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Federal Reinsurance for Disasters. A Congressional Budget Office Study. Prepared at request of Senate Budget Committee Analyzes proposals for federal reinsurance of risks from terrorism and natural disasters Contributors included: Rade Musulin - Florida Farm Bureau Richard Roth

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Federal reinsurance for disasters

Federal Reinsurance for Disasters

A Congressional Budget Office Study


Introduction

Prepared at request of Senate Budget Committee

Analyzes proposals for federal reinsurance of risks from terrorism and natural disasters

Contributors included:

Rade Musulin - Florida Farm Bureau

Richard Roth

Other assistance from

Dennis Kuzak - EQE

Jack Nicholson - FHCF

Stan Devereux - CEA

Introduction


Two types of federal proposals to increase supply of p c insurance after a catastrophe

Auction reinsurance contracts to primary insurers and state-sponsored insurers

considered after Hurricane Andrew and Northridge Earthquake

offer reinsurance when coverage is in short supply, at market prices designed to cover governments cost

Pay for losses directly, without reimbursement or only partial reimbursement

considered for terrorism attacks after Sept. 11

Two types of federal proposals to increase supply of P/C insurance after a catastrophe


Key consideration

How the P/C industry would respond without federal intervention?

would the supply of insurance rebound quickly?

Is the risk of terrorism insurable w/o government’s assistance?

Are there policies that could avoid undermining private activity while providing backstop?

What would cost be to taxpayers and government?

Key consideration


Study brief

Large insured losses that are unanticipated reduce the supply of insurance and put pressure on private insurers to raise prices

Higher prices generally attract new capital

insurers reassess their risks

supply increases

prices decline to levels consistent with perceived risks

Proponents contend that federal program needs to add capital to the market and then withdraw after market recovers

Study brief:


Study brief1

Federal program would probably expose taxpayers to substantial risk

$25B for natural disaster

$100B for contingent liabilities from terrorism

subsidies could lead to fewer preventative actions

delay innovation that could increase private supply

Study brief:


Study brief2

States’ experience with regulations has shown that controlling prices/requiring coverage can delay drop in supply and surge in prices

if keeps prices below costs and crowd out private markets, insurance may be more expensive in long run

issues with subsidization, reduce incentives for mitigation

Since Sept. 11, supply of terrorism coverage has grown and coverage has become less restrictive

Study brief:


Study brief3

Private insurers may not be able to pay claims and continue issuing coverage after every contingency

Under current proposals for federal reinsurance of terrorism risks

government initially pays for most of losses

CBO estimates that government should charge insurers about $3 billion annually to cover costs

Study brief:


Study brief4

As an alternative to providing reinsurance, Congress could consider other measures to encourage private sector to supply reinsurance following catastrophic events

offering property owners incentives to mitigate risks

reduce federal assistance after an event

changing the tax treatment of loss reserves held by insurers

limiting damage awards

Study brief:


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