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Public cat fund popular, but far from a good idea

Posted On: Apr. 1, 2007 12:00 AM CST

AN IDEA THAT'S gaining popularity on Capitol Hill and elsewhere is that government ought to get into the business of insuring catastrophe-exposed property by establishing public natural catastrophe funds.

The reasons for the idea's popularity are quite understandable. After all, nobody--homeowner or business--wants to get slammed with the higher insurance rates the private market will demand to cover an increasingly expensive exposure. But simply because there are good reasons behind an idea's popularity does not make it a good idea.

In fact, subsidizing property insurance at artificially low rates through government-backed catastrophe funds strikes us as a bad idea indeed. Political reality can be expected to trump actuarial reality, and pressure will always be exerted to hold rates down, thus encouraging more building and greater exposure. When the catastrophe occurs, the taxpayers are left holding the bag.

Government policy would be far better directed toward reducing vulnerability to hurricanes than by pursuing politically popular yet economically unsound--and potentially quite expensive--measures that could very well make a bad problem even worse.