Insurance bill would be disaster for Maryland

Most people would likely deem it fair that Americans who choose to live in vulnerable areas — such as the Florida coast, a major earthquake fault or a fire-prone California canyon — should pay more for property insurance than those who live in safer areas. Some in Congress disagree, however, and in recent weeks they've started to move forward with a bill called the Homeowners' Defense Act, introduced by Rep. Ron Klein, a Florida Democrat. The bill would be awful for Maryland and much of the rest of the country.

Although the two of us approach it from vastly different points of view — one of us is a conservationist, the other a free-market advocate — we agree that this proposal is the wrong approach because it would drive up the national debt, damage the nation's coasts and encourage more people to move into harm's way.

The bill deals with "reinsurance" — the insurance that insurance companies buy to cover their losses in the event of a major catastrophe that requires them to pay out a huge amount of money all at once. It would create a "private" catastrophe risk consortium modeled after Fannie Mae, as well as bond guarantees and loans for state-run programs, with the aim of reducing the cost of the reinsurance. In theory, Mr. Klein says, these programs would break even and cost taxpayers nothing at all.

Maryland, however, doesn't qualify for any of the bond guarantee mechanisms that the bill provides. Florida, on the other hand, wants them very much because the state's political leaders, unlike those here in Maryland, have worked to keep property insurance rates far lower than the actual risks demand. To do this, they've taken on about $30 billion in liabilities that they want federal taxpayers to pick up.

When Maryland experiences a natural disaster, private insurance companies rather than the government will pay the rebuilding costs. Florida, on the other hand, would have to raise its taxes an enormous amount to pay to repair and replace hurricane-damaged homes.

Even if Maryland would benefit from the proposal — and it won't — the mechanisms at the heart of Mr. Klein's bill can't possibly work as advertised. Here's why: Through international reinsurance markets, private companies already pool the risk of a hurricane striking the Eastern Shore with the risks of earthquakes in California, cyclones in Indonesia and industrial accidents in Japan. Because these events almost never happen at the same time, insurers can earn a profit insuring against one type of disaster even as they pay out enormous claims on another. This pooling reduces overall insurance prices.

By focusing all its risk in the United States, a federally run disaster insurance program would have to charge more than the private sector in order to break even. Thus, in order to work as advertised, such a program would under-price its coverage and stick taxpayers with enormous liabilities to deliver the promised savings.

The Homeowners' Defense Act also seems certain to cause enormous environmental destruction by encouraging development in many places where it simply shouldn't take place. Sea-level rise will certainly continue in the 21st Century and, many scientists believe, may accelerate as a result of global climate change. Many climate scientists also anticipate stronger hurricanes. In this context, anything that encourages more coastal development appears foolhardy.

While the Homeowners' Defense Act proposal is not good public policy, there is a real problem that still needs to be addressed: Many people who have long lived in unsafe areas don't wish to move and have a hard time affording property insurance. To help people of modest means, we support federal assistance to make homes and communities more secure. Simple efforts such as reinforcing roofs, installing storm shutters and using storm-resistant landscaping can make people and property far safer.

Quite simply, the federal government should stay out of the homeowners' insurance business and refrain from creating incentives that will foster more coastal development and encourage more people to locate in areas prone to natural catastrophe.

Ed Hopkins is director of the Sierra Club's Environmental Quality Program. His e-mail is Eli Lehrer is national director of the Center on Finance, Insurance, and Real Estate at the Heartland Institute. His e-mail is