Federal lawmakers introduced a bill to create a federal natural disaster backstop recently, in response to insurers’ problems with rising private reinsurance costs. But a trade group for carriers suggested the federal remedy could create more problems.
“Federal solutions to a state-regulated industry must be carefully considered, as evidenced by the fact that federal taxpayers are currently at risk for $20.525 billion in debt already owed by the National Flood Insurance Program,” said First Deputy Chief of the Federal Reserve Nat Winicke. Relations of the American Property Casualty Insurance Association (APCIA) in a media statement issued against the bill on Friday.
The bill in question, called the Incorporating National Support for Unprecedented Risks and Emergencies (INSURE) Act, was introduced in the US House of Representatives on Wednesday by Rep. Adam Schiff, D-Calif. Details of the law reveal that the new scheme would effectively end the National Flood Insurance Program at a future date, as the law aims for the proposed federal reinsurance mechanism to cover a range of cat risks, including wind, wildfires, severe convective storms, floods and earthquakes.
“This legislation would create a federal catastrophic reinsurance program to insulate consumers from unrestrained cost increases by offering insurers a transparent, affordable public reinsurance alternative for the worst disasters caused by the climate”. The intention was announced to “stabilize the home insurance market while ensuring that vulnerable communities are not excluded from coverage.”
Schiff specifically pointed to the problems his constituents are experiencing in California’s insurance market — shrinking home insurance options and rising insurance costs — in a media statement two days later. “When major home insurers State Farm and Allstate announced last year that they would stop writing new insurance policies in California, they cited the cost of reinsurance — which acts as insurance for insurers, allowing them to shift some liability — as the reason for their exit,” the statement said.
He said that lower reinsurance rates would achieve the goal of providing lower insurance rates to consumers.
Relief will not be immediate, however, as the law directs the Secretary of the Treasury to establish a federal property reinsurance program “no later than four years after the date of enactment.” The phased reinsurance program for forest fires and severe storms will not be implemented until six years from the date of its issuance. (The other stage is in periods of four years for floods, five years for winds and hurricanes, and eight years for earthquakes, with the earthquake cover undergoing a feasibility study).
According to the language of the Insurance Act, to be eligible for the proposed federal reinsurance program, a residential or commercial property insurer must offer coverage for all property risks and participate in a “loss prevention partnership” with policyholders, under which insurers and policyholders will invest in mitigation Disaster losses and prevention.
The Federal Catastrophe Reinsurance Program will limit the liability of eligible insurers above a limit established by the Secretary and an advisory committee of experts. In setting the threshold, the Treasury Secretary will take into account “the amount necessary to materially reduce participating insurers’ costs and the private reinsurance market capacity needed to ‘promote stable and competitive markets for catastrophe reinsurance.’” The language of the law states that the threshold “shall be an amount not Exceeds 40 percent of an individual participating insurer’s maximum potential loss” for each cat risk in the program.
Insurers are also expected to make significant investments aimed at minimizing losses, and this is another factor that the trustee and advisers will take into account when setting the threshold. (Activities included in the list of eligible loss prevention partnerships include insurers that cover the costs of loss prevention measures, in whole or in part, and insurers that make coverage “contingent on the performance of a loss prevention activity by a potential insured party.” Premium discounts for policyholders are not considered To prevent loss “in the absence of investment by a participating insurer,” or for the insurer to simply provide information about loss prevention.
The premiums paid by participating insurers, based on their expected average annual losses and program administration costs, will be placed in a Federal Catastrophe Reinsurance Fund. Bonds will be issued to finance any shortfall if the fund balance is insufficient to pay obligations to participating insurance companies.
“We are still analyzing the legislation,” APCIA’s Wienecke said. “We appreciate Representative Schiff’s interest in addressing the challenges of insurance availability and affordability in many areas of the country. However, the combination of climate change, the backlog of homes in vulnerable areas, significant increases in labor and material costs due to inflation, abuse of the legal system, and regulatory Outdated regulations cannot be overcome by a broad federal program that may be more costly to vulnerable policyholders and put families at greater risk of losing access to the coverage they need.
One section of the law describes the creation of a grant program that provides grants to states to enhance loss prevention and authorizes tens of billions of dollars annually to be appropriate for the secretary to support the program — $50 billion in 2026, increasing to $70 billion in 2030. The state grants are intended to incentivize insurers and carriers. Insurance policies, state and local governments finance activities that will reduce insurance company losses, and prompt states to require insurance companies to provide coverage for all risks. Among other provisions, this section indicates that grants benefiting low- and moderate-income consumers and businesses will receive priority. (Grants can also be used to move low-income consumers out of uninsurable properties, as a later section notes.)
In the final section of the law, there is language about states and the National Association of Insurance Commissioners working with the Treasury Department to create a pilot program on multi-year, all-risk policies — with terms of five years or more.
The legislation was co-sponsored by Reps. Zoe Lofgren, D-Calif., Rashida Tlaib, D-Mich., Julia Broly, D-Calif., Kevin Mullen, D-Calif., and Andrea Salinas, D-Ore., APCIA reported. and Val Howell, D-Oregon.
According to media releases from Schiff’s office, the INSURE Act is supported by various consumer groups: Center for Economic Justice, Consumer Action, Consumers Council of Missouri, Consumers Federation of America, Consumers Federation of California, Consumer Watchdog, and Delaware Community Reinvestment Action Council . , Georgia Watch, Oregon Consumer Justice, True Reform Louisiana, Strategic Action for a Fair Economy, Texas Appleseed, Texas Watch, and the United Policy Campaign.
One section of the law also addresses new data requirements for participating insurers, so that the Office of Financial Research and the Federal Insurance Bureau in cooperation with state insurance regulators can improve market oversight. The Secretary of the Treasury will contract with a “statistical agent through a competitive bidding process” to collect and review the necessary data.
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