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

See all articles by Cassandra R. Cole

Cassandra R. Cole

Florida State University - College of Business

Patrick F. Maroney

Florida State University - Risk Management Center

David A. MacPherson

Trinity University; IZA Institute of Labor Economics

Kathleen A. McCullough

Florida State University - College of Business

James W. (Jay) Newman, Jr

Florida State University - Risk Management Center

Charles Nyce

Florida State University

Date Written: February 3, 2010

Abstract

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

Cole, Cassandra R. and Maroney, Patrick F. and MacPherson, David A. and McCullough, Kathleen A. and Newman, James and Nyce, Charles, The Use of Post-Loss Financing of Catastrophic Risk (February 3, 2010). Risk Management and Insurance Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1547343

Cassandra R. Cole (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Patrick F. Maroney

Florida State University - Risk Management Center ( email )

Tallahasse, FL 32306
United States

David A. MacPherson

Trinity University ( email )

San Antonio, TX 78212
United States
210-999-8112 (Phone)
210-999-7255 (Fax)

HOME PAGE: http://www.davemacpherson.com

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Kathleen A. McCullough

Florida State University - College of Business ( email )

Department of Risk Management and Insurance
150 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-8358 (Phone)
850-644-4077 (Fax)

James Newman

Florida State University - Risk Management Center ( email )

Tallahasse, FL 32306
United States

Charles Nyce

Florida State University ( email )

821 Academic Way
349 RBB, College of Business
Tallahassee, FL 32306
United States
850-645-8392 (Phone)

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