Losses covered by federal proposals to add windstorm coverage to the National Flood Insurance Program and to create a system of loans and reinsurance to state residual market mechanisms and catastrophe funds could reach $230 billion in five years. They could also add $332 billion in a decade, according to a report sponsored by the group Americans for Smart Natural Catastrophe Policy.

The report examines potential effects that a repeat of a hurricane season similar to the one seen in 2005 would have if the federal programs proposed by H.R. 3355, the Homeowners Defense Act, and H.R. 3121, the Flood Insurance Reform and Modernization Act, were in place.

The Homeowners Defense Act, which the U.S. House passed in November 2007, would allow state-sponsored insurance mechanisms to bundle catastrophic risks in a National Catastrophe Risk Consortium, capitalized through the issuance of catastrophe bonds. It also proposes a system of short-term Treasury loans and reinsurance contracts for state catastrophe funds.

The flood insurance bill, which would enable the purchase of coverage for hurricanes, tornadoes, cyclones, typhoons and other wind events through the NFIP, also passed the House last year. However, the Senate passed a version of the legislation earlier that does not include the windstorm provisions. The current statutory language authorizing the NFIP is set to expire Sept. 30.

The report authors, former Clinton administration official Robert J. Shapiro and Aparna Mathur of the American Enterprise Institute, estimate a replay of the record 2005 Atlantic season would leave the federal government responsible for between $140 billion and $161 billion of losses in 2009; $197 billion to $230 billion in 2013; and $278 billion to $332 billion in 2017. The year 2005 saw 27 named storms, 15 hurricanes, seven major hurricanes and four Category 5 hurricanes.

Those bills would end up costing taxpayers in New York between $11.2 billion to $12.7 billion, the study claims. In California, the burden of losses would be between $19.2 billion to $22.1 billion, while in Iowa it would be between $1.2 billion and $1.4 billion. Altogether, 20 states would face new burdens of at least $2 billion, the report claims.

"While these proposals cover every state -- and, if approved, also would effectively transfer the burden of hurricane insurance for Louisiana, Texas, Alabama, Mississippi, Georgia and the Carolinas to the taxpayers of other states — its provisions are targeted to Florida and the prospects its government faces under its recent legislation," Shapiro and Mathur wrote. "For now, Florida is the only state with the 'qualified reinsurance program' required to receive the proposed new Treasury loans and federal reinsurance coverage, although others will almost certainly follow if the federal program is approved."

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However, others disputed the report and called into question the motivation of the group funding it. ProtectingAmerica.org -- whose members include leading homeowners' insurers Allstate Corp. and State Farm Mutual Insurance Co. -- cited a study by Milliman Inc. suggesting establishment of a federal catastrophe fund backstop would save policyholders more than $11 billion annually on homeowners insurance premiums.

"The report...makes erroneous assumptions, misreads the specific aspects of pending legislation and comes to conclusions that are designed to serve the needs of the interests that fund this organization, and not the American taxpayer," said David A. Smith, a director of ProtectingAmerica.org, in a statement.

ProtectingAmerica.org also argued the study did not take account of the accumulation of surplus from years where there are no catastrophic events and that the legislation noted that while the study assumes that cat plans would charge inadequate rates, H.R. 3355 requires rates to be "actuarially sound."

Also, while conceding the private reinsurance market "may have enough capital on paper" to cover coastal catastrophes, the report argues the private sector will not allocate that capacity in sufficient amounts to coastal markets, pointing to the "painfully slow growth and still-tiny size of the cat bond market" as evidence.

Americans for Smart Natural Catastrophe Policy includes the Association of Bermuda Insurers and Reinsurers, the Reinsurance Association of America and the National Association of Professional Insurance Agents. Other members of the coalition include the Consumer Federation of America, American Consumer Institute, Defenders of Wildlife, Environmental Defense, Friends of the Earth, Republicans for Environmental Protection, the Association of State Floodplain Managers, Americans for Prosperity, Council for Citizens Against Government Waste, the Competitive Enterprise Institute, FreedomWorks and Taxpayers for Common Sense.

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)