1. Federal Reinsurance for Disasters A Congressional Budget Office Study

2. Introduction F Prepared at request of Senate Budget Committee F Analyzes proposals for federal reinsurance of risks from terrorism and natural disasters F Contributors included:  Rade Musulin - Florida Farm Bureau  Richard Roth  Other assistance from  Dennis Kuzak - EQE  Jack Nicholson - FHCF  Stan Devereux - CEA

3. Two types of federal proposals to increase supply of P/C insurance after a catastrophe F Auction reinsurance contracts to primary insurers and state-sponsored insurers  considered after Hurricane Andrew and Northridge Earthquake  offer reinsurance when coverage is in short supply, at market prices designed to cover governments cost F Pay for losses directly, without reimbursement or only partial reimbursement  considered for terrorism attacks after Sept. 11

4. Key consideration F How the P/C industry would respond without federal intervention?  would the supply of insurance rebound quickly? F Is the risk of terrorism insurable w/o government’s assistance? F Are there policies that could avoid undermining private activity while providing backstop? F What would cost be to taxpayers and government?

5. Study brief: F Large insured losses that are unanticipated reduce the supply of insurance and put pressure on private insurers to raise prices F Higher prices generally attract new capital  insurers reassess their risks  supply increases  prices decline to levels consistent with perceived risks F Proponents contend that federal program needs to add capital to the market and then withdraw after market recovers

6. Study brief: F Federal program would probably expose taxpayers to substantial risk  $25B for natural disaster  $100B for contingent liabilities from terrorism  subsidies could lead to fewer preventative actions  delay innovation that could increase private supply

7. Study brief: F States’ experience with regulations has shown that controlling prices/requiring coverage can delay drop in supply and surge in prices  if keeps prices below costs and crowd out private markets, insurance may be more expensive in long run  issues with subsidization, reduce incentives for mitigation F Since Sept. 11, supply of terrorism coverage has grown and coverage has become less restrictive

8. Study brief: F Private insurers may not be able to pay claims and continue issuing coverage after every contingency F Under current proposals for federal reinsurance of terrorism risks  government initially pays for most of losses  CBO estimates that government should charge insurers about $3 billion annually to cover costs

9. Study brief: F As an alternative to providing reinsurance, Congress could consider other measures to encourage private sector to supply reinsurance following catastrophic events  offering property owners incentives to mitigate risks  reduce federal assistance after an event  changing the tax treatment of loss reserves held by insurers  limiting damage awards