THE ESTIMATED IMPACT OF RESIDUAL MARKET ASSESSMENTS ON FLORIDA PROPERTY INSURERS

• Author: David C. Marlett,Alan D. Eastman
• Date: 01 July 1998
• DOI: http://doi.org/10.1111/j.1540-6296.1998.tb00081.x
• Published date: 01 July 1998

THE ESTIMATED IMPACT

OF

RESIDUAL MARKET

ASSESSMENTS

ON

FLORIDA PROPERTY INSURERS

by

David

C.

Marlett

Abstract:

The authors examine the

risk

financ-

ing approach of the Florida state-sponsored

property insurance programs. The programs

rely heavily on post-disaster assessments on in-

surers to meet expected obligations. The au-

thors evaluate the impact of the assessments

and discuss whether this approach represents a

realistic solution to the “cat problem.”

INTRODUCTION

rguably, Florida has the most

A

extensive state-sponsored in-

surance operations

of

any state with

respect to property insurance.’ In or-

der to understand the reasoning behind

the current activity, a brief background

on the market conditions

in

Florida is

provided. This analysis begins with

Hurricane Andrew,

the

turning point

for the residential property insurance

market. Hurricane Andrew signifi-

cantly increased the insurance

industry’s recognition of catastrophe

risk, providing a strong impetus for

dramatic changes in the Florida mar-

ket. Insurers changed from aggres-

sively trying to write new business to

taking drastic measures to reduce their

market shares.

However, insurers’ actions were not

based solely on the effects of Andrew.

A much broader reassessment

of

ca-

tastrophe risk and how

best

to deal with

it

was already underway prior to An-

and

Alan

D.

Eastman

drew due

to

earlier catastrophes and

advancements

in

catastrophe model-

ing that significantly increased insur-

ers’ assessments of catastrophe

risk.

An important aspect of this discussion

is the appropriate role of government

in providing protection from natural

disasters. Kunreuther

(1

974)

and

Kunreuther and Miller

(1985)

exam-

ine issues relating to the use of disas-

ter relief and insurance, addressing the

question of what proportion

of

the cost

of disasters should be borne by the in-

dividuals living in high-risk areas, by

state and local governments, and by the

general taxpayer (federal government).

An over-emphasis on disaster relief

removes responsibility from those liv-

ing in high-risk areas and creates moral

hazard problems relating to the loca-

tions and types of new construction.

Heavy reliance on private insurance

raises questions

of

affordability and

availability, and also whether

it

is re-

alistic to believe that the uninsured

victims of disasters will be forced to

bear the consequences on their own

without government assistance.

Florida’s approach attempts to

strike a balance between individual

responsibility for insurance and gov-

ernment involvement designed

to

en-

sure availability and affordability, and

to

provide temporary financial re-

David

C.

Marlet1 is an Assistant Professor at Illinois Wesleyan University. Alan

D.

Eastman is an Assistant

Professor at Indiana University

of

Pennsylvania.

37