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As Floyd moves up the coastline, it appears that most property owners have dodged the burden of potentially devastating losses that could stress private-insurance markets: But someday, somewhere, the next mega-catastrophe will arrive at the wrong place and wrong time. With losses ranging from $50 billion to $100 billion, such a natural disaster would not only cause great hardship and possible loss of lives. It, also could cripple many insurers.
What's needed, however, is not a race toward a superficial quick fix in the form of an ill-considered new federal reinsurance program. That approach has several troubling drawbacks.
It has 'a serious potential to undermine private-insurance markets and crowd out the development of better long-run alternatives. It likely would force. low-risk policyholders to subsidize high-risk ones. It could distort incentives for hazard mitigation and further sub-* sidize development in catastrophe-prone areas. And it could impose significant financial risk on taxpayers throughout the country.
There's a better way. We should instead fix current public policies that impede the ability of private-insurance and financial markets to promote better management of catastrophic risks. Examples:
► Regulatory restrictions on rates and underwriting undermine the supply of catastrophe insurance, discourage the entry of new insurers into the market and cut the incentive to mitigate hazards.
► State reinsurance funds and residual-market pools tend to crowd out viable private-sector coverage.
► Federal disaster assistance discourages the purchase of insurance and investments in hazard mitigation.
► And federal tax law discourages insurers from setting money aside for catastrophes.
At the very least, federal tax law should be fixed so insurers are encouraged to set aside and accumulate special reserve funds devoted exclusively to covering future catastrophic losses. That would be the most prudent, market-based approach.
By Tom Miller and Scott E. Harrington