Assistant Secretary for Economic Policy Phillip Swagel stated that the proposed measure would provide a new subsidy and implied federal guarantees that would distort prices for reinsurance contracts, crowding out private insurance coverage and encourage building in high-risk areas.
“Subsidies for natural catastrophe insurance will encourage over-development in hurricane-and earthquake-prone areas, putting more people in harm's way," Assistant Secretary for Economic Policy Phillip Swagel said in prepared testimony to a House Financial Services subcommittee hearing.
Rep Ron Klein from Florida sponsored the bill, which is known as the "Homeowners' Defense Act of 2007" and aims to ensure the availability and affordability of homeowners insurance coverage for catastrophic events, such as wind damage from storms and earthquakes. It would create a consortium of states that would protect against unexpected catastrophic losses and transfer the risk to the capital markets.
J.P. Schmidt, Hawaii's insurance commissioner, said the current system is very good at addressing "normal" disasters for auto accidents, storms and some hurricanes, but the private market will not insure bigger natural disasters.
"This risk-transfer mechanism for states would create another avenue to cede risk," Mr. Schmidt said in prepared testimony.