Ensuring Disaster : State Insurance Regulation, Coastal Development, and Hurricanes

Natural disasters are called Acts of God, but the severity of their impact depends upon many factors, including state insurance regulations. Insurance provides voluntary, contractual disaster relief - insurers agree to pay disaster losses in exchange for payment of premiums. In the United States, state commissions regulate entry, exit, and premiums, and contractual forms in the insurance industry. This policy comment examines how state insurance regulation affects societal vulnerability to hurricanes. States provide insurance for high-risk properties at below market rates primarily through insurance pools. Seven states, including Louisiana and Mississippi, have wind pools, with over 1.8 million policies and a total liability of over $500 billion as of early 2007. Wind pools are financed, in part, through additional charges on other citizens' premiums throughout the state to cover excess losses from hurricanes. State guaranty funds, which ensure payment of claims of insolvent insurers, also subsidize high-risk properties. Pools and guaranty funds create an inefficient insurance market and inefficient growth in coastal regions. Four state policy responses are recommended: 1. Halt the creation or expansion of wind pools, and phase out existing subsidies and pools. 2. As premiums rise to market levels, give tax credits or means-tested insurance vouchers to low-income residents. 3. If such reforms are not possible, cover potential excess losses using reinsurance or catastrophe bonds. 4. Offer actuarially justified discounts for mitigation measures