Cape Cod homeowners are urging lawmakers to establish a fund that would help pay for damages from catastrophic storms and reduce their insurance costs.
Homeowners on the Cape and other coastal areas have seen their insurance premiums balloon in recent years as companies have scaled back their coverage or stopped offering it altogether. Insurers have blamed rate hikes on the escalating cost of reinsurance, which is insurance that insurers purchase to protect themselves against projected catastrophic losses.
“This is impacting virtually everyone on the Cape and Islands dramatically,” Sen. Robert O’Leary, D-Barnstable, told members of the Legislature’s Joint Committee on Financial Services.
The committee held a hearing Tuesday to discuss several bills including one filed by O’Leary that would create a $6 billion state-administered catastrophic event fund. The fund would rely on a mix of state and private money. O’Leary’s proposal seeks to have insurance companies funnel payments that currently go to reinsurers into the fund.
Supporters say such a fund, where money could accumulate tax-free, would help reduce the cost of reinsurance and the savings would be passed onto consumers.
But some insurance industry representatives say there is no evidence that such funds save consumers’ money or increase availability of insurance. In Florida, the only state with a catastrophe fund that writes reinsurance, consumers end up paying more for car insurance and other types of coverage.
When a hurricane occurs in Florida that requires the fund to pay for losses greater than the fund’s balance, the fund issues bonds that are paid for by policyholders.
“State funds like the Florida Hurricane Catastrophe Fund do not reduce the vulnerability of people to natural catastrophes. They are not a proactive, disaster-planning approach. Rather, they are a cost-shifting mechanism. There is no free lunch – someone will pay for the losses,” Tami Stanton, of the Reinsurance Association of America, said in prepared testimony.
In late November, a 16-member commission recommended the creation of a catastrophic fund in Massachusetts. On the national level, the U.S. House of Representative has approved a measure that would pay for a national catastrophic event fund.
O’Leary, who re-filed the bill last year, told Banker & Tradesman in December that he thought interest in the fund was growing especially since the commission recommended its formation. His bill would also freeze rates for homeowners insured under the FAIR Plan for two years. The FAIR Plan is the state’s insurer of last resort.
Bay State homeowners could save $220 million a year through the creation of state and national catastrophe funds, according to ProtectingAmerica.org, a nonprofit organization that gets funding from Allstate and State Farm.
“Right now, [the fund] is key to providing relief to consumers,” said Edward Collins, national director of the group.
Collins noted that the fund in Florida, which had four major hurricanes in 2004, has been essential. “The only reason the Florida market survived was because the [catastrophe] fund,” he said.
Homeowners on Cape Cod have been urging state leaders to bring them some relief. Marta Kube, who owns a home on the Cape, said she is perplexed about why her insurance costs have mushroomed. She faced an insurance deductible of $15,000 until she started shopping around.
“All I know is they’re making tremendous profits,” she said of the insurance companies.
