Managing the Risk of Natural Catastrophes: The Role and Functioning of State Insurance Programs

Abstract

This paper surveys state-mandated programs designed to provide natural catastrophe insurance to property owners and businesses unable to find a policy in the private market. The paper provides an overview of the 10 state programs offering wind or earthquake coverage and outlines the motivation for establishing such programs. The implications of design and operation decisions, such as pricing strategies and contract options, are discussed, as well as how these programs interact with the private property insurance market. Finally, the paper examines whether such programs can handle a truly catastrophic loss year and the merits and drawbacks of federal support for the programs.

Keywords: insurance, catastrophe, hurricane, earthquake, residual market mechanisms

JEL Classification: G22, H79, Q54