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Disaster Bait
Proposed Natural Disaster Reinsurance Fund

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"[I]t is unlikely that the federal government would be able to establish prices for disaster reinsurance that would fully cover the potential future costs of these financial obligations." Congressional Budget Office, February 9, 2000.

Proposals for a federal Natural Disaster Reinsurance Fund (NDRF) would put taxpayers on the hook for increased disaster-bailout costs, subsidize insurance companies, and reduce incentives for sound insurance practices. Federal disaster insurance would encourage development in disaster-prone areas, which are often ecologically sensitive.

Green Scissors Proposal
Reject proposals for a new federal government role in assuming private risks that are better handled by free market mechanisms. While unpredictable, savings could certainly run to tens of billions of dollars in the likely event that one or more mega-disasters require a federal bailout from the proposed fund.

Current Status
In the 106th Congress, Representative Rick Lazio (R-NY) sponsored the "Homeowner's Insurance Act of 1999," (H.R. 21) which would establish a new federal Disaster Reinsurance Fund and an associated bureaucracy in order to provide state insurance pools with reinsurance. The bill would make the federal government responsible for the losses of an insurance program over which it has no significant control and could thus leave taxpayers on the hook for up to $25 billion annually. On November 10, 1999, the House Banking Committee passed the bill on a vote of 34 to 18. The issue is certain to be revisited in the 107th Congress.

Project Hurts Taxpayers

The program would reduce incentives for sound insurance practices by interfering with market mechanisms. By limiting insurance industry exposure to financial losses from natural disasters, the NDRF would protect insurance industry profits.

Taxpayer-protection provisions in the bill would be inadequate to prevent excess reinsurance contracts from being sold at too low a price.

A major disaster would pressure Congress into costly bailouts by forgiving loans to the reinsurance fund, whether the federal guarantee is direct or implied. Taxpayers would shoulder the ultimate risks while insurers pocket the profits for disaster insurance.

"Either a mega-catastrophe or a series of closely timed disasters could result in large federal payments for disaster relief," according to Thomas J. McCool of the General Accounting Office.

Taxpayers should not be forced to invest in yet another flawed insurance program. Taxpayers are still paying for other flawed federal insurance programs that cover floods, banking, savings and loans, and pensions.

Cheap, federally subsidized reinsurance will also encourage additional development in high-risk areas, which will in turn increase federal disaster costs. Federal reinsurance will also assure its own continued existence by undercutting and eventually crowding out the existing private market, making federal reinsurance all that is available. The CBO recognized this same fact, commenting, "consumer and political pressures probably would create a strong incentive to keep reinsurance prices low to address the perceived price and availability problems in the market for homeowners' insurance."

Project Hurts the Environment

Disaster-prone areas, such as coasts, are often the most environmentally sensitive. The bill would encourage development in these areas by reducing the costs for that development.

Contacts

• Steve Ellis, Taxpayers for Common Sense, (202) 546-8500 x126.