R Street paper looks at government sources of systemic insurable risk
WASHINGTON (Dec. 3, 2013) – Natural disasters pose significant threats to taxpayers and the economy at-large, thanks to trillions of dollars of insurable risk concentrated on the balance sheets of state and federal government entities, a new paper from the R Street Institute argues.
Authored by R Street Senior Fellow R.J. Lehmann, the paper first examines the growth of residual insurance markets at the state level, where total exposure to loss has surged from $54.7 billion in 1990 to $818.1 billion in 2012—an increase of 1,396 percent.
“Funding sources for these exposures within the plans have not grown at this pace,” Lehmann writes. “There is currently no regulatory oversight of the broader systemic risk these plans pose to insurance markets, financial markets, homeowners or consumers more broadly.”
The paper focuses specific attention on Florida, where a state-sponsored insurer, a state-sponsored reinsurer and the state’s insurance guaranty association all would, in the event of a sufficiently bad hurricane season, rely heavily for funding on market-share based assessments on what would at that point be a weakened private insurance market.
“While these assessments can be made over time, and states have latitude to exempt particularly troubled insurers from undue assessments, this interconnected nexus of assessments raises the risk of ‘cascading insolvencies,’ as a smaller and smaller assessable base of private insurers to bear the burden of larger and larger shortfalls,” Lehmann wrote.
The paper also examines the roughly $130 billion of uninsured earthquake risk absorbed by the Government-Sponsored Enterprises – Fannie Mae and Freddie Mac. While loans bought or secured by the GSEs are required to maintain property insurance coverage for most standard perils— including flood, fire, windstorm and hail — due to a unilateral loophole, the GSEs do not require insurance for earthquake risks.
“For the GSEs, the result is that, in the event of a major earthquake, there would be no insurance to recover on most of the properties that serve as security for the mortgages held by Fannie and Freddie,” Lehmann wrote. “The USGS estimates a 7.8 southern California quake on the San Andreas Fault could produce $200 billion in damage, and much of that would be uninsured.”
Read the full paper here:
http://www.rstreet.org/policy-study/government-sources-of-systemic-insurable-risk/
