Q: What role should the federal government play in setting natural catastrophe policy?
The federal government certainly has a role to play in setting natural catastrophe policy, but it’s a pretty limited role. For the most part, the federal government should work to encourage people to take better care of their own property, to reinforce it, and to promote mitigation.
The best way to promote mitigation is through risk-based rates. The second-best way is through programs that, in one way or another, help people of modest means to mitigate their own homes.
Q: Why are you opposed to creation of a federal catastrophe insurance backstop?
It’s a terrible idea for two major reasons. First and most importantly, it simply won’t work. A federal insurance backstop would concentrate risk within the United States. That is a clear violation of sound actuarial principles. If it were to charge actuarially adequate rates, if legislation says that it will, such a backstop would have to charge more than the private reinsurance market charges. If it doesn’t charge such rates, then it’ll need a very large subsidy from taxpayers.
Second, and perhaps just as importantly, more importantly to some environmentalists, a backstop would encourage lots of development in places where it simply should not happen, environmentally sensitive areas, areas that are better used either for the homes of very rich, very stupid people or as open space.
Q: Turning to the National Flood Insurance Program: Here’s a program that provides commercial as well as residential coverage. Do you think this program is viable or should there be another solution to it?
In the long term, there needs to be a private solution for flood insurance. The NFIP is almost $20 billion in debt and has no practical way of paying it back. That said, it’s not possible to end NFIP overnight. There needs to be an incremental process of reform that would involve improving the maps, raising rates both for conforming and nonconforming properties, and probably figuring out ways to move some people and some properties out of flood zones entirely. So there is a private solution and I don’t think (the NFIP) is viable in the long term. In the short term, there’s an alternative.
Q: Is the private market, particularly for commercial insurance, adequate to respond to another event on the scale of Hurricane Katrina?
Yes, the capacity was there for Katrina and, even with the weakened economy, the private capacity is still there particularly for commercial insurance. Rates might well go up after another major event, but that’s a sign that the market works.
I don’t really see any signs that the market, particularly for commercial insurance, is weak even in places where, as a result of burdensome government regulation, there is a weak individual or private market.
Q: If you could put one single reform in federal catastrophe policy into effect, what would it be?
I’d raise the rate substantially in NFIP and kick out a lot of the nonconforming properties. I’d make NFIP move closer to actuarial adequacy.