The New York Times recently brought up a casualty of the economic climate facing many states: the cost/benefit analysis being made by states in regards to insurance against dangerous storms. Often extremely costly and unnecessary, this reinsurance looks to bolster defenses against disastrous natural calamities but, with budget cuts at a premium, states are beginning to count every dollar and looking to go without.
Public insurance programs in some coastal states are flirting with the notion of saving millions of dollars every year by shrinking or canceling the coverage they buy from private reinsurers — the deep-pocketed companies that insure insurers whose exposure to loss exceeds the budgets of some nations.
States are the insurers in this case. And they are either tired of paying piles of cash for reinsurance policies that are rarely needed, or too broke financially to maintain coverage that has saved state residents from paying billions in hurricane damage claims. In the parlance of the insurance business, without coverage or a hedge against their expensive risks, they are “running naked.”
Here’s the bet: Save hundreds of millions with no disaster, or pay perhaps billions with one.
Two of the nation’s biggest states are looking to gamble on the odds of a disaster-free summer:
Texas let its policy die at the end of May, less than a year after reinsurers paid $1.5 billion in claims related to Hurricane Ike. That’s not a bad return on the state’s investment. Texans paid $180 million for the policy.
Texas will buck this hurricane season with no reinsurance.
California is also looking to reduce its coverage.
Overall an unfortunate situation that will leave many state budget workers hoping they made the right decision, depending on what decision they make.