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Home / Insurance / Bailout Nation — Should the federal government step in to provide insurance for disaster-prone areas? | Property Insurance Protection Law Blog

Bailout Nation — Should the federal government step in to provide insurance for disaster-prone areas? | Property Insurance Protection Law Blog



A recent article in the Duke Law Journal argued that the current property insurance market cannot properly insure disaster-prone areas, and the federal government must intervene. The article shows that the situation is similar to the national health insurance dilemma and calls for a similar response. Here is the abstract of Regulating Homeowner’s Catastrophic Insurance through Federal Intervention: Lessons from the Affordable Care Act:

One of the most impactful effects of climate change in recent years has been the increasing frequency and severity of natural disasters, even in geographic areas previously not known to be disaster-prone. These disasters have caused untold damage to property. Typically, the cost of rebuilding a home is at least partially covered by private insurance companies, but many homeowners are significantly underinsured for disaster-related losses. Additionally, in areas where natural disasters are becoming more common, private insurance companies have decided that it is no longer profitable to continually issue massive payouts without charging astronomical premiums, leaving many homeowners without access to financial relief. This memo argues that these circumstances require federal intervention. Specifically, it analogizes owning a disaster-prone home to having a pre-existing health condition as defined by the Affordable Care Act. Using lessons from this analogy, this memo proposes a federal mandate requiring all homeowners to purchase natural disaster insurance and argues that such a policy can be achieved through Congress̵

7;s taxing power. Further, this memo argues that features of the proposed mandate, such as precautionary crediting and a subsidized insurance program, make it superior to previous attempts to regulate natural catastrophe insurance.

The assumption that one’s health – which cannot be sold or changed to another – is sufficiently similar to home ownership, which itself involves the ability to pay for that particular property and can be sold or changed, is a bit of a leap. Yet, in this age, we have a number of insurance programs supported by the federal government, including the National Flood Program.

Currently, we face large geographic refusals from the private insurance market to insure wildfire areas, windstorm areas, flood prone areas, hurricane prone areas and earthquake areas. The fragmentation of the private insurance market has others proposing alternatives, including government-sponsored programs to fill the gaps.

This article argues for the need for government intervention and suggests that the National Health Insurance Program provides support to do so. But it goes much further:

This note lays the foundation for such an analysis. More specifically, it argues for a new model of federal intervention, one that optimizes maximum coverage and risk prevention at minimal premiums. This new model will create a permanent infrastructure in which the federal government subsidizes a large portion of the costs incurred by natural disasters as an assumption of public liability. This intervention is not limited to property losses caused by forest fires; instead, it will cover all disaster-related losses so that the government can take advantage of nationwide risk sharing as an insurer.

Part I introduces insurance in general, discusses how it works, and why risk analysis specifically related to catastrophe insurance is inextricably linked to environmental justice. This section then focuses on current challenges in the California state legislature, demonstrating that pressing issues in the homeowner market are far from historically isolated challenges. Finally, by exploring the post-Hurricane Katrina emergency legislation and the pre-existing conditions of the ACA, this part contextualizes the later discussion of how the United States has failed to respond to insurance crises in the past and what should be accomplished in the future.

Part II achieves three goals. First, the public insurances that form the basis of functional insurance services are discussed. Second, it raises important constitutional issues related to the federal government’s right to intervene in state homeowner’s insurance markets. Third, it suggests the optimal structure for federal intervention in the home insurance market. This final section concludes with a permanent federal intervention requiring catastrophe insurance via a tax on real estate mortgages. Such a tax will facilitate the use of nationwide risk corridors, ultimately reducing the financial burdens associated with natural disasters for homeowners, insurers and states alike.

The law journal entry is simply an idea. It’s not written by a public policy wonk or insurance insider. I found the statistics and concerns valuable. I do not agree on how to solve the problem. Nevertheless, the article is a worthwhile study for those involved in the insurance market leaving disaster-prone areas.

Today’s thought

The problem with socialism is that you eventually run out of other people’s money.
-Margaret Thatcher


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