An article in the Wall Street Journal over the weekend reminds us of the rumblings about the federalization of catastrophe insurance possibly playing a role in this year’s election cycle:
The proposal — backed by giant insurers Allstate Corp. and State Farm Mutual Automobile Insurance Co., as well as Florida lawmakers — focuses on "reinsurance," the policies bought by insurers themselves to protect against catastrophic losses. The proposal envisions a taxpayer-financed reinsurance program covering all 50 states, which would essentially backstop the giant insurers in case of disaster.
The program could save homeowners roughly $500 apiece in annual premiums in Florida, according to an advocacy group backed by Allstate and State Farm, the largest writers of property insurance in the U.S.
But environmentalists and other critics — including the American Insurance Association, a major trade group — say lower premiums would more likely spur irresponsible coastal development, already a big factor in insurance costs. The program could also shift costs to taxpayers in states with fewer natural-disaster risks.
"This bill makes it a little bit too easy for the state to go to the federal government for a bailout," said Eric Goldberg, associate general counsel at the American Insurance Association, an insurers’ trade group.
The legislation passed the House with bipartisan support, 258-155, late last year, despite a presidential veto threat. Although a Senate vote is unlikely this year, proponents are trying to make it a litmus-test issue in the presidential race. The two Democratic contenders, Sen. Hillary Clinton of New York and Sen. Barack Obama of Illinois, in their recent visits to Florida — a key swing state — have both voiced support for the plan.[...]
The proposal envisions the creation of funds like Florida’s in all 50 states. These reinsurance funds would collect premiums from companies like Allstate, who would benefit because they would be paying less than in the private reinsurance market. That savings would get passed on to homeowners. Then, if a state got hit with a particularly severe disaster, whether hurricane, earthquake, tornadoes or other crisis, federal loans and state-backed reinsurance could step in to cover big losses.
In order to draw congressional support from states with somewhat less disaster risk, the federal program is designed to kick in for events that don’t necessarily approach the catastrophic level of, say, a Hurricane Katrina. In tiny Delaware, for example, federal payouts could begin after yearly losses of less than $300 million. Katrina-related losses in Louisiana, by comparison, topped $20 billion.
On general principle, I’m not a fan of the government stepping in to provide a service that is already mostly-adequately addressed in the open market.
However, I also have to admit that yes, a chunk of reinsurance cost is a hefty profit/risk load, required to attract the capital necessary to support the business. If cover were provided with the feds underwriting the risk, then in theory, the profit motive should be eliminated, and arguably less capital would be required to maintain solvency…assuming that the federal government can continue to be thought of as infinitely solvent.
Aside from my small-ell libertarian objection to federalization of cat cover, I also have a couple of practical concerns of the idea:
First, our government seems allergic to fiscal responsibility — it likes to spend money without adequate thought being given to exactly how or when the revenue will be raised. A catastrophe program like this should accumulate assumed premiums into a reserve fund which can be tapped to pay when disaster strikes, if the program is to be financially viable over the long term.
I don’t think I’m being too cynical to think that an accumulation of a large warchest of cash will be too tempting for bureaucrats to resist repurposing, as part of accounting magic to hide the national addiction to credit, much as is being done with the Social Security trust fund (and as was done with the Medicare trust fund, before it was depleted).
Such manipulations of the national financial records will eventually net themselves out, but I am extremely uncomfortable with providing the feds another means by which they can deceive the public about our debt problems.
Second, I have reservations about any federal bureaucracy attempting to operate as efficiently as a private business. I’m not sure that the personal insurance behemoths of Allstate and State Farm would be doing themselves any favors by relying on federal reinsurance to eventually pay out, rather than private reinsurers.
And finally…even though a federally-supported entity might be able to avoid some of the price drag created by a need to provide investors profit, there is still the reality that the underlying loss costs are very high in certain parts of the country. Do we actually think that a federal agency will have the chutzpah to demand adequate cessions in support of (say) Florida wind exposure, when the head of the executive branch of the government (and therefore the federal reinsurance entity) has to appeal to Florida voters every four years?
With Obama supporting the idea, and Florida still considered a swing state (albeit not as much of one as it would be with Hillary at the head of the Democratic ticket)… I could actually see this mattering somewhat as an issue this summer and fall.