A Buffet/Berkshire Bailout with Bonds? I feel a bit like Dr Seuss!

It appears that Berkshire Hathaway has guaranteed to buy $4 billion in bonds from Florida in the event of a large scale event (> $25 billion). For this service, the state of Florida has agreed to pay Berkshire $224 million up front. From the News Journal Online:

The deal would partly shore up the Florida Hurricane Catastrophe Fund, a state program that sells low-cost reinsurance to property-insurance companies. Reinsurance is a type of coverage that insurers buy to help pay claims after hurricanes.

With the nation's financial markets in disarray, state officials have grown increasingly concerned the catastrophe fund would not be able to borrow enough money to meet its obligations after a Hurricane Andrew-type storm.

The Herald Tribune describes the situation well:

In order to attract insurers, the state-run Florida Hurricane Catastrophe Fund was formed after 1992's Hurricane Andrew to reimburse insurers for major claims paid to residents.

The so-called Cat Fund has $8 billion in reserves collected from assessments on insurance policies in the state. But after Crist led the charge last year to deepen the state's risk in order to lower insurance premiums, the fund is on the hook for up to $29 billion in reimbursements to insurers this year in case of catastrophic storm damage.

This move may have been necessary due to current conditions, but there needs to be a better long term policy to address this type of risk. In a previous post, I discussed private insurer's attempt to provide flood insurance (here). This would likely give more homeowners access to flood insurance.

Howard Kunreuther of the Risk Management and Decision Processes Center at the Wharton School argues for a system with risk based premiums where policies are long term contracts tied to the property itself rather than individuals. In this proposed system premiums would be tied to mitigation measures, thus creating an incentives for these types of measures. As it stands now, people tend to under invest in these measures. He states

By mitigating existing and new homes with structural measures (e.g., better
designed roofs) one could reduce future disaster losses significantly. If all residential
homes in Florida were fully mitigated, the damage from a 100‐year hurricane would
be reduced from $84 billion to $33 billion, a decrease of 61 percent.

Nationwide is on your wet side...

Nationwide is asking Congress to allow insurance companies to sell flood coverage. Here are some of the details of the plan ( Times-Picayune):

Under the plan, homeowners would buy flood coverage as part of a new type of homeowners policy. The private flood coverage would be the same price as what consumers could buy through the National Flood Insurance Program, but consumers could buy more than they can through the federal program, which limits coverage to $250,000.

But unlike regular homeowners policies, the new homeowners policies with flood coverage would be regulated by the federal government instead of state insurance commissioners. The flood premiums would be held in a separate account than the regular homeowners money. Insurers wouldn't profit from the flood premiums, but wouldn't be taxed on what they collect in flood premiums.

A portion of the flood premium that consumers would pay would go to the federal government to help build a reinsurance fund that would step in if a huge flood exhausted the regular flood premiums that private companies collected. The National Flood Insurance Program would continue to exist, but a flood reinsurance fund to serve the private flood policies would be created alongside it.

The article notes that this action may address some of the wind vs flood disputes that occur after large storm events such as Katrina. These companies could play a more active role in making sure clients have flood coverage.

The idea is that enough private companies would start offering their own flood policies that the reinsurance program would be more financially viable than the flood program, which went broke after Katrina.

With this proposal, Nationwide joins other companies in trying to offer solutions to how the country finances disasters. Travelers has pitched a federally regulated coastal wind zone and Allstate is backing the notion of a national catastrophe fund.

I like the idea of developing private market solutions to these types of problems. In order to develop a more concrete opinion, I would need more information on any proposed legislation; however, it is promising that Nationwide would proposing this type of move.