Leave the wind to Uncle Sam?

A newish Congressional Research Service report raises some very interesting questions about current proposals that the federal government begin to provide wind insurance. Paired with existing federal flood insurance, wind (aka multi-peril) insurance would make the federal government the primary source of catastrophic-loss coverage for most homeowners in coastal areas.

Given that a California Democrat, Maxine Waters, is currently the first listed co-sponsor, I’d suspect that the proposal could well evolve to include earthquake coverage as well. (For the moment, however, the bill looks unlikely to move forward.) Still, the idea has real appeal. In the short term, federally backed wind insurance would make a lot of people happy: this year, Gulf Coast Mississippi homeowners will see wind-related premiums rise 90 percent. Even that was a compromise: for a time, insurers threw around the idea of a 400 percent premium increase.

The CRS, report, however, raises what I think is the key point about any type of government-provided insurance coverage:

Government insurance only appears cheaper than private insurance. Federal insurance programs like any of the state catastrophe funds or federal insurance programs appear cheaper up front than they really are. Because government can use taxpayer capital without compensating the taxpayer, government can provide an up-front cost of insurance that is “actuarially sound” for much less than private insurers. This is how the NFIP [National Flood Insurance Program] has functioned to date. Now, there is a call on the taxpayer’s capital in the form of a $22 billion deficit. Analysts ask: How was the taxpayer compensated for taking that risk? If NFIP was a private company, then it would have had to acquire capital from investors and/or reinsurers — and pay them for that capital. Government can implicitly tax the taxpayer pre-event by shifting the risk to large future post-event expenditures, thereby denying taxpayers compensation for that risk. In this way, government can make insurance appear cheap on the front end but with enormous post-event costs.