Disaster Insurance, Government versus Private-Sector
Disaster Insurance, Government versus Private-Sector : "Government natural catastrophe insurance programs were created because certain perils are difficult to insure privately and because, when private insurance is available, it may not be affordable. To keep natural catastrophe insurance available and affordable, government insurance programs operate differently than private insurance companies. Private insurance companies generally rely on premiums collected from those they insure to cover operating costs and losses and set premium rates at levels that are designed to reflect the risk that the company assumes in providing the insurance. These companies may also accumulate reserves to cover large losses. Federal and state government insurance programs also collect up-front premiums, but their rates do not always reflect the risks that the programs assume. Because premiums are inadequate to cover operating costs and losses, the government programs generally have limited resources and often face deficits after disasters. However, unlike private insurers, federal insurers may obtain funds after a catastrophic event through emergency appropriations. State programs may also access postevent funding through various means, including assessments on private insurers, bonds, and private reinsurance. State programs may also be postfunded through state general revenue funds and federal disaster relief payments. This structure has several implications. First, it may encourage homeowners in catastrophe-prone locations to seek coverage from government programs, crowding out the private market and increasing the government's financial exposure. Second, homeowners may not receive appropriate price signals about the risk of living in catastrophe-prone locations. Third, taxpayers who live in less risky locations may be subsidizing those living in catastrophe-prone locations. Finally, the added burden of private insurers' assessment obligations may provide another reason for them to leave already stressed markets. Federal natural catastrophe insurance programs fill gaps in private insurance markets and help limit disaster relief payments. (GAO, Natural Disasters: Public Policy Options, Nov 2007, 17). "Unlike private insurance companies, government natural catastrophe insurance programs often do not employ accrual accounting and are not always required to accumulate adequate resources to meet their obligations". (GAO, Natural Disasters: Public Policy Options, Nov 2007, 22)
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