The Homeowners’ Defense Act of 2007
On November 8, 2007, the House passed the Homeowners’ Defense Act of 2007, H.R. 3355. This bill is designed to address the growing crisis in the availability and affordability of homeowners’ insurance. The legislation focuses on stabilizing the catastrophe insurance market by expanding private industry’s capacity to cover natural disasters and helping states to better manage risk. Following are highlights of the bill’s provisions.
Natural Catastrophe Risk Consortium
Allows states to combine their natural disaster risks together through a consortium. The bill would allow states to responsibly plan for disasters before a catastrophic event occurs. The bill creates a Natural Catastrophe Risk Consortium, which provides a venue for state-sponsored reinsurance funds to voluntarily bundle their catastrophic risk with one another, and then transfer that risk to the private markets through the use of catastrophe bonds and reinsurance contracts. Following the risk transfer, state-sponsored reinsurance funds will be better protected and increasingly able to provide a stabilizing effect on the state insurance market.
Offers a market-based solution to the current crisis in affordable catastrophe coverage for homeowners. This bipartisan solution to the homeowners’ insurance crisis will decrease the need for government bailouts when a natural catastrophe hits. The bill is a responsible approach to the homeowners’ insurance crisis which expands coverage and stabilizes the market.
Restores reliability and predictability to the homeowners’ insurance industry. This bill restores reliability and predictability to the homeowners’ insurance industry by minimizing the price volatility in insurance following a large natural disaster.
National Homeowners’ Insurance Stabilization Program
Creates a federal program to provide loans to state reinsurance programs impacted by severe natural disasters. The bill creates a National Homeowners’ Insurance Stabilization Program within the Treasury Department to provide loans to state reinsurance programs in the event of a severe natural disaster, while also encouraging those programs to accumulate capital sufficient to pay their reasonably anticipated losses. By doing so, the Federal Government will be providing the capital needed to begin the rebuilding process. Specifically, the program makes available two types of loans: liquidity loans and catastrophic loans. Liquidity loans would allow a state’s reinsurance fund to cover its liability in the event that it is not fully funded. Catastrophic loans are available to a state’s reinsurance fund after insured losses in the state exceed 150 percent of the state’s direct written premium for property and casualty insurance.
Contains provisions to minimize the cost to taxpayers. The provisions creating the federal loan program are designed to minimize the costs to taxpayers. Strict requirements are placed on state reinsurance programs in order to qualify for the federal loans. In addition, loan terms and “penalty” rates are designed so that the Federal Government is the lender of last resort.
General Provisions
Sets strict requirements that state reinsurance programs must satisfy in order to participate in the bill’s programs. The bill sets out specific requirements that state catastrophe reinsurance programs must satisfy before the Treasury Secretary can certify the program as a Qualified Reinsurance Program. Only Qualified Reinsurance Programs may participate in the National Catastrophe Risk Consortium and the federal loan program created by the bill. To be certified as a Qualified Reinsurance Program, a state program must reinsure only risks in their state deemed truly catastrophic by the Treasury Secretary. Furthermore, participating states must also require state insurance and reinsurance programs to establish risk-based rates.