Time for a national insurance program to cope with natural disasters?

Advocates of legislation to create a national insurance program say it's better to plan ahead than do a bailout after a natural disaster. Critics say it would amount to a subsidy for owners of coastal mansions and encourage people to live in places they shouldn't.

Given that so many Americans live in areas that have been prone to natural disasters – hurricanes, earthquakes, tornados – is it time for the federal government to intercede to help states and property owners obtain more reasonable castastrophic insurance?

Former FEMA director James Lee Witt says it is. He stressed the need Wednesday for a national financial plan for insuring against disaster-related losses, saying it's better to plan ahead up front than to do a bailout after the fact.

Mr. Witt addressed a House Financial Services Committee panel on behalf of the controversial Homeowners' Defense Act, a bill sponsored by Rep. Ron Klein (D) of Florida and more than 70 bipartisan cosponsors. A similar bill has been filed in the Senate by Sen. Bill Nelson (D) of Florida.

An earthquake along the New Madrid Fault Zone in the central United States or a massive coastal hurricane, Witt testified, “would cause such enormous damage that our economy would be stunned, private resources quickly depleted, and an immediate federal bailout of hundreds of billions of dollars could potentially be required.”

The Homeowners’ Defense Act would create a federal risk catastrophe pool that would allow states to pool their risk for various disasters to the private insurance market. In turn, homeowners would have lower premiums.

Opponents call it a “beach house bailout” because the majority of claims are expected to come from places with coastal mansions. States without a coast would help pay for the insurance coverage.

Insurance Studies at the Competitive Enterprise Institute and Reinsurance Association of America oppose the bill, as do many environmental groups.

In a letter to Rep. Barney Frank, chairman of House Financial Services Committee, environmental groups including the National Wildlife Federation, Audubon, and the Sierra Club wrote: “We have no doubt that Representative Klein's efforts to ease Floridians' insurance rates are well intended, but we are extremely concerned that providing a federal insurance subsidy will create incentives for more development in environmentally sensitive coastal areas and increase exposure to hurricane-related risk.”

Pete McDonough, spokesman for ProtectingAmerica.org, the nonprofit group that Witt co-chairs, says homeowners would save between $20 and $500 a year. That's not enough of an incentive, he says, for people to move “by large numbers into environmentally sensitive areas along the coasts.”

He adds, “Fifty-seven percent of the American population already lives in areas that are prone to earthquakes and hurricanes.”

The bill's supporters include American Red Cross, the International Association of Fire Chiefs, other emergency responders, Allstate, and State Farm Insurance.

ProtectingAmerica.org also supports the bill. Its members include emergency management officials, first responders, disaster relief experts, insurers, and more than 300 other organizations and businesses.

The New Madrid Fault Zone is of particular concern to disaster experts. The largest earthquake in the United States occurred in this zone in 1811, affecting an area stretching from Mississippi to Michigan and from Pennsylvania to Nebraska. The area contains major telecommunications and energy grids and natural-gas lines.

The bill would also establish and enforce stronger building codes and better education training and equipment for first responders.

Two-hundred bridges cross the Mississippi River in the New Madrid Fault Zone, says McDonough. Few meet seismic standards. Consequently, if another “Long Island Express” hurricane, which was the most powerful, costliest, and deadliest hurricane to ever strike New England, were to occur again, damages would be $100 billion, he says. Hurricane Katrina cost an estimated $81 billion, and discussions about disaster-related insurance arose then, too.

Witt, who oversaw more than 300 disasters during his time at the Federal Emergency Management Agency, insists that it is better to use private insurer dollars to pre-fund coverage rather than government bailout dolloars on the back end of a disaster.

"The American public has lost its appetite for bailouts,” Witt says.