Insurance and the Government – An ugly dance

For many consumers and citizens, the mention of insurance and government elicits fear and loathing.  Looking beyond the initial reactions and the stereotypes, we realize that both are necessary components of an orderly, prosperous economy and society.  Insurance and government are necessarily intertwined, ranging from social insurance to regulation to market support.  There are currently two prime examples of this relationship and the ongoing dance between the private insurance industry and government.

First, the National Flood Insurance Program (NFIP) is in bad shape, $24 billion in debt.  In a rare demonstration of fiscal responsibility, the US Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012.  The reform would have phased in premium rates that were more reflective of the flood risk and updating the flood maps on which premium rates are based.  I say “would have” because the politics of Biggert-Waters has led to its unraveling through subsequent legislation that basically undoes much of the original reform.  Politicians’ knees became weak when flood-prone property owners and the realtors who sell such properties were inflamed by the eventual rise in flood insurance premiums.  So the government’s fiscal train-wreck that is the NFIP is off the track once again.

The second example is the imminent expiration of Terrorism Risk Insurance Act (TRIA) later this year.  After the September 11 attacks, it was apparent that the private insurance industry could not insure the losses connected with a major act of terrorism.  In order to stabilize the insurance market and the terrorism exposures of our post-9/11 world, the government stepped in with TRIA which provided a government “backstop” to cover up to 90% of terrorism losses above certain thresholds.  The looming expiration of TRIA has rattled the insurance marketplace because of the uncertainty over the future of the government’s terrorism backstop and its structure if it is renewed.  There are some credible arguments against renewing TRIA altogether.  Insurers are already hedging by writing policies that expire at the same time as the current TRIA law so that they can write new policies with different terrorism coverage provisions in response to a possible world without TRIA, or a radically different TRIA.  The point is, once again the government and the insurance industry are very much intertwined, for better or worse.

There are many, many finer points in both the NFIP reforms and the TRIA expiration/renewal that I do not have time to explore here.  The larger point that led me to raise these two issues today is the ongoing and unavoidable interaction between the insurance industry and government.  Although these examples both originate at the federal government level, there are countless issues at the state government level – Michigan no-fault auto insurance reforms being a prime example.  The libertarian in me prefers government to get out of the way of private insurance and let the markets sort it out, but the pragmatic economist in me knows that there has to be a government role in insurance.  I just wish the dance between these two giants wasn’t so darn ugly.

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