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Is insurance industry next takeover target?

Aftermath of Hurricane Katrina

The federal government, in its efforts to take over health care, auto companies, Wall Street interests and student loans and talk about plans for imposing new mandates on talk radio, the Internet and oil companies, isn’t ignoring the insurance industry.

There’s now an advancing new plan to put more taxpayer dollars into claims coming out of catastrophes like Hurricane Katrina. And a wide-ranging coalition of interest groups from the National Association of Mutual Insurance Companies to the Reinsurance Association of America are in league with the Environmental Defense Fund and the Sierra Club to oppose it.

The plan, H.R. 2555 by Rep. Ron Klein, D-Fla., has been reported out of the House Committee on Financial Services. It is expected to be up for its next vote soon.

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But a letter to members of Congress by members of SmarterSafer.org, dispatched just days ago, said the plan would “displace the private insurance market, and require American taxpayers to pay billions of dollars to support beachfront homes and development in environmentally sensitive areas.”

“The ‘Homeowners’ Defense Act,’ H.R. 2555, dubbed the ‘Beach House Bailout,’ requires taxpayers across the country, and in your district, to subsidize insurance for wealthy homeowners along the Florida coastline,” the letter to members of Congress said. “The bill is structured to assist the state of Florida (and to a much smaller extent, California) through federal assistance.”

Analyst Eli Lehrer, a senior fellow of the Heartland Institute, called it “a takeover of the reinsurance market.” That, he said, would lead government into the insurance business and eventually the primary insurance market.

“It isn’t direct. It’s still a takeover of the insurance market by the federal government,” he said.

Primary insurance is basically what a homeowner would purchase from a private company to protect himself against cataclysmic losses in a tornado or hurricane. In the reinsurance market, insurance companies protect themselves against huge losses essentially by insuring their own policies with other companies.

Lehrer said the legislation includes several mechanisms through which the government would get involved with paying for programs to guarantee payment of claims in catastrophes.

“At the end of the day it would ultimately be a liability for the taxpayers,” he said.

A government summary of the bill specifies the creation of the “National Catastrophe Risk Consortium” as a “nonprofit, nonfederal entity” that would “better assist the financial recovery from significant natural catastrophes.”

It requires officials to make available for purchase contracts for reinsurance and establishes a fund full of money “appropriated for liability” and establishes “grants” to mitigate losses.

The SmarterSafer organization includes American Rivers, Cerres, Defenders of Wildlife, Environmental Defense Fund, National Wildlife Federation, Republicans for Environmental Protection, Sierra Club, National Flood Determination Association, Americans for Prosperity, Americans for Tax Reform, The Heartland Institute’s Center on Risk Regulation and Markets, Competitive Enterprise Institute, Allianz of America, Association of Bermuda Insurers and Reinsurers, Chubb, Liberty Mutual Group, National Association of Mutual Insurance Companies, National Association of Professional Insurance Agents, Reinsurance Association of America, Swiss Re and USAA.

Opposition also is coming from the American Legislative Exchange Council, the nation’s largest individual-membership organization of state lawmakers.

The letter, signed by dozens of state lawmakers from across the nation, warns that the Klein plan “will impose billions of dollars in liabilities on taxpayers, discourage the insurance and reinsurance private markets and create incentives to build in environmentally sensitive areas.”

“This bad idea is the result of a previous bad idea put into practice by Florida,” the letter says. “Over the past two decades, Florida has created a cumbersome government-run homeowners’ insurance system that directly or indirectly gives the state government liability for every disaster-prone home in the state.

“The system, which consists of a government agency that writes homeowners’ insurance and a hurricane catastrophe fund, has only $4 billion in hard assets to pay liabilities that could top $25 billion after a major storm. Rep. Ron Klein has introduced H.R. 2555 to give this broken system a pre-funded taxpayer bailout.”

Lawmakers objecting to the idea come from Alabama, Arizona, Arkansas, Colorado, California, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, Wisconsin and Wyoming.

The list misses only about a dozen of the states.

“Due to the warmth of a federal-government security blanket, risky bets will increase, beach homes will be built and sold in unsafe areas and a taxpayer in the Midwest will help to cover the cost of the bets post-hurricane,” the letter says.

“The end result of this legislation is that homeowners across the country will be forced to bail out beach-house owners in Florida because the state is politically unwilling to have homeowners pay actuarial sound rates,” the lawmakers said. “Congress should not reward the bad practices of a few states by punishing the majority.”

The SmarterSafer organization suggests it’s not just pennies, either.

“H.R. 2555 will create a new, expensive public insurance program and displace the private insurance market, making the federal government the insurance company for natural catastrophe risk. This will result in significant taxpayer funds being used to take over a large segment of the private insurance market. CBO found that the bill will cost $1.7 billion over the next five years. However, an independent study found that the actual cost to taxpayers could be well over $200 billion,” it says.

“U.S. taxpayers provide disaster assistance to victims of natural disasters but do not pay for rebuilding private homes – a cost now borne by private insurance companies. H.R. 2555 would change that policy for properties insured in public programs in just two states at the expense of other U.S. taxpayers.”

A Congressional Budget Office report on the plan released just days ago said it would “authorize appropriations to establish a federal disaster reinsurance program.”

It also would “authorize appropriations for the Treasury to enter into commitments to guarantee the principal and interest of bonds issued by eligible insurers and reinsurers following a disaster.”

Specifically, the law would create the National Catastrophe Reinsurance Fund and authorize “such sums as may be necessary to cover the maximum potential liability. …”

The move into insurance would be just the latest effort by the federal government to control private business.

There have been discussions about the nationalization of oil companies, a new law to nationalize health care already is in place and the Obama administration has bought interest in automobile companies and bailed out Wall Street markets, has taken over the student loan industry and has discussed vast new regulations for the talk-radio industry as well as the Internet.