Over at ThinkTankTown, Ron Nessen chimes in on the concept of federal catastrophe reinsurance:
The Policy Brief from the Brookings Institution says that disasters of the magnitude of Katrina cause losses which are too large for private insurance companies to cover. This causes insurance companies to charge such high premiums that customers cannot afford insurance, or else the companies are unwilling to sell policies at all in high-risk areas.
As a result, says the author, Brookings senior fellow Robert E. Litan, taxpayers all over the country are forced to pay for what he calls de facto insurance ” tens of billions of dollars in government disaster relief costs.[...]
“If nothing is done,” Litan writes, “society as a whole, and the federal government (taxpayers) in particular, face potentially much larger burdens for future disaster relief than is necessary.”
His proposed solution is a government insurance program. The government would charge premiums to provide disaster insurance to individuals, and to underwrite losses above a certain level by private insurance companies and state catastrophic insurance programs.
The idea’s been tossed around before, and has gotten more play in recent months, since Katrina. I have mixed thoughts about the idea, personally, but my logic ladder on the subject goes something like this:
- Prudent property owners seek the protection of their property from disasters through insurance.
- There is capital available in the market to underwrite the risk
- However, given the nature of catastrophic loss (infrequent, severe, and potentially affecting a large number of risks simultaneously), a tremendous amount of capital is required to underwrite the risk, and the owners of that capital require above-average returns to assume the risk.
- These added returns translate into higher premiums to be charged to the property owner.
- Some property owners will be unable to afford coverage, and will opt to go without.
- Disaster strikes
- Undercapitalized insurers suffer, leaving their policyholders in a difficult situation. Victims who are outright uninsured seek assistance from the government
- In both cases, taxpayers end up picking up the tab because it is politically expedient for the government to cooperate.
Setting aside very valid concerns about the expense of coverage providing a necessary disincentive to build and live in harm’s way, it’s the affordabilty and capital requirements that create the issue.
The federal government has tremendous capital at its disposal, and there is no obligation to return a profit. (Indeed, most modern iterations of our government have been quite happy operating deep in the red.) Thus, it should, in theory, be able to offer coverage at a much reduced price than a private (re)insurer can, making it a natural provider of mega-catastrophe coverage.
However, that level of government involvement annoys my inner libertarian. Perhaps this falls under the category of “safety net”, which satisfies my acceptance that an appropriate role of the government is to provide some minimal safety net to protect individuals when bad luck befalls them. But it still seems to me that there ought to be a way to structure financing in the open market, etc. to creatively reduce the risk and capital requirements, making there be less overhead to pass on to the consumer.