CRS Issue Statement on Disaster Risk Financing

CRS Issue Statement on Disaster Risk Financing

CRS Issue Statement on Disaster Risk
Financing
Rawle O. King, Coordinator
Analyst in Financial Economics and Risk Assessment
January 22, 2010
Congressional Research Service
7-5700
www.crs.gov
IS40291
CRS Report for Congress
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repared for Members and Committees of Congress

CRS Issue Statement on Disaster Risk Financing

nsurance 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
I 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 economy’s 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 industry’s 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 nation’s
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.
Some Policy Questions
• Does the catastrophe insurance market provide a sufficient amount of insurance
against a mega-catastrophe? To the extent that catastrophe insurance exists, are
the insuring firms sufficiently capitalized so that widespread insolvencies will not
occur?
• Should the federal government provide some kind of “backstop” insurance to the
private market for large-scale natural disaster losses?
• What alternative catastrophe risk management arrangements or tax policy
changes should Congress consider to reduce future disaster losses, accommodate
the risk transfer needs of the public and private sectors, and stabilize the extreme
fluctuations in the availability, affordability and utilization of natural catastrophe
insurance?
• When is it appropriate (or inappropriate) for the federal government to assume a
risk, and for those occasions and locations where it is inappropriate, how should
that be articulated to those who are at risk without federal back-up?
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CRS Issue Statement on Disaster Risk Financing

• What is the appropriate role of the public sector in addressing the financial and
economic effects of all-hazard risks, and encouraging insurance and loss
mitigation practices in both the public and private sectors?

Issue Team Members

Rawle O. King, Coordinator
Natalie Keegan
Analyst in Financial Economics and Risk
Analyst in American Federalism and Emergency
Assessment
Management Policy
rking@crs.loc.gov, 7-5975
nkeegan@crs.loc.gov, 7-9569
D. Andrew Austin
Steven Maguire
Analyst in Economic Policy
Specialist in Public Finance
aaustin@crs.loc.gov, 7-6552
smaguire@crs.loc.gov, 7-7841
Nicole T. Carter
Justin Murray
Specialist in Natural Resources Policy
Information Research Specialist
ncarter@crs.loc.gov, 7-0854
jmurray@crs.loc.gov, 7-4092
Peter Folger
Carolyn V. Torsell
Specialist in Energy and Natural Resources Policy
Information Research Specialist
pfolger@crs.loc.gov, 7-1517
ctorsell@crs.loc.gov, 7-7888
Bruce R. Lindsay
Edward C. Liu
Analyst in Emergency Management Policy
Legislative Attorney
blindsay@crs.loc.gov, 7-3752
eliu@crs.loc.gov, 7-9166

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