Bailout Nation—Should The Federal Government Step In To Provide Insurance For Disaster Prone Areas?

A recent Duke Law Journal article argued that the current property insurance marketplace cannot properly insure disaster-prone areas, and the federal government needs to intervene. The article indicates that the situation is similar to the national health insurance dilemma and calls for a similar response. Here is the abstract of Regulating Homeowners’ Disaster Insurance Through Federal Intervention: Lessons From The Affordable Care Act:

One of the most impactful effects of climate change in recent years has been the increasing frequency and severity of natural disasters, even in geographic areas not previously known as disaster-prone. These disasters have caused untold property damage. Typically, the cost of rebuilding a home is assumed at least in part by private insurance companies, but many homeowners are significantly underinsured for disaster-related losses. Additionally, in areas where natural disasters are becoming increasingly frequent, private insurers have determined that it is no longer profitable to continually issue massive payouts without charging astronomical premiums, leaving many homeowners without access to financial relief. This Note argues that these circumstances call for a federal intervention. Specifically, it analogizes owning a disaster-prone home to having a preexisting health condition as defined by the Affordable Care Act. Using lessons from this analogy, this Note proposes a federal mandate requiring all homeowners to purchase natural disaster insurance and argues such a policy is achievable through Congress’s taxing power. Further, this Note argues that features of the proposed mandate, such as precaution crediting and a subsidized insurance program, render it superior to previously attempted regulation of natural disaster insurance.

The premise that one’s health—which cannot be sold or changed to another—is sufficiently similar to home ownership, which inherently involves the ability to pay for that particular property and can be sold or changed, is a bit of a leap. Yet, in this age, we have a number of insurance programs backed by the federal government, including the national flood program.

Currently, we are facing large geographic refusals of the private insurance marketplace to insure wildfire areas, windstorm areas, flood-prone areas, hurricane-prone areas, and earthquake areas. The breakdown of the private insurance marketplace has others suggesting alternatives, including government-sponsored programs to fill the gaps.

This article argues the need for government intervention and suggests that the national health insurance program provides support to do so. But, it goes much farther:

This Note lays the foundation for such an analysis. More specifically, it argues for a new model of federal intervention, one that optimizes maximal coverage and risk prevention at minimal premiums. This new model will create a permanent infrastructure whereby the federal government subsidizes much of the costs incurred through natural disasters as an assumption of public responsibility. This intervention is not limited to property losses caused by wildfires; instead, it will encompass all disaster-related losses so that the government may properly benefit from a nationwide distribution of risk as an insurance provider.

Part I introduces insurance generally, discussing how it functions and why the risk analysis specifically related to disaster insurance is inextricably linked to environmental justice. This Part then focuses on current challenges in the California state legislature, demonstrating that pressing issues in the homeowner insurance market are far from historically isolated challenges. Exploring the emergency legislation following Hurricane Katrina and the preexisting conditions provisions of the ACA, this Part finally contextualizes the later discussion of how the United States has failed to respond to insurance crises in the past and what should be achieved in the future.

Part II accomplishes three objectives. First, it discusses the public policies underlying functional insurance services. Second, it addresses key constitutional questions related to the federal government’s right to intervene in state homeowner insurance markets. Third, it proposes the optimal structure for a federal intervention in the homeowner insurance market. This final Section concludes with a permanent federal intervention mandating disaster insurance via a tax on property mortgages. Such a tax will facilitate the use of nationwide risk corridors, ultimately reducing the financial burdens associated with natural disasters for homeowners, insurance companies, and states alike.

The law journal note is simply an idea. It is not written by a public policy wonk or insurance insider. I found the statistics and concerns worthwhile. I am not in agreement on how to resolve the issue. Nevertheless, the article is a worthwhile study for those involved with the insurance market leaving disaster-prone areas.

Thought For The Day

The problem with socialism is that you eventually run out of other peoples’ money.
—Margaret Thatcher