Homeowners Insurance

Issue

Availability of homeowners insurance in disaster-prone areas.

Position Statement

Availability of residential insurance is essential in order to promote homeownership. ABA supports oversight of insurance industry practices in order to maintain general availability of homeowners insurance at the state or regional level. ABA also supports efforts by the Congress to address the availability of homeowners insurance in all regions of the United States through common-sense natural disaster legislation. Such efforts should reduce the financial burden on taxpayers created through ad hoc disaster relief and help to ensure availability and affordability of coverage for our nation's homeowners.

Explanation

The 2005 hurricane season created a ripple effect throughout the insurance industry. Some of our nation's largest property casualty insurers suffered billions of dollars in catastrophic losses, prompting business decisions designed to reduce exposure to hurricane risk. Waning reinsurance capacity forced companies to cancel coverage in areas considered too risky to insure, such as the Gulf Coast and other hurricane-prone regions up and down the eastern seaboard.  The propensity of states to continue price controls and to prohibit actuarially sound rating also contributed to a shortage in the availability of homeowners insurance.

Canceling policies does more than reduce company exposure. It forces property owners to seek coverage though alternative means, either through state-based "insurance of last resort" pools or by seeking coverage through any remaining providers at prohibitively expensive rates.

The attacks of 9/11 and the 2005 hurricane season illustrated the federal government's method of responding to widespread catastrophes. Both instances prompted record spending in disaster relief and industry bailouts, the costs of which were borne by the taxpayers. In the case of 9/11, Congress quickly established a temporary federal backstop for terrorism insurance in order to maintain stability and certainty in the commercial insurance marketplace. Congress also had the foresight to realize that any additional events of such magnitude would continue to become a financial burden on the Treasury, and a federal backstop would encourage more private sector involvement on the front end, thereby reducing the government's ultimate costs. Most importantly, it had a "make-available" requirement for companies benefiting from the backstop to protect against adverse selection based on exposure.
 
In the 109th Congress, all of the natural disaster legislative proposals introduced were intended to mitigate the government's ultimate financial burden prior to the next large-scale catastrophic event, and similar proposals are under consideration in the 110th Congress. Prohibiting insurance companies from cherry-picking regions with limited risk is difficult without providing relief from potential insolvency. Any natural disaster legislation should consider the consequences the lack of insurance availability has on home and business ownership across the United States. Most mortgages are bound by an insurance requirement, so availability and affordability of coverage in all regions are paramount in order to avoid disruptions in the real estate marketplace. Any natural disaster legislation must offer incentives that encourage private sector participation in disaster-prone regions.

Contact for further information: Kevin McKechnie (202) 663-5172.