National insurance for natural disasters: a necessity or "beach house bailout"

Published 12 March 2010

Supporters of national disaster insurance program say it is better to plan ahead than do a bailout after a natural disaster; opponents say it would be a subsidy for owners of coastal mansions and encourage people to live in disaster-prone areas

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Many Americans live in natural disaster-prone areas — hurricanes, earthquakes, tornados. Should the U.S. federal government intercede to help states and property owners obtain more reasonable catastrophic insurance?

Former FEMA director James Lee Witt says it is. Christian Science Monitor’s Suzi Parker writes that he stressed the need Wednesday for a national financial plan for insuring against disaster-related losses, saying it is better to plan ahead up front than to do a bailout after the fact.

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


Witt said that an earthquake along the New Madrid Fault Zone in the central United States or a massive coastal hurricane “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.”

As we reported, the New Madrid Fault Zone is of particular concern to disaster experts (see “The Lessons for U.S. Preparedness from Haiti Relief Efforts,” 29 January 2010 HSNW; and “Scientists Anxious about Other Big Quakes,” 19 January 2010 HSNW). 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

Two-hundred bridges cross the Mississippi River in the New Madrid Fault Zone, says Pete McDonough, spokesman for, the nonprofit group that Witt co-chairs. 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.


Parker writes that 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 such as the National Wildlife Federation, Audubon, and the Sierra Club.

Parker quotes McDonough to say that homeowners would save between $20 and $500 a year. This is 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. also supports the bill. Its members include emergency management officials, first responders, disaster relief experts, insurers, and more than 300 other organizations and businesses.

Witt, who oversaw more than 300 disasters during his time at the FEMA, insists that it is better to use private insurer dollars to pre-fund coverage rather than government bailout dollars on the back end of a disaster. “The American public has lost its appetite for bailouts,” Witt says.

Parker notes that the bill would also establish and enforce stronger building codes and better education training and equipment for first responders.