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Government Insurance & Running Naked Through Storm Risks

There has been a lot of talk about the way in which a public health insurer would compete against private ones.  As the President put it recently:

People say, well, how can a private company compete against the government?  And my answer is that if the private insurance companies are providing a good bargain, and if the public option has to be self-sustaining — meaning taxpayers aren’t subsidizing it, but it has to run on charging premiums and providing good services and a good network of doctors, just like any other private insurer would do — then I think private insurers should be able to compete.  They do it all the time.

He makes a good point.  But we don’t have to talk about this in theory – we can look at existing state insurance programs to see how they operate.

In states prone to natural disasters like hurricanes, the market for private insurance has become increasingly uncompetitive.  Several state governments have responded by setting up public insurance programs to sell coverage to property owners in their states.  They operate something like private insurance companies – collecting premiums, maintaining reserves, and, importantly, buying reinsurance in the event of a catastrophe that exceeds what they can pay for themselves.

The New York Times reports that a number of the state insurers are thinking of doing something that a private insurer would likely never do: dropping their reinsurance coverage.  It could save hundreds of millions of dollars a year.  But it would expose them to billions of dollars in risk – that they likely would be unable to pay.  The Times calls it “running naked through storm risks.”

Why can they do this?

I suspect that in the event of a bad hurricane that depleted their reserves, these insurers believe they can turn to the state or federal government to cover their losses.  They are acting as if they already have a sort of “free” reinsurance from the government.  Or, to use a modern expression, they are assuming they will get a bail out if something bad happens.

What it means is that these companies aren’t running anything like a private insurer.  By not accounting for the cost of a catastrophe, they aren’t dealing with the real insurance risk they are taking.  As long as a disaster doesn’t happen they save money.  But when (not if) a major hurricane hits, they will be swept away in the storm, leaving the state and federal government – and the rest of us – with the bill.

“It’s typical of governments today to not be willing to make the hard decisions that are necessary to face up to the true risks and the true costs of the policies that they’ve undertaken,” said Robert Hartwig, president of the Insurance Information Institute, an industry group.

The Times says there are some efforts underway to formalize this sort of “implicit guarantee” from the government.  That might be a step in the right direction if it forces everyone to grapple with the extent of this risk.

But what we see with these kinds of insurers is one of the important ways in which public insurers really aren’t the same as private ones.

*This blog post was originally published at See First Blog*

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