Natural Catastrophe Insurance Coverage Remains a Challenge for State Programs

GAO-10-568R: Published: May 17, 2010. Publicly Released: Jun 16, 2010.

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Natural catastrophes can adversely affect U.S. residents and businesses by causing extensive property damage. The 2005 hurricanes and other recent natural disasters have had significant effects on the cost of obtaining insurance against such risks, especially in high-risk areas. As private market insurers have raised their premium rates, an increased number of residents have obtained coverage through state-sponsored natural catastrophe programs. In a previous report, GAO identified public policy goals for government involvement in natural catastrophe insurance and applied those goals to potential changes in the federal government's role. To assist Congress as it considers legislative proposals that would increase the federal role in natural catastrophe insurance coverage, Congress asked us to provide a briefing on (1) the current status of key state natural catastrophe insurance programs, and the extent to which the state programs support public policy goals identified in prior GAO reports; (2) the extent to which proposed changes to federal involvement in natural catastrophe insurance support policy goals identified in prior GAO reports; and (3) how natural catastrophe insurance is provided in selected other countries.

We reviewed state natural catastrophe insurance programs in Alabama, California, Florida, Louisiana, Mississippi, North Carolina, New Jersey, South Carolina, and Texas. We found that most of the state programs in our review had grown since 2005. In particular, the insurance programs in Mississippi, Texas, and Florida experienced the most growth in total exposure to loss since 2005, with increases of 495 percent, 147 percent, and 146 percent, respectively. Also, the combined total exposure of over $2 trillion in the Florida insurance and reinsurance programs far exceeded that of all other programs combined. With respect to the public policy goals for government involvement in natural catastrophe insurance, we found that support varied across the state programs. Six of the 10 programs charged rates that did not fully reflect the risk of loss, potentially discouraging private market involvement and mitigation efforts by property owners. However, charging rates that do not fully reflect the risk of loss can also potentially increase broad-based participation in state programs. Officials from 7 of the 10 programs said that they took steps to encourage private market participation, and officials from 9 programs told us that they are implementing or considering ways to encourage mitigation, including providing mitigation credits or attempting to develop a more effective mitigation plan. Officials from most of the programs said they encourage broad participation in their programs; however, a few said they specifically discourage it and instead try to encourage homeowners to purchase insurance from the private market. We identified four proposals contained in proposed legislation that would increase the federal role in natural catastrophe insurance and could affect the reinsurance industry's participation in natural catastrophe insurance markets: facilitation of risk transfer, guarantees of state pre- and post-event bonds, a federal lending facility for qualified state natural catastrophe insurance programs, and a federal reinsurance program. We found that these proposals involve trade-offs that would have to be balanced. For example, while these proposals could lower premium rates for and increase public participation in state natural catastrophe programs, they could discourage private market participation and mitigation efforts and increase taxpayer exposure to potential costs. In particular, a federal guarantee of state bonds could give state programs access to capital at reduced or below-market costs, allowing state programs to continue to charge premium rates that do not fully reflect risks or even to lower their premium rates. Furthermore, it could result in decreased reinsurance purchases by some state programs and increased reliance on post-event funding, which could increase taxpayers' exposure to the potential costs in the event of state financial difficulties.

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