October 2006

Do Some Members of Congress Want You to
Subsidize Earthquake and Hurricane Damage Relief?

I admit that this column may read more like an editorial than a consumer protection column, but I want you to know about important federal legislation that could affect your pocketbook through higher homeowner insurance rates.

In September, a Milwaukee Journal Sentinel article noted Wisconsin is one of the safest places in the nation to live from a risk perspective. Obviously we suffer from blizzards and summer storms, but the insurance industry does not consider us to be in a high-risk area for tornadoes, wildfires, heat waves, earthquakes, and hurricanes. For this reason, we enjoy some of the lowest homeowner insurance rates in the nation.

However, Congress is now considering a bill sponsored by a Florida representative that would essentially ask Wisconsin consumers to subsidize the insurance of those who have chosen to live in riskier areas, such as along the hurricane-prone Gulf Coast or the earthquake-prone West Coast. The bill, known as H.R. 4366, states that it “establishes a program to provide reinsurance for state natural catastrophe insurance programs to help the United States better prepare for and protect its citizens against the ravages of natural catastrophes.”

Devil In the Details

On its face, the bill seems like a worthy initiative. It is even supported by a red, white, and blue-colored website and newspaper ad campaign that runs under the banner, “Be Part of Protecting America.”

However, the truth of the bill appears to be in its details and may not be good for us. The bill creates a complex system of private reinsurers purchasing reinsurance from state catastrophe funds that bought the reinsurance from the U.S. Treasury. It appears to me that this complicated system is intended to ensure low-risk states like Wisconsin end up paying part of the bill for earthquakes and hurricanes so that insurance companies will offer more insurance in those riskier areas.

Am I off target on my concerns? Apparently not. Dennis C. Burke, vice president of state relations for the Reinsurance Association of America, testified in Congress last June that the bill is not needed and “creates unfair cross subsidies.” He explained, “Coastal and earthquake-prone properties are subsidized by property policyholders that cannot afford or choose not to live in such hazard zones.” He also noted that insurers made profits in 2005 despite the large number of hurricanes striking Florida.

Express Concerns

I support the philosophy behind insurance: Those facing similar risks band together to provide mutual financial support in the event that the risk event happens to some members of the group. However, is it fair to ask those who do not face the risk of hurricanes and earthquakes at all to share that risk?

If you have similar concerns about H.R. 4366, you may want to consider contacting your member of Congress. You can find contact information for your U.S. House of Representatives member at www.house.gov/writerep. There is a similar Senate bill, S. 3117, that you may want to discuss with our senators. Senator Herb Kohl can be reached by calling toll free at 1-800-247-5645 or by writing to him from his website at kohl.senate.gov/gen_contact.html. Senator Russ Feingold can be reached by calling 1-202-224-5323 or by writing to him at russell_feingold@feingold.senate.gov.