CRS Issue Statement on Disaster Risk Financing (CRS Report for Congress)
| Release Date |
Jan. 22, 2010 |
| Report Number |
IS40291 |
| Authors |
Rawle O. King, Coordinator, Analyst in Financial Economics and Risk Assessment |
| Source Agency |
Congressional Research Service |
Summary:
Insurance plays a key role in the U.S. economy in covering, among other things, the financial losses caused by natural disasters. It also provides incentives for disaster mitigation investments, which helps to reduce the vulnerability of households and businesses to natural hazards.
Reliance on the decades old practice of reallocating resources throughout the economy after a major natural disaster to compensate disaster victims has become problematic, particularly in light of current fiscal deficits and the increasing frequency and severity of natural disasters. Importantly, the magnitude of damages caused by the 2004, 2005, and 2008 hurricane seasons, and predictions of more frequent storm activity in the Atlantic Basin over the next 15 to 20 years, have restricted homeowners insurance, reduced availability, and raised affordability issues in disaster-prone areas. Insurance market analysts now question whether the economys market for catastrophe insurance is sufficient to meet the burdens of a future mega-catastrophe. Some insurance experts reject the notion of a federal role in catastrophe insurance market, arguing there is adequate worldwide reinsurance capacity to protect U.S. primary insurers against catastrophe losses. Others support expanded government intervention, pointing to market failure and the insurance industrys limited claims-paying capacity in the event of a mega-catastrophic event.
Congress may consider a wide range of policy options and strategies for managing the nations exposure to catastrophic risk, including a federal reinsurance backstop for future natural disasters, authorizing the Treasury Department to make loans available to states affected by natural disasters, and authorizing the Federal Reserve to guarantee the bond obligations of the states catastrophe funds a move that would make it easier for states to sell bonds to finance the payments of claims in the event of a mega-catastrophe. The funds obtained through issuing bonds would be repaid by assessments on insurers and policyholders. Finally, Congress is also considering tax policy changes to allow for the deductibility of multi-year catastrophe loss reserves and the creation of a bi-partisan commission to examine catastrophe risks and recommend possible solutions for Americans living in areas that are prone to natural disasters.
