The creation of tax-advantaged catastrophe and hazard mitigation savings accounts for homeowners is one of several options for solving the insurance crisis put forth in a new white paper from the Bipartisan Policy Center (BPC).
Released in Washington this morning, the report discusses the factors driving the crisis, their impact on housing affordability and potential solutions, which also includes developing a risk-sharing agreement between the federal government and private insurers that would cover catastrophic losses.
The list of ideas is not meant to be exhaustive, the paper notes, but rather to serve as a starting point for further discussion.
BPC is the only D.C.-based non-profit think tank that combines politically-balanced policymaking with proactive advocacy and outreach. Since its founding in 2007, it has helped all parts of the political spectrum work across party lines to craft legislative solutions on many issues, including housing.
To help home owners prepare for the financial impact of a disaster, money they set aside under the catastrophic savings account proposal would be exempt from federal income taxes if the funds are left in the account until a disaster strikes or used to mitigate disaster risk.
Some states, including South Carolina and Mississippi, have enacted similar accounts that exempt set asides from their taxes. In Mississippi, limits on contributions are tied to the amount of the owner’s insurance deductible.
If the deductible is $1,000 or less, the owner can sock away up to $2,000. If it is greater than $1,000, he can save up to $15,000 or twice the amount of the deductible, whichever is greater. If the owner has no coverage and is, therefore, self insured, he could donate up to $350,000 or the value of his residence, whichever is less.
In the past, many tax-advantaged savings accounts have disproportionately benefitted higher-income earners, the paper admits. But it says this type of account “could ultimately decrease future funding needed for federal disaster assistance by helping homeowners strengthen their homes before a disaster and better cover post-disaster losses on their own.”
“Recovery funding could then better target those most in need of assistance,” it adds.
The risk-sharing option draws on a proposal put forth recently by the Congressional Budget Office. It calls for the federal government to act as a re-insurer, sharing catastrophic losses with private insurers.
In this public-private arrangement, private companies would remain the primary providers of coverage, setting terms and bearing initial losses. Uncle Sam would assume only a specified portion of the risk, with the government dictating when its share comes into play and possibly even capping its exposure.
Catastrophic risk-sharing has already drawn some interest from lawmakers. When he was in the House last year, now Sen. Adam Schiff, D-CA, proposed legislation to create such a program. The measure has found support among consumer groups, which argue, according to the white paper, that a federal program “has the potential to address market failures, improve homeowners’ access to affordable and adequate coverage, and promote risk reduction.”
At the same time, though, the bill has garnered “staunch opposition” from the insurance business, maintaining that the plan would endanger consumers’ access to coverage, further increase costs and risk increasing budget deficits.
However, the white paper notes that “a broad group of stakeholders” is interested in what public-private risk-sharing program could look like and how it might function. “This interest demonstrates the value of exploring the option,” it says.
Another option for alleviating the insurance crisis calls for the Department of Housing and Urban Development (HUD) to make permanent steps it has already taken to allow additional insurance flexibility for affordable housing operators. These include raising allowable deductibles and accounting for rising premiums in setting rents.
“Making these steps permanent and building on them through additional actions could create more opportunities for affordable housing operators to choose how to adjust to changing property insurance rates,” the paper says.
More immediate proposals calls for a national study on disaster risk mitigation efforts and convening a national working group on “harmonizing” lender insurance requirements.
On the latter point, the paper noted that while federal agencies are vital sources of liquidity for housing, they often have varying insurance requirements, including minimum coverage amounts and specific hazard protections. Creating a national working group could evaluate the different rules and identify opportunities for standardization, it hopes.
