A better way to fund disaster recoveries

Later today, when the monster leaves, we’ll better know the damage wrought by Hurricane Irma. But this we already know: Rebuilding is going to be expensive.

Look at Hurricane Harvey, which caused catastrophic flooding in eastern Texas two weeks ago. Texas Gov. Greg Abbott expects to ask Washington for $150 billion to help Houston and other areas recover — a big request from an anti-tax state with an anti-Washington swagger.

Or look at Superstorm Sandy, the most destructive hurricane of the 2012 season. It cost the government $50.5 billion, no matter that conservative Republicans like Texas Sen. Ted Cruz voted against it.

Or look at 1992’s Hurricane Andrew, then the costliest hurricane in U.S. history. It caused about $26.5 billion in damages, or about $50 billion in today’s dollars, according to the National Weather Service.

Now consider that Hurricane Irma is the strongest Atlantic hurricane in history. And Florida has grown by seven million people — to 20.6 million — since 1992. And a lot of these newcomers are living along the coast and other vulnerable areas.

So though we don’t yet know the extent of Irma’s damage, it’s likely to be the most expensive disaster ever.

Yet our federal government struggles with how to help regions sucker-punched by extreme natural disasters. When we see people suffering, as we recently did in Texas, Congress generally comes through with a bail-out, but political gamesmanship can cause delays.

There was a certain irony last week in watching Sen. Ted Cruz explain why Texas deserves federal disaster relief when he’d voted against such relief for Sandy sufferers in the Northeast.

Our nation needs a better way of funding recoveries from extreme natural disasters.

Specifically, we need a national catastrophic insurance program.

In 2007, then-U.S. Rep. Ron Klein, who represented Broward and Palm Beach counties, tried to create such a program. He modeled it after the Terrorism Risk Insurance Act, which Congress passed after 9/11.

The way the thinking goes, an act of terrorism — like that against the World Trade Center — is what the insurance industry calls an “uninsurable peril.” No standard risk pool, with standard pricing, exists because the potential damage runs so high.

It’s the same with natural disasters, real and imagined.

What would be the bill for an earthquake in downtown Los Angeles, for example? Consider that the 1906 quake in San Francisco led to a nationwide financial panic.

And what if a tsunami were to flood the Seattle area several miles inland?

No standard insurance market could handle such scenarios.

Yet in Florida, insurance companies must price policies based not on disaster, but on catastrophe. To do so, they must add the cost of expensive private reinsurance. Think of bookies making bets to cover their own bets. That level of coverage pushes up premiums.

In addition, Florida is one of the rare states with a system of subsidized reinsurance. It’s called the Hurricane Catastrophe Fund, which state lawmakers set up after Hurricane Andrew. This system could be a model for the nation.

Under the plan proposed by Klein, the Treasury Department would have underwritten bonds issued on the private market. Investors would have bought them to repay outsized insurance claims. There would have been no net loss for the treasury.

Many politicians didn’t understand the concept. Some called it a bailout, when it actually was a market-based solution. The House passed the bill in 2007, but the Senate refused to give it a hearing. And since Klein lost to Allen West in 2010, no one has revived the idea.

Klein, now a lawyer in Fort Lauderdale with Holland & Knight, told the Sun Sentinel Editorial Board this week that the idea makes even more sense now. “When something like (Harvey or Sandy) happens, the same thing happens: The government writes a big check, and everyone forgets about the deficit.”

Basically, Klein’s plan had four tiers. For minor storms, homeowners would assume most of the responsibility because the costs likely wouldn’t meet the deductibles. For more serious storms, policyholders and insurers would pay. For the third tier, the state would contribute — though the Hurricane Catastrophe Fund, in Florida’s case. When something stronger than a one-in-100-year storm hits, the federal plan would kick in.

Klein says the insurance industry was fairly receptive. State Farm and Allstate favored it, though The Hartford opposed it. The reinsurance industry, which is headquartered in Bermuda and unregulated, generally was unsupportive because it stood to lose business.

In the Senate, Klein mostly heard that the plan would be an unfair subsidy for states like Florida. In fact, he said, pricing would be based on the amount of risk a state faced. “Pennsylvania would pay much less than Florida.” No state could participate unless it had created its own backup plan.

Some lawmakers, Klein recalls, told him. “My constituents shouldn’t have to pay.”

Well, guess what? When the government writes a check, they’re paying. Every one of them.

Perhaps a revised version of Klein’s plan could improve on the original. The concept, however, remains not only sound, but also free-market.

A national catastrophe insurance program could mean potential savings for policyholders and the federal treasury.

The timing is right to discuss such an approach, since the federal flood insurance program is up for renewal this month.

Let’s end the disastrous financial response to natural disasters, and the politics that go with it.

Editorials are the opinion of the Sun Sentinel Editorial Board and written by one of its members or a designee. The Editorial Board consists of Editorial Page Editor Rosemary O’Hara, Elana Simms, Andy Reid, Deborah Ramirez and Editor-in-Chief Howard Saltz.