AnalysisTime for an IRA-like national financial backstop for catastrophe insurance?

Hurricane Katrina was bad enough, but only a year earlier Florida was hit by four major hurricanes in six weeks. In fact, seven of the ten most destructive hurricanes in U.S. history have occurred within the past five years. Here are a few more facts and figures, showing that hurricanes are not to preserve of southeastern United States: Since 1900, eleven hurricanes have made direct hits on New England, and six have made landfall in New York. In 1938 the most powerful of those hurricanes landed with such force that it became known as The Long Island Express, killing 700 people and leaving 63,000 homeless. If a hurricane of the same force struck New York today, the economic damages could exceed $100 billion, to say nothing of the potential loss of life.

Admiral James Loy (Coast Guard, Ret.) is now the co-chairman of the Washington, D.C.-based ProtectingAmerica.Org. He also served as deputy secretary at DHS. He writes that the U.S. private insurance industry is efficient and effective in providing financial resources to families that have been victims of foreseeable losses and small-scale catastrophes. There is a limit to what the private insurance industry can do: In total, the property and casualty insurance industry has only about $400 billion of capital to cover all claims for all lines of insurance. This amount is adequate to cover predictable losses, it may well be inadequate to cover unpredictable mega-catastrophes. “Why take that chance?” he asks.

His solution: Supplementing those reserves to make sure consumers will be protected could be easily accomplished by creating privately funded state and national catastrophe funds. These funds would include deposits of private insurance-company revenues which could grow free and would be used to pay the extraordinary claims following a catastrophe. A limited amount of the investment income could be used to support consumer education, expand first-responder programs, strengthen building codes, and improve code enforcement. A bipartisan group of representatives has introduced legislation that would allow for a IRA-like national financial backstop. “It is important legislation that should be considered before the next catastrophe strikes,” Loy concludes.

-read more in Loy’s article