The Hartford’s Modest Proposal on Coastal Wind Coverage

In all the discussion since Katrina on federalization or semi-federalization of coastal storm risk in property insurance I’ve had a few qualms with the idea.  They include:

• My inner libertarian objects to government involving itself in a matter that the free market should be able to address.
    
• Most of the proposals implicitly rely on subsidization from folks who choose to live out of harm’s way.
   
• Virtually none of the proposals address some of the real problems with coastal wind exposure – that storms will be perceived as more damaging as more folks choose to live and own property in harm’s way, that property owners choose to go uninsured (and rely on government support to recover post-catastrophe), and that there are holes in coverage between homeowners/commercial property insurance and coverage offered through the National Flood Insurance Program.

The Courant has an article discussing one carrier’s idea on a more modest middle ground on the subject:

The Hartford’s plan, pitched by Chief Executive Ramani Ayer to media Wednesday, says:

• Coastal homeowners should be required to buy flood insurance, to avoid battles over what kinds of damage are covered or not by regular homeowner policies. The $40 billion Katrina spawned massive litigation concerning wind v. water damage.
• IRA-style savings accounts could be created to help people afford insurance, and states could administer subsidies for low and moderate-income coastal homeowners.
• A federal financial backstop is needed to protect insurers from a catastrophic storm, the kind that is expected to happen once in 100 years.
• States could create their own reinsurance funds, bound by federal guidelines. Insurers buy reinsurance to spread their risk of high claims. The state reinsurance funds would only kick in when the private market seriously deteriorates.
• Costs associated with the federal backstop and any state reinsurance funds would be passed directly to policyholders and identified separately on their insurance bills.
• The federal government would set guidelines involving land-use planning, risk mitigation, and disaster preparedness. States would follow the guidelines, making insurers doing business in a state eligible for help from the federal backstop.

I’m not sure that I necessarily fully agree with the above ideas – the real test would be in the details – but I must give The Hartford props for addressing some of the shortcomings I’ve seen in prior ideas.

Making flood and wind cover mandatory takes care of some of the gaps in the system, for example. 

Providing a mechanism to subsidize coverage outside the insurance mechanism also appeals to me; for quite a while I’ve had the notion that if social interests should dictate subsidization, that subsidization should be handled by the government, outside the standard insurance funding mechanisms, to permit insurers to rate as efficiently as possible.

And, it sounds like someone’s finally thinking that more intelligent coastal development (or non-development) planning might not be a bad thing – a positive development from my point of view.

Add in some harmonization between NFIP coverage terms and those found in standard homeowners and property insurance contracts…and the proposal certainly looks interesting.