Tuesday, August 9, 2011

Deutsch on how Federal disaster reinsurance is just like Frannie and Freddie

Consider the following comment by Congressman Peter Deutsch (D-FL) in 1994 during a Congressional hearing titled "The Availability of Insurance in Areas of Risk of Natural Disasters." Deutsch was discussing his cosponsored bill the National Disaster Protection Act of 1993 (HR 2873) because "it addresses the underlying cause of insurance availability problems- by the lack of reinsurance- by creating a Federal reinsurance program."

(bold is mine)

... Let me focus on what we can do to develop (and Jim brought up the idea and you have and the chairman has mentioned as well, is that there is something on the table in Washington) a national program similar to what you probably and hopefully are going to adopt this week. I think there's a clear consensus that we as Members of Congress do not want the Federal Government to be at risk in this type of program. And, I believe that we would not be. However, we have the burden of proving to the public that this is not going to be another S&L bailout [savings and loan crisis]. Thus, I call everyone's attention to two Federal programs that are not bailouts: Fannie Mae and Freddie Mac. These are incredibly successful Federal programs which increased the opportunity for home ownership to hundreds of thousands of additional Americans by using the private sector, but with the Federal Government playing a role that only the Federal Government can play. And I guess the one question is directed to two companies with extremely large market share; Allstate and State Farm, which together have probably about 50 percent of the market. The numbers of cancellations by the companies are 40 percent of the market. It is my understanding that Allstate and State Farm are essentially without reinsurance, and just have to reduce their sales in Florida. It's not like they don't want to sell in Florida, but they have too much at risk here. If they could just lay off a little bit on reinsurance they would keep selling.
At the practical level, about 2 1/2 million Floridians may not be able to get insurance in several weeks if you don't pass legislation or emergency measures are not adopted. We need to articulate why it wouldn't cost the taxpayers any money, why insurers need and can't get reinsurance, and why a Federal program or a State program of reinsurance would solve this problem and create a win-win situation?
When does reinsurance become a backstop? When does a backstop become a bailout? If they are much the same thing, then who favors one term over the other and why?

Does Federal reinsurance to the private market encourage risky behavior by private insurers?

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