Former Clinton Economic Adviser Concludes That Homeowners’ Defense Act Is An Effective Vehicle To Help Protect U.S. Homeowners and American Economy from Natural Catastrophes

The Homeowners’ Defense Act of 2009 (HR 2555) is an effective vehicle to help deal with the financial devastation following major natural catastrophes, to alleviate a potential source of shock to the U.S. economy, and to provide assurances to homeowners that they will have the ability to rebuild and recover in the aftermath of a massive hurricane or earthquake, according to a report co-authored by Jon Orszag, a former economic advisor to President Clinton, and economist Doug Fontaine.

'The inevitable occurrence in the future of massive hurricanes like Katrina, Rita, Andrew, Ivan and Ike, or a replay of earthquakes like those that emanated from Northridge, San Francisco or across the American heartland from New Madrid, Missouri, make it imperative that the nation, in order to protect American families, move as quickly as possible to enact a comprehensive, integrated program that is economically sound and marshals the resources of the private and public sectors,' said Jonathan Orszag, a Senior Managing Director of Compass Lexecon, a world-renowned economic consulting firm.

'Major catastrophic events can pose a serious threat to the economy, especially in its present distressed condition, and highlight market failures in the private insurance and reinsurance industries that should be addressed before the next major catastrophe strikes,' Orszag said.

The 30-page report was commissioned by ProtectingAmerica.org, a non-profit organization of first responders and disaster response groups, leading businesses including insurers, as well as more than 300 other organizations and 20,000 individual members.

'The Homeowners’ Defense Act of 2009 would leverage public and private resources and mandate more comprehensive prevention and mitigation. As such, the proposed legislation represents an economically sound solution to address the inefficiencies that plague the current system of disaster relief,' Orszag said.

The Orszag-Fontaine report notes that the current after-the-fact system of catastrophe relief relies on ad hoc government intervention that leads to the financing of relief efforts through taxpayer-funded bailouts. These bailouts are inequitable insofar as people who reside in areas not susceptible to catastrophic events are called upon to share in the financial burden created by a major catastrophe. Moreover, from an economic perspective, the current system distorts the incentives of residents in exposed areas to take prudent actions to lessen the potential damage to their properties or families.

In the report, Orszag, who in addition to serving on President Clinton’s National Economic Council also served as the Director of the U.S. Commerce Department’s Office of Policy and Strategic Planning and as an Assistant to Secretary of Commerce, and Fontaine assess alternatives that have been discussed to address the shortcomings of the current system.

'The more than $400 billion in capital that some have claimed the insurance industry has at its disposal to cover losses for future catastrophes is, upon close inspection, not available for those purposes. Other proposals such as the use of catastrophe bonds and insurance derivatives may play a supplemental role, but are not sufficient in and of themselves to address effectively the shortcomings of the current system,' Orszag said.

The Homeowners’ Defense Act of 2009 (H.R.2555, sponsored by Rep. Ron Klein (FL-22) contains the following key provisions:

• The Act facilitates the ability of state-sponsored insurance funds to bundle voluntarily their catastrophic risk with one another through a National Catastrophe Risk Consortium (the 'Consortium').
• With the approval of participating states, the Consortium can issue financial instruments linked to the catastrophe risks insured or reinsured through its members.
• It provides a federal guarantee of state funds’ bond obligations, thereby supporting the capacity of state plans to issue bonds and address timing risk.
• It establishes a standard attachment point for a national catastrophe fund layer of protection.
• It creates the Federal Natural Catastrophe Reinsurance Fund, which will collect premiums from the sale of contracts for reinsurance coverage.
• Under the Act, premiums for reinsurance are based upon expected losses plus a modest expense load.
• It requires participating states to provide coverage under their insurance and reinsurance programs at rates that are actuarially sound.
• It requires participating states to adopt and enforce mitigation measures, to establish an insurance rate structure that accounts properly for investments in mitigation, and to encourage the development of comprehensive land use and zoning plans that reflect the state’s exposure to natural catastrophes.

About ProtectingAmerica.org

ProtectingAmerica.org was formed in 2005 and is a non-profit organization consisting of emergency management officials, first responders, disaster relief experts, insurers, and others. Its members include the American Red Cross, the International Association of Fire Fighters, more than 300 other organizations and businesses, and more than 20,000 individuals from across the nation.

The non-partisan organization is chaired by James Lee Witt and Admiral James M. Loy. Mr. Witt served for eight years as the director of the Federal Emergency Management Agency. Admiral Loy was formerly the deputy secretary of the US Department of Homeland Security and formerly served as commandant of the United States Coast Guard.

At the core of ProtectingAmerica.org’s mission is the creation of a comprehensive, integrated national catastrophe management solution that will better prepare and protect American families, communities, consumers, and the American economy from the financial devastation that can result from a major catastrophe and the ensuing need to rebuild. Among its efforts to support this mission, ProtectingAmerica.org is working to increase public awareness and consumer education, to advocate for better coordination with local, state and federal mitigation and recovery efforts, and to strengthen emergency response and financial mechanisms to rebuild after a major catastrophe.

About the Study’s Authors:

Jonathan Orszag (jorszag@compasslexecon.com) is a Senior Managing Director of Compass Lexecon and a member of the firm’s Executive Committee. Orszag is also a Fellow at the University of Southern California’s Center for Communication Law & Policy and a Senior Fellow at the Center for American Progress. Previously, Orszag served on President Clinton’s National Economic Council and as the Assistant to the Secretary of Commerce and Director of the Office of Policy and Strategic Planning.

Doug Fontaine (dfontaine@compasslexecon.com) is a Senior Vice President at Compass Lexecon, and Managing Director of the firm’s San Francisco Bay Area offices. He has more than 20 years of experience providing economic and policy consulting services to clients engaged in antitrust and intellectual property litigation, regulatory proceedings, and claims for damages. He holds an MBA from the Haas School of Business at U.C. Berkeley.

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