Saturday, May 31, 2008

Disaster Reinsurance: socialize the risk, privatize the profits

Congress, particularly some Democrats, are talking about socializing the reinsurance risk of catastrophic losses in major storms such as hurricanes and tornadoes, and possibly other risks like earthquakes and wildfires. Government reinsurance would kick in when losses in an area exceed certain levels. Discussion on reinsurance may be increasing as the official Atlantic hurricane season begins Sunday June 1.

Conservatives criticize this with the usual mantra. This encourages building in high-risk coastal areas. This means people who live in lower risk areas subsidize those who “choose” to live in high risk areas. (The reality of choice is certainly debatable). However, some versions of legislation like this would kick in at different levels in different areas, offering subsidies at a lower loss area in geographical locations exposed to less risk.. For example, for most contingencies, mid Atlantic residents who live away from the coast and on the Piedmont, within the influence of mountains, usually have less risk of flood and tornadoes, as well as hurricanes, than do coastal or Midwest residents (these risks can increase with global warming), and have low earthquake and wildfire risks compared to California. The southern part of the Mississippi valley may have a considerable earthquake risk because of the New Madrid dimple.

There is an old adage about “privatizing profit” and “socializing risk.” Of course, that seems to be what our system is faced with in health care financing, too. Perhaps this is an working example of the New Testament adage, "I am my brother's keeper."

The Weekend Wall Street Journal article today (May 31) on the front page of the print version is by Elizabeth Williamson and is titled, “Taxpayers May Face Hurricane Tab.”
The link is here.

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