Yesterday, September 6, 2007, Philip Swagel, Treasury Assistant Secretary for Economic Policy, submitted testimony to the House Committee on Financial Services strongly opposing the Homeowners’ Defense Act of 2007 or H.R. 3355.  For background information on H.R. 3355, see our earlier report here.

Swagel’s testimony centered on the Bush Administration’s belief that the private insurance market is currently functioning in an efficient manner and able to best provide the necessary coverage “to maintain the economic sustainability of communities at greatest risk of natural catastrophes.”  The Administration is concerned that government involvement may upset the balance and “make it more difficult and costly for families and business to obtain coverage” while creating “large liabilities for the federal government.”  It believes that States could achieve the purpose of the Homeowners’ Defense Act of 2007 without legislation by working together and pooling risks in the private markets that are already available through the use of traditional reinsurance arrangements or natural catastrophe bonds.  Swagel also testified that the Administration is concerned that the subsidies provided by H.R. 3355 would promote States to create new programs and expand current programs, which in turn may lead to the “displacement of private coverage” and “retard innovation,” as “[l]ower insurance premiums would reduce economic incentives to mitigate risks and encourage individuals to take on inappropriate risks,” placing the ultimate burden for high-risk areas on taxpayers nationwide.

Meanwhile, Hawaii’s Insurance Commissioner J.P. Schmidt, spoke on behalf of the National Association of Insurance Commissioners, and offered its support of the Homeowners’ Defense Act of 2007.  Schmidt stated that the private market works well with respect to normal everyday disasters, but is not effective in dealing with natural disasters, whereas the creation of a federal fund would give state-sponsored entities “the ability to spread their absorbed risk over time.”  “Such an approach leaves the private market as the first line of defense for the vast majority of insured events but recognizes that state and federal government involvement becomes necessary for truly catastrophic events.”

We will continue to monitor the progress and provide updates of H.R. 3355 at InsureReinsure.com.

For a complete copy of Swagel’s testimony, click here.

For a complete copy of Schmidt’s testimony, click here.