Should Taxpayers Fund Reinsurance?

Reinsurance is insurance for insurance companies. If losses exceed reserves under certain circumstances, insurers can pass that risk on to their reinsurers.

Recent legislation in front of Congress and recent comments from presidential candidates support the idea that government - taxpayers - should contribute or support a fund of reinsurance for those insurers insuring major storm damage claims. A recent article in the Wall Street Journal by Elizabeth Williamson points out that the reason these proposals have such support is simple - electoral votes. Florida and other coastal states that would benefit from such legislation have large blocks of electoral votes.

The article reveals that several insurers have "teamed up" with the American Red Cross to create an advocacy group to support the plan. Problem is the Red Cross joined up to push preparedness, not endorse any insurance legislation.

Such a plan would undoubtedly lower insurance premiums in states such as Florida. There are estimates such legislation would save insurance purchasers over $500 million. On the other hand, critics charge that reinsurance is a cost of business. Insurers should not receive a bail out or subsidy to conduct their business. Further, lower premiums encourage coastal development which in turn causes higher losses when the storms strike.

This is a complicated issue with business owners and taxpayers throughout the country asking why they should fund businesses in storm-prone coastal regions. The same logic applies to areas where flooding, earthquakes, or tornadoes are the primary risk. If you own a business, I would be interested in your comments on this issue.