Here comes another potential bailout.
The newly released GAO report, “Natural Catastrophe Insurance Coverage Remains a Challenge for State Programs,” supports ACI’s conclusion that state funds “discourage private market involvement and mitigation.” The report finds that some states are setting insurance prices below cost, driving out private insurers and putting nearly involvent state-run “public options” in their place.
So that when a storm arrives, states like Florida and Texas levy assessments on consumers and insurers, including those that may not own any property at all. The subsidies encourage development in coastal areas that put more lives and property at risk, eventually raising insurance prices for all.
States generally cite the “need for insolvency” as the justification for insurance regulation. Ironically, however, some states have pushed private insurers out of the market and replaced them with state-fund insurers and upstart insurers that have insufficient reserves to protect consumers, leaving consumers in the cold, should catastrophe strike. As a result, states have created cat funds that are nearly insolvent and forced the remaining insurers to price so low that consumers may not have any confidence that their claims will be paid.
Now some states have been pressuring the Federal government to pass legislation to bailout these nearly insolvent state funds, but the states current Federal cat fund is in red too!
A better solution would be to let the market function, bring capital back into the state to bolster solvency and price closer to risk. This approach would provide consumers the protection they need, should a storm arrive.