After more than a decade of failed attempts to create a national catastrophe fund, legislation taking a somewhat different tack on homeowners insurance issues now appears it may quickly be gaining traction in the U.S. House. Introduced just before the August recess, the Homeowners Defense Act already has seen its first hearing and could be set for a committee mark-up at some point in October.

Despite its building political momentum, the bill, H.R. 3355, continues to draw mixed response from those both inside and outside of the insurance industry. Some praise it for innovating the concepts of "liquidity loans" to state cat funds, creating voluntary pool for residual market entities, and capitalizing itself by issuing catastrophe bonds. Others complain it would displace private markets, or subsidize continued development in environmentally sensitive areas.

Partisans both in favor and opposed to the bill shared some of their thoughts during a recent joint hearing of the House Financial Services Committee's subcommittees on housing and capital markets.

Coastal Problems

Vince Malta, vice chair of Public Policy Coordinating Committee, National Association of Realtors: Without property insurance, lenders will not lend; without insurance, property owners could be in violation of their mortgage terms. The limited availability and high cost of insurance, therefore, not only threatens the ability of current property owners to hold onto their properties, but also to slow the rate of housing and commercial investment in these communities. Either of these threats could, in turn, further delay the rebuilding of communities on our storm-ravaged coasts.

Massachusetts State Rep. Matthew Patrick, D-Falmouth: The increases are being driven by the high cost of international reinsurance companies and their reliance on private computer models...We believe the establishment of our state catastrophic fund, backed by the federal fund, will result in a calming of the market because the insurance companies will be purchasing reinsurance from the Commonwealth at a lower cost than if bought through private reinsurers -- a fund that will continue to grow until there is a catastrophic event.

John D. Echeverria, executive director, Georgetown University Environmental Law & Policy Institute: The financial burdens imposed by disasters, and/or the premiums necessary to cover such losses, create a strong, concentrated, and highly motivated constituency seeking financial relief from these burdens. On the other hand, the costs to the federal government and in turn to federal taxpayers of providing this relief are dispersed and often deferred to the future. As a result of this political dynamic, there is a substantial risk, verging on an inevitability, that federal government involvement in the disaster insurance market will lead to systematic under-pricing of coastal disaster insurance.

Capital Markets Capacity

Franklin Nutter, president, Reinsurance Association of America: It is important for the committee to understand that, notwithstanding the extraordinary losses from natural catastrophes in 2004 and 2005, the private insurance and reinsurance sector proved exceptionally resilient. The record losses for insurers reduced insurer earnings in 2004 and 2005, but U.S. property and casualty insurers increased capital from $359 billion at year-end 2003 to $437 billion at year-end 2005 and $500 billion at year-end 2006.

Danyal Ozizmir, managing director of asset backed securities-insurance linked securities, Swiss Re Financial Products Corp.: In our view, cat bonds and related solutions play an important role in assuring the continued availability of affordable insurance to policyholders in areas exposed to peak perils such as East Coast hurricanes and California earthquakes.Swiss Re believes this market will continue to grow and will assist in growing insurance capacity throughout the United States and around the world.

The Federal Role

Rep. Paul E. Kanjorski, D-Pa.: The bill aims to avoid the problems that have stalled previous efforts to mitigate the costs of catastrophic disasters for homeowners. States will voluntarily participate in the bill's programs, thereby hopefully avoiding cross subsidization from states that do not bear similar risks. Additionally, the bill aims to mitigate the transfer of risk to the federal government. These important provisions ought to help the legislative prospects for the bill.

Robert Joyce, chairman and chief executive officer, The Westfield Group: Any federal financing role should include measures intended to promote freedom for markets to respond to these exposures, including support for greater rating freedom, support for actuarial soundness of private market rates, freedom for product innovations, use of sound underwriting tools, and lower market barriers.

John Seo, cofounder and managing member, Fermat Capital Management LLC: Cat reporting is probably the single most obvious way that the U.S. government could aid the growth and vitality of the cat bond market for U.S. natural peril risks. For the cat bond market, it would be similar to adding an Internet system to an existing telegraph network. The network effects would be tremendous, including data to improve building practices.

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By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com

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