Hurricane Sandy certainly earned the “Superstorm” moniker. The combination hurricane/ Nor’easter spawned high winds and high water, flooding Lower Manhattan, erasing landmarks from the Jersey Shore and dumping three feet of snow in West Virginia.
East Coast cities and towns from North Carolina to Connecticut felt Sandy’s power, and in the coming weeks and months, residents in affected areas will likely face another impact of the storm: less availability of homeowners’ insurance and higher premiums. A national catastrophe fund could soften future blows by spreading risk across state lines and pooling capital, allowing for the “pre-funding” of all natural disasters in the United States.
It certainly sounds like a great idea if you live in Florida or other coastal states, but imagine how such a plan sounds to taxpayers in states that aren’t affected by hurricanes. The truth is, however, that people in those states end up paying for disasters anyway, in the form of the Federal Emergency Management Agency and state government post-disaster assistance.
Sandy is just the most recent example of how hurricanes don’t always pick favorites. The total cost of property damage and lost business ranges from, depending on the forecaster, $15 billion to $30 billion, which will make it among the top three most expensive natural disasters on record. And who says “the big one” has to be a hurricane? In 2011 alone, wildfires burned 370,000 acres and caused $6.9 billion in damage in Texas, New Mexico, and Arizona. Upper Midwest and Mississippi River flooding combined totaled more than $5 billion in damage, and deadly tornadoes ripped through the Midwest and Southeast causing $10.3 billion in insured damage.
What about tsunamis, earthquakes, and drought? No state is immune from natural disasters. If multiple states pooled their catastrophic risk, they would achieve an economy of scale and risk diversity that would effectively lower their cost of reinsurance in a way that states cannot achieve on their own.
Here in Florida, we struggle mightily with the availability and affordability of home insurance, something our friends along the Gulf and Atlantic coasts are already beginning to know too well. States that pool resources under a national CAT-fund model would, in essence, provide a backstop for private insurers in their state. That, in turn, would make the private market more stable, heat up competition among insurers for non-catastrophic perils, and help prevent company insolvencies and marketplace disruption in the future.
Many scientists believe that climate change will increase the number and severity of natural disasters in North America. There’s no way to know with absolute certainty if that’s the case, but worldwide insurance risk experts such as Munich Re and others are factoring climate change into their risk models. Indeed, the insurance industry is betting on larger and more costly catastrophes in the future and is managing business accordingly. Will our nation be proactive, or will we continue to deal the predictable consequences in an unsustainable way?
Spreading risk is a proven economic principle that makes insurance more affordable and plentiful. While the definition of what constitutes a natural disaster is somewhat controversial, there is no question that some natural disasters will exceed the financial capacity of state funds. Only a program that is national in scope can generate enough capacity to cover the most costly disasters. A national CAT fund is long overdue, and Congress should act now to put it into place.
Jeff Grady is president and CEO of the Florida Association of Insurance Agents, an industry group representing independent insurance agents.