The news of the horrible devastation from the east coast storm has brought calls for a national government-run catastrophe (CAT) fund.  However, government-run insurance and CAT funds have proven to be the wrong approach for protecting lives and property from these major disasters.   

Each inevitable calamity pushes government-run insurance and CAT funds into the limelight.  To be blunt – politicians shackle taxpayers and pluck them to pay recovery costs for beach cottages that most taxpayers could never afford.  Shore-side and riverside owners rebuild in the path of risk with flood insurance proceeds from subsidized policies.  Politicians cannily avoid the subject waiting for taxpayers’ indignation to ebb like the tide.  And then the farce repeats.

Government-run insurance and CAT funds are wrong on many levels.  They set rates below actual and prospective costs.  These below-cost rates spew forth as losses that taxpayers and other consumers must fund, and they encourage building in paths proven susceptible to storm damage and loss of life.  Government’s below-cost rates also crowd out investors (both private insurers and reinsurers) who actually have the expertise and the will to put their own private-sector money at risk.    

A prime example of this failure is found in the National Flood Insurance Program (NFIP).  The General Accountability Office reports that 22% of homes with NFIP protection pay premiums that are so subsidized that they cover only 40-45 of risk-based costs, which explains why the program owes the U.S. Treasury over $18 billion in losses.  With $3 billion in annual premiums, it will take many years for the national fund to pay off its past debt and to build up the fund for future storms — as solvent insurance companies are supposed to do — not to mention pay for Sandy’s losses.  The sheer idiocy of the NFIP program can be highlighted by one home that accounted for 34 claims totaling $668,000 over a 32-year stretch. 

The home in question is worth just $70,000.  

In Florida, government-run Citizens Property Insurance Corp is now the biggest homeowners insurer in the state, sets coastal prices at predatory levels, pushes insurers out of the market, and has inadequate financial reserves to pay policyholders should a hurricane hit.  The Florida CAT fund is low in reserves, or what CAT Fund Chief Operating Officer Jack Nicholson summarized as “dangerously overexposed.”   Without financial solvency, what good is your insurance policy and exactly how are consumers protected by these government-run schemes?

Taxpayers deserve an answer to the core question — why must government be in the insurance business?  If its defenders claim it would otherwise be unavailable from the private sector, then the properties are uninsurable, and therefore the owners are unwilling to pay the expected costs for recovery.  If you refuse to pay the cost of recovery, then you should have no right to force someone else to pay it.  Therefore, insurance as a “last resort” needs to represent a minimal share of the market, and not the market leader.  It is as simple as that.       

It seems politicians cannot help themselves and compulsively buy shore-side votes.  But there are ways for politicians to establish a sounder insurance market without sticking it to all their constituents.  For the sake of consumers, here are a few tips for political success:

  • Risk-based pricing is the fairest and most workable solution.  It prevents consumers that move inland from subsidizing coastal millionaires, and it is environmentally sound because it preserves natural storm barriers from risky development. 
  • Government-run insurance schemes pose the biggest insolvency problem for consumers and taxpayers.  While there is a need for improving the government’s role in emergency management, the government needs to get out of the insurance business or limit its involvement to the once in 100-year event, if that.
  • Private insurers and reinsurers add value to the economy by their expertise and large diversified capital capacity.  Attracting national and international capital into the market means increased financial protection, risk diversification and price competition, which makes consumers safer and insurance policies cheaper — and it does not cost taxpayers a dime. 
  • Where government does have a role is in maintaining solvency regulation and developing risk mitigation measures that reward homeowners for reducing potential storm damage.  That keeps prices low for consumers and makes sure that claims are paid.

Going forward, let’s end this wasteful government farce.  It is time to get the government out of the business of insurance, reduce taxpayer obligations, and let private reinsurers and insurers back into the market.  This needs to be part of the solution in Florida. 

Alan Daley is a resident of Florida and Steve Pociask owns coastal property.  Both write for the American Consumer Institute, a nonprofit educational and research institute.

Printed in the Tallahassee Democrat 11/16/2012