by Eli Lehrer
November 16, 2008

As it continues to pick up the pieces from the mortgage mess, Congress needs to take note of another housing-related crisis that threatens America’s fiscal future. Already, irresponsible federal and state homeowners’ insurance schemes could easily cost the nation several hundred billion dollars when and if a major hurricane hits. Virginia would pay a significant share of the tab. If it wants to secure America’s future, in short, Congress needs to take a look at homeowners’ insurance.

Quite simply, states along the Gulf and Atlantic Coasts have taken on massive—probably unpayable—property insurance burdens in order to keep homeowners’ insurance rates down. Florida alone has a potential taxpayer liability of at least $36 billion in bonds. (No state has ever issued more than $11 billion in bonds all at one time.) Texas, Louisiana, Massachusetts, North Carolina, Mississippi also have large and growing obligations to insure their citizens’ homes. (Virginia has, so far, resisted doing anything like this.) These enormous liabilities could result in a massive stream of private and public bankruptcies following a single, bad storm season.

Some in Congress want to make things worse. Federal wind insurance and “homeowners’ defense” bills that have passed the House of Representatives but were rejected in the Senate would have transferred enormous amounts of hurricane liability from the states to the federal government. A recent study by former President Clinton appointee Robert Shapiro and American Enterprise Institute research fellow Aparna Mathur estimates that these proposals could cost as much as $230 billion a year. States away from the Gulf and Atlantic Coasts would pick up most of the tab but sensibly run Atlantic Coast states would get hammered too. Here in Virginia, for example, the bills for taxpayers from these programs could top $4 billion—just about $1,400 per household. Even without these proposals, the federal government could easily end up with multi-billion dollar bills from a single major storm.

And the costs will go sky-high specifically because of misguided state government programs. North Carolina is about the same size as Virginia and faces roughly the same danger from hurricanes. But it would reap several billion in benefits at the expense of Virginians. Although Virginia has a small government-mandated, privately run program intended to help people who really can’t find insurance at any price, it currently covers less than 1 percent of homeowners and has shrunk for the last two years. North Carolina, on the other hand, covers about 4 percent of its homeowners and has seen its subsidy program more than double in size over the past five years.

Quite simply, avoiding another economic crisis means doing away with these subsidy programs rather than making things worse by transferring them to the federal government. Still, the federal government does have a role to play. While well-off people should pay their own costs if they chose to live in a hurricane-prone area, it would be unfair to many people on fixed incomes if the government suddenly ended every government-run insurance program.

Instead state and federal governments need to work together to encourage people to help themselves and reinforce their homes against storms. Some people might receive incentives to move out of harm’s way while more should receive tax credits, rebates or grants to retrofit their homes and protect them against hurricanes.

In the Tidewater area, most people living within a few miles of the coast—most of the population of Hampton Roads and many Virginia Beach residents—would qualify for these credits. In all likelihood, furthermore, the subsidies would more than pay for themselves by reducing recovery costs each time a hurricane hit.

If it wants to avoid another economic crisis, Congress needs to pay careful attention to the nation’s homeowners’ insurance environment. And, instead of subsidizing bad building choices, it should help Americans help themselves.