Only the sagest of seers could know whether similar storms will strike between now and Labor Day, but it doesn’t take a crystal ball to see that catastrophe issues will once again be high on the agenda. House Financial Services Committee Chairman Barney Frank has placed new homeowners insurance legislation from Florida Reps. Ron Klein and Tim Mahoney on the fast track, with a first set of hearings as early as Sept. 5, and a full mark-up possibly by early October.
Named for a bill Klein sponsored while a member of the Florida state Senate, the Homeowners Defense Act is different from previous attempts to create a national catastrophe fund. Not only does it have support from a powerful committee chairman – and, it is reported, from House Speaker Nancy Pelosi – but it is the first to earn the full endorsement of a major insurer trade association, the Property Casualty Insurers Association of America.
The bill could be considered something of a coup for PCI, as it incorporates a concept -– "temporary liquidity" loans from the U.S. Treasury to state cat funds – the association has been flogging for the better part of a year, previously to no avail. Split internally between members who oppose and support the national cat fund concept, the liquidity proposal was the compromise PCI reached to make both sides happy. With PCI members writing 39% of the U.S. homeowners market, and pro-cat fund State Farm writing another 22%, an argument can be made that a majority of the industry is now behind the idea.
The bill Klein and Mahoney dropped early this month looks substantially different from the proposals they were touting in March, when Frank took the unusual step of hand-selecting the freshmen members to lead the House Democrats' catastrophe efforts. Back then, the pair were adamant they would force insurers to "pass through" any and all realized discounts to their policyholders.
The final bill doesn't ponder federal rate regulation. What it does propose is a mechanism that would allow not just cat funds, but state-run entities like the Louisiana Citizens Property Insurance Corp., California Earthquake Authority, and Florida’s Citizens Property Insurance Corp., to pool risks on a national basis. This federal "consortium" also would be a player in the capital markets, authorized both to purchase reinsurance and to issue catastrophe bonds and other capital-raising instruments.
Klein and Mahoney are key members of the class that swept to power in 2006, and both are expected to face tough battles in defending South Florida seats that had been held for decades by Republicans. Klein pulled off an upset 51% to 48% victory over veteran Rep. Clay Shaw, while Mahoney holds the seat vacated by the disgraced Rep. Mark Foley. Though Foley resigned a month before the election, Mahoney still won by just a 49.5% to 47.7% margin.
No issue may be more important to Klein and Mahoney's constituents right now than homeowners insurance. The pair's challenge, however, is to convince fellow members the bill offers benefits to other states. One of the basic rules of insurability is the pooling of "like" risks, and no other residual market mechanism is quite like Florida Citizens, which not only the state's largest homeowners insurer, but no longer, in any sense, an insurer of "last resort."
And even the temporary liquidity provisions that earned the support of PCI come with a controversial twist. In addition to loans covering the very large catastrophes that exceed a cat fund's statutory liability, the bill ponders offering loans to cover a fund's liability in the event it is not fully funded. To most, that provision seems purposefully designed to apply to the undercapitalized Florida