Maryland & Other States React to Proposed Nation-Wide Homeowners Insurance Hikes

Published: Wed 19 May 2010

Donald Chase

Most Americans would probably agree that it is fair for people who live in disaster-prone areas-such as along a major earthquake fault or near the hurricane-prone coast-to pay higher homeowner's insurance premiums than people who live in safer regions. However, some members of Congress do not see it that way and have furthered along a bill entitled the Homeowners' Defense Act, introduced by Florida Democrat Rep. Ron Klein. The home insurance bill would be calamitous for most of the country, including Maryland. The proposal would add to the nation's debt, provide incentive to move to vulnerable areas, and hurt the country's coasts.

About the Proposed Homeowners Insurance Bill

The bill addresses "reinsurance," or the coverage that insurers purchase to pay for their losses when a major disaster forces them to pay out a prodigious amount of money at one time. The bill would establish a "private" catastrophe risk consortium fashioned after Fannie Mae, in addition to loans for state-operated programs and bond guarantees, with the purpose of lowering the cost of reinsurance. Theoretically, Klein claims, these programs wouldn't cost taxpayers a dime because they would break even.

However, Maryland is ineligible for any of the bond guarantees offered by the bill. By contrast, Florida is desperate for these guarantees because the political leaders of the state, unlike Maryland's, have succeeded in keeping property insurance premiums much lower than the actual risks warrant. In order to do so, they've assumed roughly $30 billion in liabilities that they believe federal taxpayers should bankroll.

When a natural disaster occurs in Maryland, private insurers, not the government, would fund the costs of rebuilding. Florida, however, would have to drastically raise its taxes to fund the repair and replacement of homes damaged by hurricanes.

Why the Homeowners' Defense Act Won't Work

Even if the bill would help Maryland, which it won't, the programs in Rep. Klein's bill cannot possibly succeed as he claims. This is why they won't work: Through global reinsurance markets, private corporations already pool the hurricane risk on the Eastern Shore with the earthquake risk in California, industrial accidents in Japan, and tornadoes in Indonesia. Because these calamities rarely occur at the same time, insurance companies can turn a profit offering coverage for one type of catastrophe even while they pay massive claims on another. This risk pooling lowers insurance costs overall.

By concentrating only on the risk in the U.S., a disaster insurance program run at the federal level would have to charge higher premiums than private insurers to break even. Ergo, to work as Klein claims, the program would price its coverage too low and leave taxpayers with colossal liabilities in order to offer the promised cost savings.

What's more, the Homeowners' Defense Act is sure to result in widespread environmental destruction by providing an incentive to develop many areas where development simply should not occur. Most climate scientists predict stronger hurricanes and significant sea-level rises in the near future, which makes anything that results in further coastal development incredibly risky.

The Bottom Line

In summation, the federal government has no business in the homeowners' insurance market and should not establish programs that will encourage people to move to high-risk, disaster-prone areas. The Homeowners' Defense Act is all around a bad idea-financially, politically, and environmentally.