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Dissenting View of Ron Paul and Jim Ryun on H.R. 219, Homeowners’ Insurance Availability Act of 1997

Dissenting View of Ron Paul and Jim Ryun on H.R. 219,
Homeowners’ Insurance Availability Act of 1997

(J. Bradley Jansen was the legislative staffer for Dr. Paul for these issues during this time)

Dissenting View of Ron Paul and Jim Ryun on H.R. 219,
Homeowners’ Insurance Availability Act of 1997

Federal reinsurance should not be viewed as the only option for reforming the market for natural disaster insurance. Unfortunately, very little attention has been paid to alternative approaches. Federal reinsurance fails to address underlying regulatory and tax policies that have limited the amount of coverage that can be offered and underwritten by natural disaster insurers in the private market. This initial government intervention in the private market is the cause of much of the problem, and it is what must be addressed.

Florida, for example, restricts the premium rates that insurers may charge for homeowners insurance. Though perhaps intended to benefit consumers living in disaster-prone areas, this type of governmental rate regulation often discourages insurers from offering greater coverage to potential policyholders. Federal reinsurance would only help states disguise some of the consequences of such adverse regulatory policies. Congress should, of course, recognize Constitutional restraints and not interfere in state regulation of insurance. It should also resist the impulse to relieve these same states from the consequences of their own misguided regulation.

Federal tax policies have likewise added to the funding problems for private insurers covering natural disaster risks. Federal tax policy ignores the nature of disasters as long-term risks. Currently, all insurer income in excess of annual expenses is considered profit and is subject to federal income tax. This undermines the ability of insurers to set aside money for that very rainy day when a hurricane causes unusually costly damages.

This bill would not be enforced uniformly throughout the country and, in effect, permanently makes Texans and Kansans second class citizens who would be forced to subsidize the greater benefits reserved only to California, Florida and Hawaii. In addition, by subsidizing insurance in high risk areas, the bill would have unintended consequences both environmental and human. High risk areas are often in environmentally fragile areas which would be put in greater environmental jeopardy under this bill than under a free market. The human toll could be great: since people judge the risks they will take using insurance rates as a guide, the distortion of this pricing system would have the effect of encouraging families to remain in or move to high risk areas and add a marginal disincentive to move to or remain in lower risk areas; thus, when the next natural disaster hits, more people will be put in danger and the casualties will likely be higher. A situation which will undoubtedly be used to justify the next “round” of intervention!

A better solution to the problem that government intervention caused would be to reduce or remove the initial artificial intervention in the market. One way would be to allow insurance companies to accumulate funds on a tax-deductible basis over time to pay for these long-term risks. Improved tax treatment would allow private insurers to accumulate reserves more quickly, and enhance private insurers’ capacity to pay for the costs of natural disasters. Such reserves would also allow a greater share of natural disaster risks in catastrophe-prone areas to remain with the private insurance sector, instead of shifting those risks to other taxpayers.

In addition, greater private disaster reserves could lead to lower insurance premiums and a more consistent supply of insurance coverage in disaster-prone areas. Consumers would benefit most under such an approach with lower costs and greater availability. For the private sector to function best, the government cannot restrict the tools necessary to maintain and accumulate the funds needed to pay for natural disaster risks. Tax-deductible reserves are just this sort of tool.

Several studies have addressed the issue of disaster reserves. These include “Tax-Deductible, Pre-Event Catastrophe Reserves,” authored by Ross J. Davidson Jr. and published in the Winter 1996 edition of the Journal of Insurance Regulation, a publication of the National
Association of Insurance Commissioners; and “Insuring Against Natural Disasters: Possibilities for Market-Based Reform,” by Catherine England and Jeffrey R. Yousey, recently published by the Competitive Enterprise Institute.

Encouraging the further growth and development of the private insurance markets would, in the end, be the best way to address the problems currently facing homeowners in disaster-prone areas. To improve the private market for disaster insurance, one must alleviate or eliminate the governmental regulatory intervention distorting the conditions under which private insurers must operate. A new federal reinsurance program goes in the wrong direction. Such a new federal regulatory intervention would only distort the market further and exacerbate the problems presented by natural disasters.