Read Senate Bill No. 624, an act establishing a Massachusetts Catastrophic Event Fund.

Why does Massachusetts need a Catastrophe Fund?
Many meteorological experts are forecasting that the Northeastern United States is due for a major hurricane.  Many people assume that private insurance or federal disaster relief will help them re-build, and in most cases, that's true. But a truly major catastrophe - one that causes tens of billions in damage - would have a profound impact on the state's economy for years to come. It only makes sense to prepare in advance to protect residents from the economic fallout that could follow such a tragedy.

How would the Massachusetts Catastrophe Fund work?
The private insurance market would continue to play a principal role in protecting Massachusetts after a disaster. The Massachusetts State Catastrophe Fund would only be needed in the event of a major catastrophe when a threshold established by lawmakers is exceeded. A portion of property insurance premiums would be deposited into the Catastrophe Fund, where they would grow tax-free. No tax dollars would be used to support the Fund, and insurance companies could not use these funds for any purpose other than to pay claims from a catastrophe that exceed a certain threshold.

Why can't private insurance companies insure against catastrophes?
The unpredictability and magnitude of major catastrophes are beyond the means of the private sector alone. Insurance companies paid over $21 billion after Florida was struck by four major hurricanes in 2004.  Losses of that magnitude can result in premium increases and insurance shortages for consumers throughout the country. Just as the Federal Deposit Insurance Corporation protects depositors from losing money when banks are insolvent, the state can do more to ensure that claims are paid after a true catastrophe and that private companies are able to continue providing insurance. While changes are needed to both the California Earthquake Authority and the Florida Hurricane Catastrophe Fund, both programs are conceptually sound, and New Jersey could incorporate the most effective elements of each into a Catastrophe Fund of its own.

Are other states in the Northeast taking similar steps?
Yes.  Meteorologists are forecasting that more frequent and intense storms can be expected and that the Northeast is particularly vulnerable for a major hurricane.  Northeast states including New York and New Jersey have introduced similar state legislation to help their residents be better prepared for and protected from catastrophe, while also helping to stabilize the insurance market to provide consumers with more affordable and available homeowners insurance.  The states are also proposing legislation so that residents can take advantage of a national catastrophe management solution currently proposed in Congress.

How do we know a Catastrophe Fund will really work?
There is no debate that both the insurance and reinsurance markets collapsed in Florida after Hurricane Andrew hit Florida in 1993. Some companies went insolvent, and many others left the market. The Florida Hurricane Catastrophe Fund was created to avoid a repeat of that collapse in the aftermath of future hurricanes. The importance of that legislation was just tested by the unprecedented four-storm season in 2004 and three storms in 2005.  There was no mass exodus of insurers, there were no mass insolvencies, and insurance companies are still doing business in Florida because the Catastrophe Fund helped stabilize the market. A similar market reaction occurred after the Northridge Earthquake in 1994, but because of the California Earthquake Authority, the homeowners insurance market in California today is healthy and competitive.

Why can't reinsurance companies help insurance companies manage their exposure to catastrophic losses?
There is a role for reinsurance companies to work with a Catastrophe Fund in place. When insurance companies buy reinsurance, it adds a layer of financial protection, which works with the Catastrophe Fund to reinforce private insurance coverage. But it is important to point out that the money paid by insurers into a Catastrophe Fund stays in the state. The same cannot be said of money paid to reinsurers. Much of the reinsurance money flows to Bermuda, London, Tokyo or Paris. After a season with no catastrophes, that money is gone. With a Catastrophe Fund, the money stays in the state, and it grows tax free to help pay for future catastrophes, while also using proceeds to strengthen first responders, develop stronger building codes and create education and mitigation programs. A Catastrophe Fund is a far more efficient way for consumers to prepare for catastrophes than watching money disappear offshore year after year.

Why should anyone who doesn't live on the coast care about a program that is meant to protect us from major hurricanes?
A Catastrophe Fund allows insurers to continue writing business in a state struck by a catastrophe, which makes continued growth and development possible statewide. Insurance is the oxygen of free enterprise; without it our economy cannot prosper and grow. Florida is a perfect example: There has been unprecedented growth in Florida since Andrew devastated that state, which would not have been possible without a vibrant and healthy insurance market. The Florida Hurricane Catastrophe Fund kept insurers in the state, which made continued growth and prosperity possible.

Would the insurance premium of a consumer living away from the coast pay the same into the Catastrophe Fund as those along the shore?
The Massachusetts State Legislature can structure its Catastrophe Fund to reflect the realities of the state. Since the risk of catastrophic loss varies among different geographic areas of the state, rates can be adjusted accordingly.  In other words, there are ways to structure a healthy Catastrophe Fund that calls for the insurance companies of those who live in areas more prone to catastrophes to pay a larger portion of premiums into the Catastrophe Fund, since the Fund is financed privately, without taxpayer dollars.