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Lloyd's: Government Intervention in Natural Disaster Insurance Places Unsustainable Burden on U.S. Taxpayers

Posted on 27 Sep 2011

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Government intervention in the insurance market is putting the financial burden of natural disasters on U.S. taxpayers. A report released today by Lloyd’s of London, the world’s specialist insurance market, also highlights other unintended impacts of government-run insurance programs.

“The private insurance market has a crucial role to play in helping communities and economies recover from disaster,” said Sean McGovern, Director, North America at Lloyd’s.  “We need to go back to first principles and redraw the boundaries between government intervention and the private market.

The cost to the US taxpayer is huge and is not sustainable.”

The issue has gained more urgency as catastrophic losses have mounted and the U.S. economy has declined. In the first half of 2011 alone, economic losses from natural catastrophes in the U.S. totalled $27 billion*. This year is on track to be one of the most costly on record for the insurance industry.

This problem is illustrated by the current fight over disaster aid for Hurricane Irene. Lawmakers can’t agree on where the aid should come from and whether it should be offset by cuts to other federally-funded programs.

The Lloyd’s report, “Managing the Escalating Risks of Natural Catastrophes in the United States,” calls for greater cooperation between government, insurers and planners in the U.S. to ensure that a greater emphasis is placed on managing and mitigating risk. It sets out nine fundamental principles for managing natural catastrophe risk in the U.S.

Allowing a healthy private insurance market to price risk appropriately is fundamental: “Insurance is not sustainable if it is offered at rates below what is required by sound, risk-based actuarial practices,” adds McGovern “When insurance is not risk-based, the wrong price signals are sent and there is little or no incentive to mitigate risk.”

There is also a need to develop a better understanding of the potential costs of natural disasters to those affected and to the wider economy. Both the insurance industry and the government need to help individuals and communities understand the steps they can take to mitigate the potential consequences of catastrophes and adapt to the future impacts of climate change. This could significantly reduce the impact and costs of natural disasters.

“The extent of the challenge facing us is best highlighted by the unprecedented series of natural disasters that have occurred this year,” added McGovern.

“Never before has it been more timely or necessary for us to work together to manage the escalating risk of natural catastrophes in the U.S.”