Congressional Budget Office: 'How CBO Analyzes Public-Private Risk Sharing in Insurance Markets' (Part 2 of 2)
(Continued from Part 1 of 2)
Here are excerpts:
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Risk Sharing in Insurance Markets
Public-private risk sharing in insurance markets takes three forms, with varying degrees of federal involvement. In the first form, which is used for terrorism insurance, the federal government acts as the reinsurer against private insurers' catastrophic risk and allows the private insurers to set the terms of the policies. In the second form, which is used for crop insurance, the government and private insurers share the risk of gains and losses on policies-that is, they coinsure losses-and the government sets the terms of the policies. In the third form, which is used for flood insurance, the government transfers some of its own risk to the private sector and sets the terms of the policies. In all three forms, private insurers service the policies (that is, they sell them to customers and adjust claims). The federal terrorism, crop, and flood insurance programs are all forms of property and casualty insurance./20 Most other federal insurance programs do...
20. Property and casualty insurance protects individuals, employers, and businesses against loss of property, damages, or other liabilities. It includes coverage for homeowners, renters, and automobiles for individuals and commercial enterprises, liability insurance, workers' compensation, and business interruption insurance.
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...not involve risk sharing with private insurers, although risk sharing is common in federal credit programs./21
The Government as Insurer of
In the form of risk sharing used in the terrorism risk insurance program, the federal government serves as a reinsurer by providing a backstop for the catastrophic losses of private insurance companies (primary insurers) that offer commercial property and casualty insurance. That backstop guarantees the availability and affordability of private insurance coverage for losses stemming from terrorist attacks (see Figure 1).
Private insurers bore most of the financial losses suffered by commercial properties and firms from the terrorist attacks on
TRIA was initially intended as a temporary measure to provide catastrophic federal reinsurance for risks from terror- ism, and that reinsurance was offered without charge. The persistence of risks from terrorism led to several reauthorizations of the program, which is now authorized through
In 2016, the
How Risk Is Shared Under TRIA. Under TRIA, private insurers share risk through their deductibles and copayments, and the federal government shares risk by reinsuring against losses. In addition, policyholders share risk in the form of potential taxes assessed to recover some of the government's reinsurance payments after a terrorist attack.
TRIA requires all property and casualty insurers to offer terrorism coverage to their commercial policyholders. The government then provides reinsurance to those private insurers by agreeing to reimburse them for a portion of their terrorism-related losses up to a
That responsibility would involve direct payments to policyholders and, depending on the magnitude of losses, might also take the form of tax payments to the government.
Private insurers do not pay premiums to the federal government for reinsurance under TRIA, but in the event of a terrorist attack, they are responsible for paying claims to policyholders up to an initial deductible-currently set at 20 percent of each insurer's prior-year premiums for all lines of insurance covered by TRIA-and then a 20 percent copayment for losses above the deductible. The government then pays the remainder of the losses until the
21. Under the Price-Anderson Act, the federal government also shares some risk with the nuclear power industry. The act caps the industry's total liability, though the limit can increase over time, and established a nuclear industry mutual or self-insurance pool to cover losses above the primary insurance layer. See
22.
23. In the
24. Through postevent assessments (taxes) on policyholders, the government recoups any reinsurance payments for claims less than the aggregate retention amount. See
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Figure 1: Risk Sharing in the Terrorism Risk Insurance Program
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premiums paid by policyholders of commercial property and casualty insurance, including those without terror- ism coverage. The tax would be set to recoup 140 percent of the gap between the insurers' payments and either total insured losses or the retention amount, whichever is less. However, that payment and recoupment process has never been used, because there has not been a qualifying terrorist attack to trigger the program's backstop. After a very large attack, policymakers might be hesitant to require the collection of the requisite amount of taxes from all commercial policyholders, including those without terrorism insurance, by the deadlines currently specified by law, especially if the economy was weak.
The two illustrative scenarios in Figure 2 show the allocation of initial costs from hypothetical terrorist attacks in 2022 causing
* In the localized attacks,
* By contrast, in the more widespread attacks, insurers' deductibles and copayments would require them to pay
TRIA's Effects on Insurance Markets. Since its inception, TRIA has helped make terrorism insurance widely available and kept premiums low. Because the federal government bears the catastrophic risk and demands no upfront compensation for doing so, terrorism risk premiums constituted only 3 percent of the total amount of premiums charged for property and casualty insurance in 2021. The relatively low additional cost is one important...
25. Panel A depicts losses that are spread among a group of insurers with collective deductibles of
26. For any given amount of insured losses from a terrorist attack, the government's unrecouped outlays are the same in all scenarios in which insurers' collective payments are below the aggregate retention amount. But if losses from a terrorist attack amounted to
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Figure 2: Allocation of Potential Insured Losses From Terrorism in 2022 Under Two Scenarios
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...factor that has led around 90 percent of all firms to purchase coverage./27
As more time has passed without a major terrorist attack, the federal government has taken steps to shift more risk to the private sector. Each time TRIA was reauthorized by the
However, private insurance companies are still responsible for a relatively small proportion, 20 percent, of total covered losses above the amount of their deductibles, which leaves the federal government to bear most of the catastrophic risk.
Broader Applications of the TRIA Risk-Sharing Framework. Lawmakers are considering whether to use the framework of risk sharing under TRIA as a model for pandemic insurance./29
The coronavirus pandemic has demonstrated the gap in insurance coverage for business interruption stemming from a pandemic. Insurers can- not easily diversify such risks, which pose concerns about their solvency, and have generally excluded them from coverage since the SARS epidemic that originated in
In the absence of insurance coverage for business interruption stemming from pandemics, lawmakers responded to the coronavirus pandemic by establishing the Paycheck Protection Program, which has provided federal guarantees of loans to small businesses.
CBO anticipates that most of those loans will ultimately be forgiven, as expected when the program was established./31
Coinsurance of Gains and Losses in the Federal Crop Insurance Program
The
Lawmakers established the program in 1938 as part of the response to the Great Depression. Attempts by private insurers to market similar policies had met with little success./32
In 1980, lawmakers added explicit premium subsidies to the program and expanded the commodities covered, in part to reduce postdisaster supplemental assistance.
Premium Subsidies and Reimbursements for Operating Expenses. In the federal crop insurance program, private insurance companies sell policies to...
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27. When weighted by insurers' premiums, coverage is closer to 80 percent.
28. For an analysis of policy options, see
29. Pandemic Risk Insurance Act of 2021, H.R. 5823, 117th
30. Firms were eligible for more than one loan.
31. As of
32.
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...agricultural producers and service them, but the government sets the annual premiums for those policies and pays a substantial portion of the premium costs on behalf of the agricultural producers. Additionally, private insurers are reimbursed for a portion of their administrative and operating expenses; the reimbursement amounts depend on the type of insurance policies they sell and service./33
The federal government sets premiums with the goal of matching total premiums with the expected nationwide losses associated with crop insurance policies./34
The FCIC does not adjust premiums to reflect differences in risks among producers or across geographic regions, as a private insurer would.
The government subsidizes producers' purchases of crop insurance by varying amounts. Premium subsidies, which are the portion of the premium costs the government pays on behalf of policyholders, are set as a percentage of the policy premiums and can range from 38 percent to 100 percent. Generally, those subsidies are proportion- ally larger for policies that cover a smaller proportion of losses or larger parcels of land./35
The subsidies and lack of risk-based pricing give the policyholders less incentive to take measures to manage their risks, such as diversifying their planting locations and the crops they plant.
The government subsidizes premiums for agricultural producers to achieve high participation and coverage levels. Historically, when agricultural producers have suffered significant losses, the government has given them supplemental financial assistance. For example, the Bipartisan Budget Act of 2018 provided
Demand for such assistance would have been higher in the absence of crop insurance and could have been lower with higher rates of coverage.
How Risk Is Shared in the Federal Crop Insurance Program. Through a cooperative financial agreement known as the Standard Reinsurance Agreement, the government shares with private insurers some of the premiums and the risk it would otherwise face in a wholly federal program of crop insurance./37
The provisions for the risk sharing are complex, which probably benefits private insurers and hurts taxpayers, but the main principle is simple. Under that agreement, the government makes net payments to the private insurers when there are gains-that is, when premiums exceed claims for each insured crop (see Figure 3). Conversely, the private insurers make net payments to the government when there are losses (that is, when claims exceed premiums). Because the government tries to set premiums to match the long-run expected cost of the claims, those gains and losses do not drive the cost of the program.
The program allows for adverse selection by insurers because it gives them the choice of allocating policies between two funds (essentially, separate risk pools)-the
That choice creates profitable opportunities for the insurers because the government does not set risk- based premiums. Consequently, private insurers seek to retain the policies that they expect to be profitable and pass the others to the government. Insurers use the
33. Government subsidies to approved insurance providers for administrative and operating expenses range from 12 percent to 21.9 percent of premiums depending on the type of insurance policies sold. Those subsidies exceed
34. By law, a policy's premium may not rise by more than 20 percent from year to year.
35. Federal Crop Insurance Act, 7 U.S.C. Sec. 1508(i)(1); and
36.
37.
38. For more information, see
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Figure 3: Risk Sharing in the Federal Crop Insurance Program
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...35 percent) they retain. They use the
The allocation of gains and losses in each fund varies, which affects the cost of the program and the willingness of private insurers to participate.
* First, the allocation depends on each insurer's loss or gain-specifically, the loss ratio (the ratio of claims paid to total premiums)-so that the larger each insurer's losses or the greater its gains, the larger the share of losses or gains the government retains (see Figure 4). That system reduces the volatility of insurers' returns and increases the volatility of the program's federal cost.
* Second, in the
* Third, for policies allocated to the
Adverse selection raises the cost of risk sharing to the government and is only partially offset by requiring private insurers to share 6.5 percent of their cumulative gains and losses from both funds with the government. In most years, private insurance providers have earned gains on their crop insurance portfolios and, thus, have conveyed a portion of those gains to the government.
Components of the Government's Total Cost of
In crop year 2021, the program's net cost was
The risk-sharing provisions of the crop insurance program can result in a very uneven distribution of gains and losses./39
Over the 2010-2021 period, the risk-sharing agreements resulted in the private insurers' receiving most of the gains. Of the
Over 100 commodities were covered, along with livestock and dairy products, and insurance take-up and the level of coverage varied widely. Producers pur- chased insurance for more than 90 percent of the planted acres of corn, cotton, and soybeans, and for 85 percent of the acreage for wheat, but much less for other crops. The subsidies disproportionately flowed to the largest producers./41
Reinsurance Policies Purchased by the National Flood Insurance Program
The
39. The dates of crop years are different for different crops. See
40.
41.
42.
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Figure 4: Risk Sharing Under the Current Standard Reinsurance Agreement, by Fund and Loss Ratio
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...private insurers, but those companies bear none of the risk associated with paying claims./43
If the NFIP's premiums and reserves are insufficient to pay all claims, the program can borrow from the
Lawmakers created the program in 1968 in response to the costly postdisaster relief the government provided following Hurricane Betsy in 1965. Private insurers had withdrawn coverage after experiencing large losses from the
How Risk Is Shared in the NFIP. The NFIP shares risk with the private sector by purchasing reinsurance from private companies and using securities to transfer risk to private investors.
Reinsurance Purchases. For most of its existence, the NFIP bore all the risk of its coverage, but lawmakers approved risk sharing with private reinsurance firms in the past decade. (The reinsurers are global firms that specialize in diversifying catastrophic risk and are separate from the insurers who market policies and adjust claims for the NFIP.) The Biggert-Waters Flood...
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43. The Biggert-Waters Flood Insurance Reform Act of 2012 included provisions that allow wholly private flood insurance policies to meet the mandatory purchase requirement. Those policies are generally marketed to more expensive properties that want greater coverage than the NFIP provides. The private flood insurance market is a small fraction of the size of the NFIP. See
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Figure 5: Composition of the
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Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014 authorized the NFIP to purchase reinsurance from private companies. Accordingly, the NFIP has transferred some of its risk by purchasing reinsurance policies every year since 2017. The NFIP pays for the purchases by giving up some of the premiums that it collects.
The NFIP's reinsurance contracts are similar to those that private insurers enter into to lessen their exposure to natural disasters. Under the reinsurance contracts, private reinsurers agree to reimburse the program for a share of total program losses above an agreed-upon deductible, which is typically large (see Figure 6). Although the details of each reinsurance contract vary, they have all covered a share of the losses between
In 2017, claims from Hurricane Harvey totaled
As of
Because the government must pay a fair market price to purchase reinsurance, those purchases are not likely to reduce the government's costs of operating the NFIP over time. In its baseline projections, which reflect the assumption that current laws governing federal taxes and spending generally remain unchanged, CBO anticipates that the NFIP will pay premiums to private reinsurers that are at least as high as the payouts it will receive from the reinsurance policies, plus a return on the reinsurers' capital. Otherwise, private reinsurers would not enter into the contracts.
Catastrophe Bonds. In 2018, the NFIP began taking additional steps to transfer risk to private financial firms and to promote private-sector participation in flood- risk management by using securities, called catastrophe bonds, issued in capital markets. Those bonds allow the government to forgo scheduled payments of interest and principal, in part or in full, in the event of specified flood losses. After a covered event, those forgiveness provisions would enable the NFIP to use the money that would have otherwise been paid to bondholders to pay catastrophe-related flood claims. Bond purchasers are compensated for those provisions by receiving a higher interest rate before disasters strike./45
As an alternative to traditional reinsurance contracts, catastrophe bonds provide a few advantages to the NFIP./46
The bonds avoid the risk that the private reinsurer might default (called counterparty risk); they have a longer duration than standard reinsurance policies (typically three years), and they allow diversification of risk in larger capital markets that can more easily bear losses./47
Each of those attributes might increase the capacity of the NFIP to absorb losses without borrowing from the
44.
45.
46.
47. Counterparty risk can be costly. Defaults and delayed payment by private mortgage insurers occurred during the 2007-2009 financial crisis and increased the losses experienced by
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Figure 6: Risk Sharing in the National Flood Insurance Program
Table 2: Risk Sharing in the National Flood Insurance Program, Calendar Years 2017 to 2022
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...the economy or the stock market. However, the costs of issuing a catastrophe bond, whose structure is legally complex and requires the creation of a trust account, can be significant./48
The NFIP uses catastrophe bonds to help cover the risk of flooding stemming directly from named storms. (A named storm is a storm or storm system that the
As of
Why the Government Uses Reinsurance and Catastrophe Bonds. Private insurers use reinsurance and catastrophe bonds in part to spread the cost of financing over a longer period of time and to reduce the need to raise capital to cover catastrophic losses, but those motivations are less significant at the federal level. Reinsurance and catastrophe bonds can lower the variability of the NFIP's annual costs and can be expected to reduce its need to borrow from the
48. For more information on catastrophe bonds and other insurance- linked securities, see
49.
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...a catastrophic flood, is small compared with the total amount of the
First, the development of a reinsurance market for risks from flooding may demon- strate the feasibility of risk sharing with primary insurers and thereby support the emerging private market for flood insurance. A robust private market requires a stable reinsurance market. Second, prices for reinsurance can signal changes in how the risk of flooding is being perceived, which could be particularly important as the effects of climate change increase.
The NFIP began to develop the market for reinsurance against flood risk (and to use catastrophe bonds) only in recent years, and it may take time for the market to mature and for risk premiums, and thus the NFIP's costs, to decrease. In the short run, the NFIP may face "novelty premiums" for new transactions covering flood risks; but more liquidity should develop in the market as reinsurers' willingness to assume more risk increases along with their experience. Those premiums should fall with more annual reinsurance transactions.
The large number of private reinsurers involved with the NFIP creates some trade-offs. Using many reinsurers helps broaden the market, diversify risk, and reduce counterparty risk (the risk that the company the government contracts with will fail), but it could also lose the benefits from economies of scale and prompt higher transaction costs than if fewer reinsurers were involved.
Budgetary Effects of Risk Sharing
The budgetary effects of public-private risk sharing depend on the structure of the risk sharing and the amount of risk that remains with the federal government. Additionally, public-private risk sharing can indirectly affect the budget if the risk-sharing mechanism changes the number of insurance policyholders. Some of those budgetary effects may be better represented by accrual estimates that summarize anticipated cash flows over many years in net-present-value terms than by esti- mates made on a cash basis, which measure flows year by year over 10 years (see Table 3).
Measuring the Cost of Federal Insurance Programs
As it does for most of the government's activities, the federal budget records the costs of insurance programs on a cash basis, which means that a program's net effect on the budget is calculated as the difference between its cash inflows (from premiums, fees, and other income) and its cash outflows (primarily to pay claims for covered losses). For future years, those inflows and outflows are typically estimated using methods that account for the differing probabilities of various outcomes.
Budget Projections. For all federal insurance programs, CBO's budgetary projections reflect anticipated cash flows in the years when those flows are expected to occur, taking into account each program's unique features and statutory framework. For programs whose cash flows are affected by events that have a small chance of occur- ring-such as the terrorism risk insurance program- CBO creates a wide range of scenarios in which the frequency of events and magnitudes of potential losses (including potentially catastrophic losses with a very small likelihood of occurring) differ. The agency then calculates a weighted average of the outcomes of the scenarios, accounting for the estimated probability of each scenario.
CBO uses different approaches to project costs for the flood and crop insurance programs. For projections related to the NFIP, CBO uses
For projections related to the federal crop insurance program, CBO estimates future crop prices, planted acreage, and production. Those projections take into account the supply of and demand for crops (including imports and exports) and interrelationships among crops./52
After taking all those factors into account, CBO generates expected premiums and subsidies and an expected loss ratio (largely on the basis of historical patterns), which is used to forecast expected payouts for claims.
50.
51. Under
52. If the demand for corn rises, for example, more land might be devoted to planting corn and less to soybeans, which would affect the prices of both crops. Changes in relative prices also lead to substitutions between crops. For example, an increase in corn prices would make wheat more attractive for use as feed, and the resulting increase in wheat prices would raise the demand for, and thus the price of, oats.
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Table 3: Factors Affecting CBO's Budget Estimates for Selected Federal Insurance Programs
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The cash-based measures that are used to account for insurance programs in the federal budget generally focus on the coming 10 years, called the budget window. However, some federal insurance programs, including deposit, pension, and terrorism insurance, have effects on the budget that may extend years or decades beyond the standard budget window. When a significant share of a program's cash flows is expected to occur outside the budget window, or when there is a mismatch in the timing of receipts and expenditures, the budget period may not be long enough to accurately indicate an insurance program's expected net effects on the budget over the long term. To make well-informed choices about federal insurance programs, policymakers need accurate measures of the extent to which a program's income is expected to cover the costs stemming from the risk assumed by the government.
Accrual Measures. The difference between cash and accrual accounting lies in the timing of when the commitment (or collection) of budgetary resources is recognized. Accrual measures summarize in a single number the anticipated net financial effects at a specific point in time of a commitment that will affect federal cash flows years into the future.
Accrual-based measures can help provide more information about the costs or savings of federal insurance programs that have long-term effects on the budget. That additional information could allow for more meaningful comparisons of the costs of competing programs and a greater focus on risk when setting premiums. Accrual measures may be especially useful for programs in which there are significant timing lags between outlays and receipts (as with the obligations of the
Using accrual measures has several disadvantages, however. They are less transparent and verifiable than cash measures and have a wider range of uncertainty. In addition, using accrual measures to project the costs of federal insurance programs would complicate budget reporting./53
Measures That Account for Market Risk. Following standard procedures for the federal budget, CBO's projections of the budgetary effects of federal insurance programs are not adjusted for market risk, but the agency has provided some estimates on a supplemental basis that adjust for market risk for pension insurance./54
(Current law requires adjustments for market risk for the Troubled Asset Relief Program. Such adjustments have been used in the past for
To make those adjustments, CBO uses accrual measures- specifically, it makes fair-value estimates that use market prices, when available, to measure net costs to the public./56
Incorporating the cost of market risk increases the estimated costs or reduces the estimated savings of federal insurance programs.
In CBO's view, fair-value estimates provide a more comprehensive measure of costs and help lawmakers more fully understand the trade-offs between certain policies. That information could be particularly important for understanding the net costs of certain programs, such as the pension and deposit insurance programs, that insure against financial risks. (The NFIP's purchases of reinsurance automatically incorporate the cost of market risk.)
However, fair-value estimates have some characteristics that limit their usefulness. They can be more volatile and uncertain than cash estimates, less transparent, and less useful for projecting the effects of policies on federal debt./57
Fair-value estimates would be less useful for programs that have little market risk, such as federal crop insurance and flood insurance.
Measuring the Costs of Risk Sharing in Federal Insurance Programs
CBO uses its baseline budget projections as a reference point to measure the cost of policy changes. Those projections reflect the assumption that current laws governing federal taxes and spending generally remain unchanged. The cost or savings of risk sharing in federal insurance programs depends on the structure of the risk-sharing mechanism and on the relative timing of the government's outlays and receipts. That relative timing can vary widely among federal insurance programs on the basis of the risk-sharing mechanisms they use.
Costs of Federal Reinsurance: The Terrorism Risk Insurance Program. In its baseline budget projections published in
When the federal government shares risk with private insurers by serving as a backstop for catastrophic losses, the budgetary costs of that risk sharing depend on the amount of risk left with the private sector. TRIA...
53.
54.
55.
56. The fair value of an asset is the price that would be paid for that asset in an orderly transaction (one that occurs under competitive market conditions between willing participants and that does not involve forced liquidation or a distressed sale). For an analysis of market risk and how it can be incorporated into cost estimates and baseline budget projections, see
57.
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...provides catastrophic federal reinsurance against the risk of terrorism, and that reinsurance is offered with- out charging premiums. By law, the government would recoup its costs by assessing a tax on all policyholders of commercial property and casualty insurance if a terrorist attack occurred. That recoupment mechanism has yet to be tested, however, and after a very large terrorist attack, lawmakers might be reluctant to require the collection of such taxes from commercial policyholders, including those without terrorism insurance, by the specified deadlines-the more so if the economy was weak./58
Lawmakers have reauthorized TRIA many times, and each reauthorization has gradually shifted more risk to private insurers through higher deductibles and copayments. CBO recorded budgetary savings for the two most recent reauthorizations, largely because the tax rate (the recoupment amount of the assessments) was set to yield 140 percent of all federal outlays, up from its initial level of 100 percent, so expected revenues from the assessments exceeded expected cash outlays for the government's share of costs./59
Costs of Coinsurance: The Federal Crop Insurance Program. In CBO's baseline projections, the federal crop insurance program has net spending of
On average, crop insurance policies have generated premiums in excess of total claims (and thus underwriting gains) for private insurers. Between crop years 2010 and 2021, the federal crop insurance program made average annual payments of
With crop insurance, the primary purpose of the risk sharing is to provide incentives for private companies to sell and service the insurance policies, not to reduce budgetary costs. In general, budgetary costs can be lower with coinsurance than if the government bears all the risk. In this case, however, because the risk-sharing agreements allow private insurers to retain the majority of the premiums from low-risk producers (which would otherwise represent income received by the government) while passing on the bulk of the risk of losses from high- risk producers to the government, the agreements tend to increase the overall cost to the federal government.
Costs of Private Reinsurance: The National Flood Insurance Program. CBO projects that, under current law, the NFIP's operations would result in net costs of
Under current law, the program is increasing premiums-in most cases, by a maximum of 18 percent annually-on all policies for which premiums do not...
58. Legislation would probably be required if lawmakers wanted to delay, reduce, or eliminate those taxes to avoid further burdening insurers and their policyholders after a major attack. See
59.
60. Over the 2022-2032 period, CBO estimates that the program's expenses would include about
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Table 4: CBO's Baseline Projections for Selected Federal Insurance Programs, 2022 to 2032
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...fully cover the expected costs./61 As premiums increase, along with additional revenues from assessments and surcharges, the structural deficit of the program will steadily decline over the coming decade, CBO estimates./62
By 2030, total revenues will have grown enough to exceed the program's expenses on an annual basis, even though a small proportion of policies at that time will probably still reflect rates that are below full risk.
Whether the NFIP's reinsurance purchases increase or decrease the program's short-term budgetary costs depends on the timing of large flooding events. Through
The reinsurance purchases resulted in outlays of about
So far, the NFIP has not realized any returns on its catastrophe bonds but has paid nearly
The program's first catastrophe bonds (which were issued in 2018) expired on
In the long run, purchasing private reinsurance or issuing catastrophe bonds will not save the program money, because private insurance companies charge market rates for risk sharing. CBO estimates, on a probabilistic basis, that the reinsurance purchases have an expected net cost in the current year on a cash basis. Because those purchases are at market prices, they should, in principle, have no cost on a fair-value basis.
Indirect Effects of Risk Sharing. The direct effects of risk sharing are determined by how much it increases or decreases the costs to the government. However, risk sharing can also have important indirect effects based on the extent to which it helps facilitate or hinders the development of well-functioning and well-priced insurance markets. Public-private insurance markets with risk-based pricing can provide incentives for people and businesses to mitigate risks, reducing overall claims. Additionally, insurance markets can reduce the uncertainty of the recovery from catastrophes and other unforeseen adverse events, making the economy more resilient. Each of those factors can help reduce the need for assistance from the government in the wake of catastrophic events.
CBO's estimates of the costs of federal insurance pro- grams do not reflect the possibility of reduced emergency spending. In the budget, most such spending-for example, on disaster assistance administered by
61. Under current law, a small proportion of subsidized policies, such as those covering vacation homes and those that have experienced repetitive losses, are subject to 25 percent annual increases.
62. In 2012, lawmakers authorized a reserve fund to help cover future claims and debt expenses from catastrophic losses and authorized
63.
64. Although catastrophe bonds provide three years of coverage, the estimate of premiums captures only the amount for the first year of coverage, not the amount for the other two years.
* * *
List of Tables and Figures
Tables
1. Effects of Risk-Sharing Mechanisms on the Federal Budget ... 3
2. Risk Sharing in the National Flood Insurance Program, Calendar Years 2017 to 2022 ... 19
3. Factors Affecting CBO's Budget Estimates for Selected Federal Insurance Programs ... 21
4. CBO's Baseline Projections for Selected Federal Insurance Programs, 2022 to 2032 ... 24
Figures
1. Risk Sharing in the Terrorism Risk Insurance Program ... 9
2. Allocation of Potential Insured Losses From Terrorism in 2022 Under Two Scenarios ... 10
3. Risk Sharing in the Federal Crop Insurance Program ... 13
4. Risk Sharing Under the Current Standard Reinsurance Agreement, by Fund and Loss Ratio ... 15
5. Composition of the
6. Risk Sharing in the National Flood Insurance Program ... 18
* * *
About This Document
This report, which is part of the
CBO seeks feedback to make its work as useful as possible. Please send comments to [email protected].
Director
* * *
The report is posted at: https://www.cbo.gov/system/files/2022-11/57615-Public-Private-Risk-Sharing.pdf
Center for Rural Affairs: NEW GUIDES OUTLINE COVER CROP INITIATIVES, INSURANCE GUIDELINES
Congressional Budget Office: 'How CBO Analyzes Public-Private Risk Sharing in Insurance Markets' (Part 1 of 2)
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