November 3, 2012
The flood waters from Superstorm Sandy had not yet receded and her winds had not yet calmed before politicians and media types took the opportunity to resume their calls for a national catastrophe fund. It happens every time there is a major disaster, and yet each disaster seems to actually make the argument against enacting a national catastrophe fund.
One reason proponents cite is that after a major disaster such as Sandy, private insurance and reinsurance companies will dramatically increase rates or reduce policy counts in affected areas or even nationally. Indeed, this has happened in Florida in recent years. However, this is not due to a storm or a failure of the free market or competition, but rather it is a consequence of government policies that have stifled free market competition.
Instead of allowing insurers to compete for business in Florida, lawmakers have imposed de facto price controls on the market that have either forced insurers to reduce policies or leave the state altogether. As a result, that concentrated Florida’s enormous risk on fewer companies, which drove up rates for consumers.
A national catastrophe fund would have a similar effect. Instead of spreading risk globally as reinsurance companies do, which allows them to pay claims on, say, hurricanes in Florida, while collecting premiums on earthquake risk in Japan, a national catastrophe fund would only serve to concentrate risk within our borders. And risk that is concentrated is always more expensive.
In contrast to Florida’s broken system, national and regional insurers who serve the states impacted by Sandy seem prepared to pay their claims without assessments, taxes or bailouts. The exception is the perpetually underfunded National Flood Insurance Program, (NFIP) which charges rates far below what it should. Like Florida’s state-run Citizens Property Insurance Corporation, NFIP subsidizes its rates and requires taxpayers to bail it out—repeatedly. A national catastrophe fund would be no different.
Will rates increase in the areas ravaged by Sandy? Perhaps there may be a readjustment in the market where property insurers may have to temporarily increase their rates to shore-up the reserves they may have depleted to pay Sandy’s claims, but these increases—if any—should not be anywhere near as dramatic as national catastrophe fund proponents argue. The global reinsurance market is currently overflowing in capital, which it will quickly allocate without any hesitation or disruption to pay claims in affected areas.
On the other hand, if we had a national catastrophe fund in place right now, it would not have enough money in its coffers to pay claims, and it would probably require Congress to bail it out–a massive one. How do I know? Just look at the catastrophe fund the Federal Government currently runs—the NFIP.