R Street warns FIO against government-run reinsurers
WASHINGTON (Aug. 24, 2012) — Governments are intrinsically ill-suited to providing property reinsurance, suggesting that legislative proposals for a federal backstop to state insurance programs should be rejected, the R Street Institute said in a comment letter to the Federal Insurance Office.
The comments from R Street President Eli Lehrer were offered in response to FIO Director Michael McRaith’s request for input on a forthcoming study of the breadth and scope of the global reinsurance market and the critical role such markets play in supporting insurance in the United States.
In his letter, Lehrer notes that any federal reinsurance mechanism that displaced private reinsurance would have the effect of concentrating risk within the borders of the United States, rather than dispersing it through the global reinsurance market.
“To simply break even in the long run, a government-run reinsurer would have to both diversify its underwriting exposure and invest its capital in a manner that produces returns similar to those that private companies can earn,” Lehrer wrote. “To do that would leave taxpayers on the hook for disasters in other parts of the world and for any unsatisfactory investment returns. It would literally be a matter of taking very large gambles with taxpayer money.”
Lehrer points to the solvency concerns currently plaguing the largest government-run reinsurer in the United States, the Florida Hurricane Catastrophe Fund, whose financial advisors estimate it would face a shortfall of more than $1.7 billion should it have to borrow money in the financial markets following a major storm to make good on its obligations to Florida property insurers.
Lehrer posited there may be very rare examples, such as the Terrorism Risk Insurance Program, of a government-run reinsurer that would be preferable to other alternatives, but laid out three criteria that would generally be characteristic of those sorts of scenarios.
- There is a strong and long-lived historical precedent that the government uses tax money to pay for the expense to be reinsured.
- The expense to be reinsured will not be covered by the private sector by ordinary means.
- The best available underwriting data is largely or entirely in the hands of the public sector and cannot feasibly be released.
“Most proposals for reinsurance to be provided by the federal government fail all of these tests. A few may pass one, but only one existing program—terrorism insurance—appears as if might even possibly pass all of them,” Lehrer wrote. “Even this, however, does not mean that the current Terrorism Risk Insurance Act programs ought to continue in their current form or, indeed, must be continued as government programs. Simply that, in our judgment, they are justifiable.”
A copy of Lehrer’s comments can be found on R Street’s website here:
R Street is a non-profit public policy research organization that supports free markets; limited, effective government; and responsible environmental stewardship. It has headquarters in Washington, D.C. and branch offices in Tallahassee, Fla.; Austin,Texas; and Columbus, Ohio. Its website is www.redesign.rstreet.org.
