A Review and Evaluation of Selected Government Programs to Handle Risk

Published date01 May 1979
Date01 May 1979
Subject MatterArticles
A Review and Evaluation of Selected Government
Programs to Handle Risk
ABSTRACT: Six government insurance programs are de-
scribed and evaluated against three criteria: (1) size and sig-
nificance of the economic burden imposed by the risks covered,
(2) public acceptance of the program, and (3) necessity of govern-
ment initiative to accept the risk if private insurers could not
do so. It is concluded that government handling of flood and
swine flu liability risks are justified, but the government pro-
grams in riot reinsurance, crime insurance, and nuclear energy
liability should be terminated. Federal crop insurance is of
questionable necessity in view of the basic insurability of this
risk by private insurers.
Mark R. Greene is Distinguished Professor of Insurance, Department of Risk
Management and Insurance, at the College of Business Administration, The Uni-
versity of Georgia. He received his Ph.D. degree from The Ohio State University,
and the A.B. and M.B.A. from Stanford University. He is past president of the
American Risk and Insurance Association, a member of the Board of Governors
of the International Insurance Seminars, Inc., and has been a member of the Board
of Directors, Southern Risk and Insurance Association. He is author of many
scholarly articles and several books, including Risk and Insurance and Risk Aver-
sion, Insurance, and the Future. Greene’s latest book, of which he is coauthor, is
Risk Management: Text and Cases.

RISK is generally considered to hand, refers to the uncertainty per-
ceived by individuals or groups
a burden on society and
about a given set of possible losses.
upon individuals alike. Individuals
tend to be risk
Specifically, if citizens are frightened
averse in many cir-
cumstances and seek
peril they
ways which
may seek political
means to transfer it even if objective
or eliminate risk. The ques-
facts would
tion is often raised
hardly justify their fear
as to whether
or need for
private business
government insurance.
or government
should bear risk. Many
Thus, the concepts of objective and
say they pre-
fer to
subjective risk are important in
use private means, but transfer
of risks to government is apparently
measuring the significance of risk
and in determining why some risks
seen by others as a way to handle
them at least cost
are handled by
or with greatest
governments rather
total efficiency.
than by the private sector.
In this paper the question is ap-
proached by examining (a) meas-
ures of risk and reasons for govern-
mental insurance programs, (b) how
Although in principle the U.S.
successful and vital government
economy is based on private enter-
insurance programs in selected areas
prise, the role of government-
have worked out to be, and (c) an
national, state, and local-has stead-
evaluation of government’s perfor-
ily increased in most areas of citizens’
mance and rationale for assuming
lives. In the area of risk management
the risk. In the following sections,
and insurance, the government has
consider objective and subjective
expanded its role to the point that
measures of selected risk burdens,
approximately half of all the insur-
and general reasons for government
ance premiums now written in the
assumption of selected risks, vis 4
United States (including OASDHI)
vis private sector assumption. Se-
are collected by a federal, state, or
lected government insurance pro-
local government.’
grams, including riot reinsurance
The question arises as to why gov-
program, crime insurance, nuclear
ernments are assuming a larger share
energy liability risks, crop failure
of those activities described under
risks, flood risks, and influenza and
a &dquo;risk management&dquo; heading. Sev-
disease control risks are then exam-
eral types of rationale have been
ined in detail.
advanced to explain it, but under-
In evaluating why or the extent to
lying all of these is a general tend-
which a risk may be viewed as &dquo;bur-
ency for society to become more
it seems important to
risk averse.2 This tendency not only
distinguish between two major di-
increases the number and variety of
mensions of risk: objective and
risks people wish to transfer to others
subjective. Objective risk may be
but, to some extent, it reduces the
defined as the statistical uncertainty
willingness of private organizations
that predicted financial losses of a
given type will be realized in prac-
1. Mark R. Greene, "The Government as
tice. It is
an Insurer,"
common to employ
of Risk and Insurance,
vol. 43, no. 3 (September 1976), pp. 393-406.
measure such as variance or stand-
2. Mark R. Greene, Risk Aversion, Insur-
ard deviation as the measure of this
ance and the Future (Bloomington, IN:
risk. Subjective risk, on the other
Indiana University Press, 1971), Chapt. 4.

to assume risk. To apply the termi-
that of achieving reforms in land use
nology in the last section, subjective
and discouraging building in flood
risk perceptions tend to be greater,
plains without proper safeguards.
and in the absence of willing takers
Third, there is a need for compul-
in the private sector (who also per-
sion, in that without it most indi-
ceive greater subjective risk), the
viduals do not voluntarily purchase
burden of risk assumption increas-
flood insurance, even if they are
ingly falls upon governments.
exposed to high loss probability,
The dominant rationale employed
because their subjective perception
for many government programs,
of the risk tends to be minimal.
particularly those discussed in this
Fourth, the rationale of convenience,
paper, is the residual market philos-
and perhaps efficiency, influenced
ophy. Under this philosophy, gov-
the way the flood insurance program
ernments move into an area of risk
has developed.
assumption because private insurers
Although at first the government
are unable or unwilling to handle
worked with private enterprise in
all the risk. What private insurers
distributing flood insurance, it later
reject is &dquo;residual,&dquo; left-over, repre-
ran into difficulties with its partner-
senting an unfilled market.
ship with the National Flood In-
Other types of rationale are also
surers Association and set up a gov-
used by governments as justifica-
ernment-controlled corporation to
tions for inaugurating insurance
operate the program. Presumably
programs. These are: convenience,
the Federal Insurance Administra-
achieving some collateral social
tion believed the government could
purpose, need for compulsion, effi-
administer the program more effi-
ciency, and handling risks produced
ciently and conveniently than by
by adverse conditions of society
working through private insurers.
itself. Obviously, one or more of the
A final rationale for government
above types of rationale may occur
risk bearing, closely related to achiev-
ing a collateral social purpose, is to
Flood risks, for example, may be
handle those risks produced by so-
assumed by the federal government
ciety itself. The argument is that if for
for several of the above reasons.
various reasons societal conditions
First, private insurers view the flood
(such as riots in cities) are responsible
risk essentially uninsurable because
for the inability of private industry
of adverse selection-the tendency
to handle certain burdensome risks,
for only those subject to loss to take
then society, through its govern-
coverage, thus inviting catastrophic
ment, should accept the task of han-
losses which are difficult to spread
dling them. Conversely, if a risk
out over a larger number of clients.
could be handled well privately,
The flood risk becomes residual and
then government should not perform
if it is to be transferred at all, the
this task. As George Bernstein stated,
government must accept it. Second,
&dquo;... Government should not per-
a collateral social purpose may be
form functions that can better be
achieved by the government in set-
accomplished through private means;
ting up flood insurance programs-
and the private sector should not be
3. Mark R.
compelled to assume the responsi-
Greene, "The Government as
bilities that are
Insurer." A discussion of these types,
primarily social and
with examples, is developed in this article.
governmental in nature, and which

are therefore the proper function
The obvious questions arise, &dquo;Are
of local, state, or federal govern-
these programs justified? Is the cost
ment entities....&dquo;4
to general taxpayers worth more
Studies demonstrate that private
than the relief obtained by specific
insurers are still preferred by the
groups in being able to transfer risks
public whenever possible Thus,
to the government?&dquo;
the justification for government op-
erated insurance programs needs to
Riot reinsurance
be demonstrated.
In 1968 the U.S. Congress author-
ized the establishment of
plans, known as FAIR plans,
which would
qualify for federally
sponsored reinsurance if certain
The federal government has set
requirements were met .7 The pur-
up programs for handling specific
pose of the program was to facilitate
areas of public risk, most of which
the establishment of private insur-
supplement or compete with those
ance capacity at &dquo;affordable rates&dquo;
of private insurance institutions.
against loss to property located in

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