Policy Documents

Facing Mother Nature

Martin F. Grace and Robert K. Klein –
December 18, 2006

Changes in insurance markets that followed the flurry of hurricanes in 2004–2005, capped by Hurricane Katrina, have been met by a storm of criticism in Congress and state capitals. Rather than addressing the economic realities of increasing catastrophe risk with informed discussion and sound proposals and policies, politicians are attacking its messenger — the insurance industry.

Political attacks on the insurance industry are not a new phenomenon. But the current assault may rank among the most severe, misguided, and damaging campaigns ever waged, with potentially disastrous consequences for many Americans. Government’s mismanagement of catastrophe risk is rooted in a climate of public ignorance and distrust of the insurance industry. That enables politicians to weave a fiction that plays well with their constituents as it sows the seeds of their and others’ exploitation. There is a pressing need to correct several fallacies that infect the current debate and educate the public about the economics of catastrophe risk, the dangers posed by the current course of policy, and better solutions.