Disaster Insurance "Overarching Principles," Financial Services Roundtable
Disaster Insurance "Overarching Principles," Financial Services Roundtable : (1) Insurable events ought to be insured to the maximum extent possible by the private market rather than by the government. Put another way, it is not the government's role to assume risks that the private marketplace is fully capable of handling, especially if the government's "insurance" is provided after-the-fact through disaster relief, which is both uncertain in amount and not priced to its potential recipients in advance and, as discussed in Chapter 4, tends to impede before-the-event mitigation efforts. (2) There are risks, however, that are so large and/or so uncertain that private insurers or the capital markets either are unwilling to insure them, or that the required premiums are so high that many will not want or cannot afford the insurance. In these cases, there is a role for the federal government to "backstop" the private sector. "We believe that the costs of some Mega-CATs are insurable, and therefore, the main object of government policy as to these risks should be to facilitate the provision of private insurance. We also believe, however, that the costs of certain other Mega-CATs - terrorism in particular - are not insurable by the private market, and as to these the federal government has an important backstop role to fill Some Commission members believe that this federal backstop function should also extend to largescale natural Mega-CATs. "Overall, however, the main aim of policy should be to maximize the purchase of catastrophe insurance: (3) Insurance provides better financial protection for individuals and firms than after-the-fact disaster relief. (4) The broader the insurance coverage, the less disaster relief will be necessary. With insurance, the costs of risk are borne by those exposed to risk. In contrast, taxpayers (currently or in the future) who may or may not directly bear risks of suffering catastrophe losses pay for disaster relief. Comparing the two systems, insurance is more efficient (because insurance premiums induce more loss avoidance and mitigation) and fairer than disaster relief". (FSR, Nation Unprepared, 2007, 44)
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