National Catastrophe Insurance Fund for Hurricane Sandy

Friday, November 9, 2012

Ponte Vedra, Florida -- We all know that hurricane Sandy earned the “Superstorm” nickname. The mixture of a hurricane and Nor’easter offered high winds and high water, flooding the majority of New York City, while erasing landmarks from North Carolina to New Jersey.  Typically, Florida is the state that gets hit with these types of storms, was the Northeast ready for a catastrophe of this magnitude?

Coastal cities and towns from West Virginia to Connecticut touched Sandy’s vigorous power, and in the coming weeks and months local residents will likely face another large problem: less accessibility of homeowners’ insurance and much higher premiums. America needs to start looking into offering national catastrophe fund to help relax future blows by spreading larger amounts of risk across all states, allowing for the “pre-funding” of future unknown disaster that reach our shores. 

This is for sure helpful for a state like Florida or other coastal areas, but imagines how such a plan sounds to paying taxes that aren’t affected by hurricanes, like “Sandy”. The real basic truth is that these other states are paying for natural disasters anyway, in the form of the Federal Emergency Management Agency (FEMA) and state government post-disaster assistance.

Hurricane Sandy is just the most recent example of how hurricanes don’t always pick favorites. The cost of homeowner damage and lost business ranges from, depending on the forecaster, $10 billion to $50 billion, which will make Hurricane Sandy among the top four most expensive natural disasters on record. And who says “the big one” has to be a hurricane? We know that in 2011 alone, wildfires burned nearly 400,000 acres and caused $7 billion in damage in states like Texas, New Mexico, and Arizona. Upper Midwest and Mississippi River flooding combined totaled more than $6billion in damage, and deadly tornadoes ripped through the Midwest and Southeast causing $11 billion paid insurance 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.

In the sunshine state, “Florida”, we struggle tremendously with the availability and affordability of home quality Florida homeowners insurance, something our networks along the Gulf and sea coasts are already beginning to know too well. Pooling state resources under a national catastrophe fund model would, in essence, provide a backstop for all private insurance companies, and might lower rates for all homeowners.   That, in turn, would make the private home insurance marketplace more stable, add competition among insurers for non-catastrophic perils, and help prevent company insolvencies and marketplace disruption in the future.

All mathematicians know that the 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 catastrophe fund is long overdue, and Congress should put it in place.


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