The Use of Post-Loss Financing of Catastrophic Risk
Risk Management and Insurance Review, Forthcoming
56 Pages Posted: 4 Feb 2010 Last revised: 26 Feb 2014
Date Written: February 3, 2010
Catastrophic risk financing is a critical issue for many states. At the epicenter of the debate is the role of the state government in helping homeowners finance catastrophic storm risk. In general, states have used a variety of pre- and post-loss strategies, including rate regulation, residual markets, guaranty funds, and post-loss assessment structures. However, several states, including Florida, Louisiana, Mississippi, and Texas have used strategies that involve potentially large post-loss funding of hurricane risk. In some cases, the structure of the post-loss financing mechanism is likely to create significant assessments and subsidies. This paper examines the role of state government in catastrophe financing, focusing primarily on post-loss financing methods. Specifically, the paper provides a discussion of the advantages and disadvantages of the post-loss catastrophe financing as well as the political forces that motivate the use of this approach. Further, given the potential magnitude of post-loss assessments and related subsidies, we use the Florida homeowners property insurance market to illustrate the implications of the state’s decisions. This allows for a concrete discussion of the impact and viability of post-loss financing mechanisms.
Keywords: subsidy, property insurance, catastrophe financing
JEL Classification: G22
Suggested Citation: Suggested Citation