• Home
• Opinion
• Commentary

Unlike their neighbors along the southern and Gulf coasts, New Jersey residents don't have much reason to worry about the hurricane season that began June 1. After all, no summer storm has made landfall in the state at hurricane strength since 1903. Coastal homeowners' insurance, although expensive for some, isn't particularly hard to find. Indeed, the state-mandated Windstorm Market Assistance Program (WindMap) - which provides wind insurance for those unable to find it elsewhere - has actually seen its policy count drop by a third even as major companies like Allstate have stopped writing new policies in the state. Therefore, it's a bit puzzling why a group of legislators led by State Sen. Stephen M. Sweeny, D-Gloucester, are proposing a state-run catastrophe fund intended to help out hurricane-prone homeowners.

Under a bill moving through the Legislature, a catastrophe fund financed through special taxes on insurance policies would theoretically help keep insurance rates down by reducing the amount that private insurers like State Farm and Liberty Mutual have to pay for their own reinsurance policies. (Reinsurance is insurance for insurance companies.)

It may sound good - some larger insurers and groups like the New Jersey Association of Realtors support the idea - but it won't work. In fact, it's likely to raise insurance rates, undermine a vital private industry and, if a storm hit, deepen the state's already serious financial woes.

To begin with, the money to pay for what's often called a "cat fund" will ultimately come from insurance customers so, unless insurance companies already feel their rates are too high (hint: they don't), it's quite possible that rates will go up by the amount of the taxes and perhaps more. In Florida, the only state to experiment with a cat fund of its own, most companies filed for rate increases on top of the taxes assessed for the government cat fund.

And, as a matter of insurance principles, a state-run cat fund won't save money. Buying insurance makes economic sense because insurers can manage risk across a broad pool of non-correlated risks. Within the United States, insurers can pool the risk of hurricanes striking Atlantic City or Cape May with the risks of major blizzards in North Dakota and Wyoming. Since hurricane and snow storm seasons don't coincide, insurers can make large profits off of snow policies while paying out claims for Atlantic storms season. Through international reinsurance arrangements, likewise, insurers can pool risks of hurricanes in New Jersey with earthquakes in Japan and cyclones in the Southern Hemisphere. A New Jersey-only backstop, on the other hand, will focus all its risk in New Jersey. In order to break even, it will have to charge more than private reinsurers.

The result is that a backstop will either prove worthless - its product will cost more than what the private market provides - or more likely, impose massive liabilities on the state. Florida's existing fund does undercut the private market but it has just about $3 billion in hard assets to cover its potential liability of $28 billion. Even Allstate, which supports the idea of a New Jersey Cat Fund, won't promise to begin writing new policies if the state sets up a new fund.

The state might well do best to avoid doing anything that significantly changes the way wind insurance gets written. If the Legislature, nonetheless, really wants to do more to help residents afford wind insurance, it might investigate efforts to offer income or property tax credits to help homeowners' of modest means afford it, encourage efforts to reinforce public infrastructure against storms, and eliminate state subsidies for construction in environmentally sensitive coastal areas. A hurricane catastrophe fund just isn't a good idea.

Eli Lehrer directs the Center for Risk, Regulation and Markets at the Competitive Enterprise Institute, a non-profit public policy organization dedicated to the principles of free enterprise and limited government. E-mail him at ELehrer@cei.org.

No comments have been posted. Be the first poster!

PressofAtlanticCity.com offers everyone the opportunity to comment on published stories. However, it is impractical for editors to screen all comments.
If you believe a comment is offensive, please click on the abuse-reporting link and your objection will be considered by an editor. We encourage participants to use their real names, but inoffensive screen names are acceptable. Comments are the sole responsibility of the person posting them.
Please post responsibly. Do not post comments that are off topic, defamatory, obscene, abusive, threatening or an invasion of privacy.
Be polite. Don’t hate. Users who don’t play by the rules may be blocked from participating.

View our full terms of service and privacy agreement

Click here to report a comment as abusive.

You must login to post a new comment