Eli Lehrer writes in the Weekly Standard this week about a bill from Congressman Ron Klein that seems to be companion legislation to Congressman Richard Neal’s Reinsurance Bill. The article correctly points out the anti-market effects of such legislation:
Those who think the federal government needs even more debt and more responsibilities will love Florida Democrat Ron Klein’s Homeowners’ Defense Act. Everyone else should treat the bill—currently moving forward in the House of Representatives—with a great deal of skepticism. The proposal, intended to reduce homeowners’ insurance premiums, turns the federal government into the insurer of last resort for many of the most disaster-prone homes in the country. Since the great bulk of the bill’s potential beneficiaries and current advocates live on or near hurricane-prone beaches, it’s quite fair to think of the bill as a bailout for them—a beach house bailout…
…Primary” insurance companies like Allstate, Nationwide, and CNA buy insurance of their own, called reinsurance, to manage and pool risk. The reinsurers that sell this type of coverage invariably operate around the globe. A large reinsurer like Warren Buffett’s Berkshire Hathaway might simultaneously underwrite the risk of an industrial accident in Japan, a flood in the U.K., a hurricane in Florida, and a cyclone in Australia. Since there’s almost no chance that all of these events will happen at the same time, the reinsurer can profit from the premiums it earns on one type of coverage even when it pays out mammoth claims on another.
All other things being equal, a broader, more diversified pool results in lower premiums. Klein’s bill actually narrows down the pool by encouraging states to concentrate risk here in the United States under the aegis of federal guarantees. Thus, to break even, the government would have to charge higher premiums and interest rates than the private sector for any coverage or guarantee it provides. This means that if it hopes to sell any coverage at all, the government will have to under-price it and thus leave taxpayers with nearly limit-less liabilities. http://www.weeklystandard.com/articles/beach-house-bailout
