Designing Public Solutions for Disaster Insurance Market Failures

Insurance for disasters—floods, wildfires, windstorms, and more—is failing. The problems of correlated risk, enormous losses, climate change, and the unpredictability of risk have undermined the private market for property insurance. When insurance against disasters is unavailable, the consequences for individual property owners, communities, and the national economy are dramatic. In response, federal and state governments have developed public programs to fill the gaps created by private market failures. This article offers no solutions to the failures of private insurance against catastrophes. Nor does it evaluate any current or proposed solutions. Instead, it frames questions. In designing public solutions to catastrophe insurance failures, what precisely is the problem to be solved? Which risks should be included? How should prices be set? To what extent should policyholders be indemnified? Only by asking the right questions can we arrive at sound answers.