The Magazine

A Disaster in the Making

Insurers don't need a federal bailout.

Feb 11, 2008, Vol. 13, No. 21 • By ELI LEHRER
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Considering the $30 billion price tag for Florida's own fund, a national program's liability--however structured--could easily top $100 billion. And it seems unlikely to help consumers. Even if a federal fund actually did cut private insurance premiums where Florida's hasn't, its total liabilities following a major catastrophe would likely be high enough to raise both interest and inflation rates nationally. And it would promote development in lots of disaster-prone places.

Ultimately, people living far from coasts and earthquake-prone areas would end up paying for those who do through either taxes or higher insurance premiums. Since existing private reinsurers can spread their risks internationally and already avoid most taxes, government-backed reinsurance might not cost less either unless Congress imposed prices so low that a government reinsurer would need a bailout.

Insurers don't all like the idea either even though it might improve their bottom lines. While the country's two largest writers of homeowners' insurers--State Farm and Allstate--support catastrophe funds (as does one of the two property and casualty insurance trade associations), others haven't followed. Marc Racicot, the head of the American Insurance Association--makes the predominate industry position clear: "We do not want Congress going down the road of incenting the creation of additional mechanisms that would interfere with the private market's ability to protect homeowners and businesses." Consumer groups have generally concurred.

While Crist, Jindal, and their counterparts are making an effort to confront a real problem, several other ideas deserve a try before the nation takes the enormous risk of setting up a national catastrophe fund. First, reducing regulation on insurance companies marketing securities to back insurance policies--an idea even the left-wing Consumer Federation of America supports--could provide many of the benefits of a government program without the need for intervention.

Second, broader markets for insurance--through proposals to let insurance companies organize themselves under federal rather than state laws, sell insurance across state lines, and operate under interstate agreements--could manage risk on a broader scale and reduce costs.

Third, better tax treatment of reinsurance and money that insurers set aside for catastrophes would probably help cut rates. Finally, a proposal from the Travelers Companies to create a special zone for private wind insurance has significant promise for helping hurricane-prone areas.

Although none of these ideas provides the tempting quick fix of a new federal reinsurance capacity, they also don't expose taxpayers to massive new liabilities.

Eli Lehrer is a senior fellow at the Competitive Enterprise Institute in Washington, D.C.