Catastrophe Risk and the Regulation of Property Insurance

This paper analyzes the regulation of property insurance markets affected by the risk of hurricanes in the US and initiates an exploration of the political economy of catastrophe risk. The severe storm seasons of 2004-2005 and subsequent market developments prompted a range of government reactions in various states. The paper examines the interaction of catastrophe risk, loss shocks, insurance market responses, and government actions. This examination focuses on Florida and compares its policies with those in other coastal states. Florida faces the greatest risk and market pressure and has responded with the strongest regulatory measures. Other states’ actions appear to be less severe but still important. Further, coastal politicians are seeking to transfer a substantial portion of catastrophe risk to the federal government in order to lower the cost of property insurance for their constituents. This paper evaluates the factors driving regulatory policies and their implications and offers opinions on government strategies that will promote market stabilization and more efficient management of catastrophe risk.