Federal Disaster Insurance

1. Federal Disaster Insurance The Best Option?

2. What is at Issue? Recent Disasters in the U.S. • August 2005: Hurricane Katrina, $125 billion in damages • August 2004: Hurricanes Charley, Frances, Ivan, Jeanne. (combined damage over $45 billion) • Sept. 2003: Hurricane Isabel ($3.7 billion in damage) • Jan. 1994: Northridge Earthquake, California. ($12.5 billion in insured damages) • 1993 Midwest Floods ($12 billion in damage, 70,000 homeless) • 1992 Hurricane Andrew: $45 billion (in 2005 dollars) Source: BBC News; infloplease; CEA website

3. Hurricane Katrina: Putting it in Perspective • Over 1,000 lives lost • 68,000 unemployed • At least $125 billion total damage • Total Insured Damage: $ 40 - 60 billion (estim.) Source: BBC News; PlanetArk

4. The Current State of Things • Private insurers provide “high risk” insurance separately from normal homeowners insurance. • The federal government provides disaster assistance after major catastrophes (largely in the form of federal loans). The Statistics: • Only 1 in 7 homeowners in California has earthquake insurance. • Only 1 in 4 homeowners in major flood plains has flood insurance.

5. Why is this? Inherent Problems: • Current tax laws dissuade insurers from ‘stockpiling’ funds to be used in the event of a large-scale natural disaster. • Free federal assistance (post-disaster) is a disincentive for homeowners to purchase private disaster insurance. • Low interest in “high risk” insurance by homeowners means higher premiums for those who do purchase the insurance. Higher premiums, in turn, drive potential customers away (vicious cycle). • With every major natural disaster, private insurers “pull out” of high risk areas.

6. The Case for Federal Disaster Insurance • Because of the problems with the current system of disaster insurance, some have advocated a federal program of disaster insurance. • Basic Outline: • Homeowners purchase separate disaster insurance through the federal government. • The government pays claims after a natural disaster. • Model: New Zealand Earthquake Commission

7. Many Questions to be Answered • Compulsory or voluntary involvement? • Does such a system encourage irresponsible growth in high-risk areas? • Repeat claims? (NFIP- 30% of claims to 1% of the population, $114,000 house example) • Will federal aid continue to be provided after large-scale disasters? To all, or simply to those who participate in a FDI program?

8. A Better System: The federal government, private companies, and homeowners should all share the risk involved in a large-scale natural disaster.

9. How would this work? • Natural disaster insurance should remain a product of the private sector, but: • Private companies would be responsible to cover up only claims to a set amount (for instance, $40 billion). • A federal reserve would be set aside to cover the extensive claims resulting from a catastrophic natural disaster (anything over $40 billion in this instance).

10. Recommendations Natural disaster insurance should remain private, but: • The government should revise tax laws to allow insurance companies to build reserves to be used in the instance of a large-scale disaster. (HR 2668) • A federal “reserve” should be set aside to cover the huge payoffs required after an enormous disaster. (think FDIC) • Post-disaster assistance should favor those with insurance as an incentive for homeowners to purchase insurance. • Government subsidies should cover the cost of private disaster insurance for those who cannot afford it.

11. Results • Major insurers can compete in the “high risk” disaster insurance market because there is a federal guarantee. • The restriction of post-disaster aid to those with insurance will entice homeowners to purchase insurance. • Premiums will decrease in cost as more people purchase insurance. • Federal subsidies can provide insurance for those who cannot afford it. • Homeowners and the government will save money.