Abstract
Insurance for catastrophes—floods, wildfires, windstorms, and more—is failing. The problem of substantial, correlated risk, and sometimes the unpredictability of risk, has undermined the private market for property insurance. Major insurers have stopped writing new homeowners policies in California, Florida, Louisiana, and elsewhere, and premiums in many states have increased dramatically. The phenomenon is not new. Private insurance companies withdrew flood and earthquake coverage decades ago. When insurance against catastrophes is unavailable, the consequences for individual property owners, communities, and the national economy are dramatic.
When the private market is perceived to fail, federal and state governments sometimes enact public programs in response. For example, the National Flood Insurance Program was established when almost all private insurers excluded flood coverage under homeowners policies, creating a huge protection gap for coastal communities and other flood-prone properties.
The focus of the paper is on property insurance, particularly homeowners insurance, in developing issues in the design of public solutions. It offers no solutions to the failures of private insurance against catastrophes. Nor does it evaluate any current public solutions. Instead, it frames questions. In designing public solutions to catastrophe insurance failures, what precisely is the problem to be solved? Which risks should be included? How should prices be set? To what extent should policyholders be indemnified? And so on. The value of the project is that without asking the right questions, arriving at the right answer is purely a matter of chance.
When addressing any particular insurance failure, moreover, answering the right questions does not lead to a single “right” answer. One of the most important questions is, “What are the goals of insurance?” Insurance is a financial transaction of risk transfer and risk pooling, but it never is solely a financial transaction. Every form of insurance embodies social values and serves public policy goals. Responding to the questions in this paper in a particular context involves choices among values and goals that are economic, social, political, and even moral.