A Review of the Development of Residual Market Mechanisms in Florida

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Abstract:

<sc>Abstract</sc>

Catastrophic risk financing is a critical issue for many states. At the epicenter of the debate is the role of the state government in helping homeowners finance catastrophic storm risk. In general, states have used a variety of pre‐ and postloss strategies, including rate regulation, residual markets, guaranty funds, and postloss assessment structures. However, several states, including Florida, Louisiana, Mississippi, and Texas have used strategies that involve potentially large postloss funding of hurricane risk. In some cases, the structure of the postloss financing mechanism is likely to create significant assessments and subsidies. This article examines the role of state government in catastrophe financing, focusing primarily on postloss financing methods. Specifically, the article provides a discussion of the advantages and disadvantages of the postloss catastrophe financing as well as the political forces that motivate the use of this approach. Further, given the potential magnitude of postloss assessments and related subsidies, we use the Florida homeowners market to illustrate the implications of the state's decisions. This allows for a concrete discussion of the impact and viability of postloss financing mechanisms.

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1540-6296.2011.01199.x

Affiliations: 1: . David A. Macpherson, Ph.D., is a E.M. Stevens Distinguished Professor of Economics, Trinity University. Patrick F. Maroney is the Director and Kathryn Magee Kip Professor, Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. Kathleen A. McCullough, Ph.D., is an Associate Professor and State Farm Professor of Risk, Management/Insurance, College of Business, The Florida State University, FL. James W. (Jay) Newman, Jr. is at the Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. Charles Nyce, Ph.D., is an Associate Director, Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. 2: . David A. Macpherson, Ph.D., is a E.M. Stevens Distinguished Professor of Economics, Trinity University. Patrick F. Maroney is the Director and Kathryn Magee Kip Professor, Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. Kathleen A. McCullough, Ph.D., is an Associate Professor and State Farm Professor of Risk, Management/Insurance, College of Business, The Florida State University, FL. James W. (Jay) Newman, Jr. is at the Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. Charles Nyce, Ph.D., is an Associate Director, Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. 3: . David A. Macpherson, Ph.D., is a E.M. Stevens Distinguished Professor of Economics, Trinity University. Patrick F. Maroney is the Director and Kathryn Magee Kip Professor, Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. Kathleen A. McCullough, Ph.D., is an Associate Professor and State Farm Professor of Risk, Management/Insurance, College of Business, The Florida State University, FL. James W. (Jay) Newman, Jr. is at the Florida Catastrophic Storm Risk Management Center, The Florida State University, FL. Charles Nyce, Ph.D., is an Associate Director, Florida Catastrophic Storm Risk Management Center, The Florida State University, FL.

Publication date: September 1, 2011

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