Briefly, an OFC would be a good way to shake up a staid, slow moving property and casualty insurance market. If you want to know more, read our FAQ on OFC, which is here. http://www.ofcfaq.org/ 

Is Rate Regulation a good idea?

Our OFC FAQ speaks about this but, briefly, no. Rate regulation will either serve to suppress rates overall or—much more likely—redistribute wealth from people who remain safe to those who take risks. Even if one believes that wealth redistribution makes moral sense, distributing wealth based on willingness to take foolish risks doesn’t seem like a good idea under any known political system.

Should the federal government and state governments get into the re-insurance business in order to drive down everyone’s rates?

Absolutely not. Some background: Reinsurance is insurance for insurance companies. It helps them to manage their own risks better. Some groups have proposed setting up a national “catastrophe fund” that would put the government into the business. By virtue of tax exempt status, economies of scale, the sheer size of the risk pool and the implicit promise of a government bailout, some claim that the a national catastrophe fund would reduce reinsurance costs, protect insurance company profits, and thereby produce savings for consumers.

Except for the implicit promise of a government bailout and protection of company profits, however, these assumptions are wrong. Existing reinsurers manage to spread their risks internationally while a national catastrophe insurer would only cover risks in the United States. They also already avoid most taxes.

Thus, a national catastrophe fund (also called a “backstop”) would serve mostly to protect insurance profits: even if it did reduce insurance costs in the short run, taxpayers would end up being on the hook for all of its liabilities if it failed.

So is any kind of catastrophe fund a good idea?

Maybe. Insurance companies’ reserves for disasters don’t always get treated fairly under current tax law. It might be a good idea to change some tax laws to encourage more private sector reserving. Reducing restrictions on the marketing of securities related to insurance risk is also worth looking into. Finally, existing anti-trust law makes it reasonably easy for insurance companies to cooperate and share data: it might make sense to clarify the laws to make sure that insurance companies can run their own business-to-business catastrophe funds if they so desire.

If it operates without an implicit guarantee of a government bailout, it’s possible that Congress might do well to consider legislation to create a major on-shore catastrophe reinsurer.

What’s wrong with the National Flood Insurance Program?

Everything. It’s likely the single worst program run by the federal government. Although intended to discourage building in flood prone areas, it actually does the opposite and encourages building in areas where the buildings are likely to flood. Although the program has had periods of decent management, it is currently mismanaged and has fallen years behind on its efforts to modernize vital flood maps.  It owes about $18 billion to the treasury and has no legitimate way to pay it back.

So why not abolish the National Flood Insurance Program right now?

Abolishing it immediately would create more problems than it would solve. Any plan to reform it should include a phased withdrawal of the public sector coupled with regulatory changes to facilitate the emergence of private flood insurance and compensation to those who currently rely on the program.