Can States Allay Risks from Hurricanes and Earthquakes?
September 22, 2010
In her paper “Managing the Risk of Natural Catastrophes: The Role and Functioning of State Insurance Programs,” RFF Fellow Carolyn Kousky surveys the role and functioning of state-mandated programs designed to provide natural catastrophe insurance to property owners and businesses unable to find a policy in the private market.
State-mandated catastrophe insurance programs augment other public efforts to mitigate exposure to homes and property through building codes, land-use regulations, crisis response, and post-disaster reconstruction. The paper covers programs in ten states threatened by damages from hurricanes and earthquakes: North Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana, Texas, Hawaii, and California.
Excerpts from the paper:
“State insurance commissioners, working with state legislatures, authorize private companies to sell insurance, oversee and approve insurance premiums, and regulate many other aspects of the private insurance market. In addition, some states that face catastrophic natural disaster risks have established state-mandated catastrophe insurance programs. The specifics of these programs vary, but all have some similar features and face similar challenges.
“Most state programs were established following a disaster that raised concerns about the ability of private insurance companies to cover catastrophic risks and the affordability of such policies when they do. Broadly referred to as residual market mechanisms, they were created to provide insurance coverage to property owners and businesses unable to find a policy in the voluntary market.
“These programs were established in response to catastrophes that led private insurance companies to reduce their exposure and raise their rates. Such programs can ensure availability of catastrophe insurance and provide it more cheaply, but to do so, they pass some costs off on other policyholders or taxpayers in the state. It is inescapable that insuring catastrophic risks is expensive.
“This raises the question of whether cheaper, more available catastrophe insurance for low-income, high-risk areas provides a public good or is something every homeowner should have access to, no matter where he locates or how she builds. If we, as society, support either proposition, then state programs that offer broad coverage and spread the costs are one mechanism to achieve our goals. If, however, we believe that those who assume higher risks should bear the costs, either for equity or economic efficiency, the design of many state programs falls short. This is not an either-or question; programs must locate themselves on a spectrum balancing affordability, cross-subsidies, and claims-paying ability.”