The Use of Postloss Financing of Catastrophic Risk

34 Pages Posted: 9 Apr 2012

See all articles by Cassandra R. Cole

Cassandra R. Cole

Florida State University - College of Business

David A. MacPherson

Trinity University; IZA Institute of Labor Economics

Patrick F. Maroney

Florida State University - Risk Management Center

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

Multiple version iconThere are 2 versions of this paper

Date Written: Fall 2011

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 postloss strategies, including rate regulation, residual markets, guaranty funds, and postloss assessment structures. However, several states, including Florida, Louisiana, Mississippi, and Texas have used strategies that involve potentially large postloss funding of hurricane risk. In some cases, the structure of the postloss financing mechanism is likely to create significant assessments and subsidies. This article examines the role of state government in catastrophe financing, focusing primarily on postloss financing methods. Specifically, the article provides a discussion of the advantages and disadvantages of the postloss catastrophe financing as well as the political forces that motivate the use of this approach. Further, given the potential magnitude of postloss assessments and related subsidies, we use the Florida homeowners market to illustrate the implications of the state's decisions. This allows for a concrete discussion of the impact and viability of postloss financing mechanisms.

Suggested Citation

Cole, Cassandra R. and MacPherson, David A. and Maroney, Patrick F. and McCullough, Kathleen A. and Newman, James and Nyce, Charles, The Use of Postloss Financing of Catastrophic Risk (Fall 2011). Risk Management and Insurance Review, Vol. 14, Issue 2, pp. 265-298, 2011, Available at SSRN: https://ssrn.com/abstract=2036917 or http://dx.doi.org/10.1111/j.1540-6296.2011.01199.x

Cassandra R. Cole (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
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

Patrick F. Maroney

Florida State University - Risk Management Center ( email )

Tallahasse, FL 32306
United States

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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