The Benefits of a Multi-State Catastrophic Risk Pool. HS Wire, March 13. The Diva admits right up front that she is not an insurance expert, but this study seemed to be worth mentioning. Some excerpts follow:
The study’s findings are particularly relevant in the wake of Sandy, which pelted coastal and inland regions with high winds, driving rains, heavy snow and flooding along the Eastern Seaboard. Kinetic Analysis projects that that storm’s direct impacts could run as high as $25 billion, excluding the New York City underground infrastructure.
Sandy has renewed calls for a federal catastrophe plan that creates risk pools across larger geographic areas — along with objections that doing so will force low-risk areas to subsidize high-risk states.
The study found, however, that the opposite to be true. As geographic diversity increased, funding levels for sustainable catastrophic risk pools decreased relative to premiums, actually resulting in savings for both low and high risk areas.
“If subsidies are created in this setting, it is due to incorrect risk pricing rather than the risk itself,” said FSU’s Dumm. “Our analysis found that each state derives benefits from geographic diversification regardless of risk ranking. In fact, failure to diversify catastrophic wind risk may impose its own set of costs in the form of lost diversification benefits that exist precisely where they are needed, for less frequent and more severe catastrophic events.”