmer states like Colorado, which sees a tornado or hailstorm now and then, but not much more.
“There is a price associated with living in these (high-risk) areas,” said Robert Hartwig, chief economist with the Insurance Information Institute in New York City. “It is not a price that can be or should be subsidized by the people of Colorado, Wyoming or Utah.”
The debate centers on whether the industry or governments should gather surpluses needed for catastrophes, Colorado Insurance Commissioner David Rivera said.
“Colorado taxpayers are paying for this now whether through FEMA (Federal Emergency Management Agency) dollars or other federal assistance,” he said.
But Rivera, whose agency oversees 1,500 insurance firms, doesn’t dismiss the idea of a government-supported calamity fund.
“It is worth having a discussion on how we can pre-fund this in advance and try to solve this in a more thoughtful manner,” he said.
Proponents of such a fund say taxpayers who live far from the coasts, floodplains and earthquake zones already subsidize people living in danger’s path.
The current system throws massive federal aid into disaster zones. That’s a process Ed Collins, an attorney with Allstate Insurance Co. and a supporter of a government fund, compares to Air Force One flying over damaged areas and dumping out billions of dollar bills.
In the face of a catastrophe, insurers increase premiums in affected areas to the degree regulators allow. Some insurers exit those risky markets entirely, leaving fewer coverage options.
Allstate, for one, is looking to do more business in “safer” states like Colorado, Collins said.
In November, the National Association of Insurance Commissioners, led by commissioners from California, Florida, Illinois and New York, endorsed the creation of a system of state and federal backstops.
Florida House members Ginny Brown-Waite and Clay Shaw also introduced a bill to create such a system.
Collins envisions a program where state catastrophe funds would kick in after losses from a given disaster reach $2 billion. The federal government would step in during the rare cases when losses exceeded $20 billion, as was the case with Hurricane Katrina, which devastated New Orleans and large swaths of the Gulf Coast.
James Lee Witt, a former FEMA director and co-chairman of ProtectingAmerica.org, a group recently formed to push for such a fund, would like to see states receive 20 percent to 30 percent of the federal funds not claimed each year to use for mitigation efforts such as stricter building codes, improved infrastructure and training for property owners.
But not every insurer agrees a federal catastrophe program is the way to go.
Some argue the private market can handle the challenge, and they fear having to “partner for life” with the federal government.
“The most difficult issue is should there be a role for federal government or should this be a state-by-state issue?” said Joe Annotti, a spokesman with the Property Casualty Insurers Association of America. “We are trying to reach a consensus.”
Calls for a federal catastrophe fund began in earnest after Hurricane Andrew devastated Florida in 1992.
Florida created a state hurricane fund, but legislation to create a federal fund went nowhere.
“The political problems haven’t changed since this idea was first floated,” Annotti said. “Legislators who represent less catastrophe-prone states are reluctant to have their constituents pay for a federal program that isn’t actuarially sound.”
“It is a complex problem with both economic and political components. The solution will take time to get to,” Annotti said.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
