What we need is catastrophic government insurance

Thursday, July 8th, 2010

Taxpayers in at least nine states have almost $3 trillion in "exposure" because leaders underfunded insurance programs. One proposed solution is "catastrophe bonds."   

Now we’re staring into the abyss of “catastrophe bonds” as a way to deal with some states’ gross mismanagement of insuring high-risk areas against the inevitable.

According to a recent Government Accountability Office report to Congress, current policies “can put state finances at risk in the event of a major natural catastrophe.” And proposed solutions could shift risk “from the states to the federal government.”

GAO studied only nine states and found almost $3 trillion in “exposure.”

 Great. Here we go again. That means taxpayers picking up the tab, something GAO recommends Congress limit “as it considers legislative proposals that would increase the federal role.” Thank you.

The report, Natural Catastrophe Insurance Coverage Remains a Challenge for State Programs, outlines situations in nine states relative to four policy goals: charging premium rates that reflect the risk of loss; encouraging broad participation; encouraging the private market to provide natural catastrophe insurance, and limiting costs to U.S. taxpayers.

 

All of the recommendations are for rational ways to deal with humanity’s tendency to live, work, play and build in areas of known high risks not shared by everybody.

 

Earthquakes and hurricanes are the big ones. We have a real good idea where they will happen, know for sure they will eventually and have no doubt they will be catastrophic.

 

The actuarially sound, free-market, best business solution for insurance companies is just to not insure anybody or anything in these areas. That may be best business policy but not best public policy because millions of devastated families and enterprises are going to end up costing us all somehow.

 

Second best solution is to charge premiums that accurately reflect risk divided among only those at risk. But most otherwise pro-free-market citizens and businesses refuse to get that insurance because it costs a lot of money. They want everybody else to subsidize their risky lifestyles.

 

Solution of last resort is to get government involved, such as the National Flood Insurance Program just reauthorized for four months.

 

It works pretty well. But there are a lot more people at risk from floods than earthquakes and hurricanes, so the solutions for those become more complicated.

 

One idea is to issue “insurance-linked securities” most likely in the form of “catastrophe bonds.”

 

 If that makes taxpayers still bleeding from bailing out the financial services industry after being ravaged by the financial services industry wince, consider this language from the report: “Potential investors (such as hedge funds and institutional investors) identify data quality and transparency as significant limitations of ILS.”

 

But the danger of doing nothing may be greater: “Reliance on post-event funding, by concentrating risk within the state instead of the broader private market, can put state finances at risk in the event of a major natural catastrophe.”

 

Sticking with what states are doing now won’t work because, “most programs charged rates that do not reflect the full risk of loss, potentially discouraging private market involvement and efforts to mitigate damages from natural catastrophes …. Concern exists that some of these programs may be unable to pay losses in the event of a major catastrophe.”

GAO analysis of possible legislation “found that the proposals involve trade-offs that would have to be balanced. For example, while these proposals could lower premium rates for and increase public participation in state natural catastrophe programs, they could discourage private participation and mitigation efforts and expose taxpayers to the potential cost of a state failure to repay its debt.”

But, “The federal program may expose taxpayers to the potential cost of implicit guarantees.”

This is just one more huge, hidden liability state leaders racked up in recent years as they contrived false balanced budgets and tried to placate all constituencies.

Add it to unfunded retirement promises, risky financial deals, deferred essential capital projects, unpaid self-insurance premiums, drained rainy day funds and an array of other accounting tricks that push costs into the future.

Once again our state leaders failed to deal with reality, putting taxpayers at risk.

What we need is government catastrophe insurance.

Frank Keegan is a national editor for the Franklin Center on Government and Public Integrity and watchdog.org. frank.keegan@franklincenterhq.org

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4 Responses to “What we need is catastrophic government insurance”

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