The Role
of Government in the Catastrophe Insurance Industry: An Analysis of the
National Flood Insurance Program
by Lauren Mattucci
The purpose of this research is to determine the sources of
profitability for federal flood insurers in the United States. The study uses
panel data to assess factors that affect the aggregate loss ratio of all flood
insurers in a given state at a given time including, the total value of direct
premiums written, the value of all losses paid in claims, the median home
value, and the value of total premium reserves for a given state during the
years 2010-2014. To frame the discussion regarding the role of government in
the catastrophe insurance industry, it follows that the goal of the public
sector, namely, providing affordable insurance, often clashes with the goal of
the private sector; generating profit. Many believe this friction is an
indirect result of the adverse incentives created by catastrophe insurance
regulation which incentivizes the behavior of private insurers in such a way
that they are reluctant to insure those risks that are unpredictable, have a
high variance, and will impose severe costs to capital. More specifically, due
to the tax regulation imposed on risk capital, property casualty insurers are
neither inclined to accumulate premium reserves in relatively low loss years
nor to access the financial markets for risk capital in order to pay claims in
peak disaster years. In the case of flood insurance, the National Flood
Insurance Program has effectively replaced the market mechanisms for flood
insurance by acting as the authority for price setting, premium allocation,
loss payments, and regulation. The consensus in existing research is that factors
inhibiting the National Flood Insurance Program’s ability to operate
efficiently include the moral hazard problem with respect to subsidized pricing
schemes, the adverse selection problem, and asymmetric information with regards
to homeowner’s actual risk of flooding. Using the above generalized framework,
the relative efficiency of the National Flood Insurance Program is evaluated
from both an empirical and theoretical perspective. The results from the panel
data analysis show that for any given state, aggregate losses paid will
increase a flood insurers’ loss ratio or consequentially decrease their
profitability. Taken together, this paper argues that the role of government in
the catastrophe insurance industry and in the federal flood insurance industry
in particular, should be to utilize an indirect role to foster the growth of an
efficient private catastrophe insurance market through properly structured
regulation and tax incentives.
Investigating the Impact of Public Social Expenditure on Income Inequality Across Nations
by Jake McLinden
The purpose of this study is to examine whether greater levels of public social expenditure are in fact causally related to decreased levels of income inequality across countries over time. Understanding the impact of welfare spending on income distribution is of particular importance today because the United States currently ranks among the highest in terms of unequal distribution of income after taxes and transfers among developed nations, while congressional opposition to progressive welfare policies is reaching its strongest point in decades. By engaging in this study, I hoped to show empirically whether higher levels of social government spending does in fact lead to reduced economic inequality. In order to maintain a holistic view of the causes of income inequality, I also examine a number of other variables that one would expect to influence income distribution, including: aggregate and per capita income; union density (the net union membership as a proportion of wage and salary owners in employment); and the dependency ratio (the proportion of the population aged under 15 and over 64 as percent of total population). To measure these variables, I have assembled cross-sectional time series data on 16 different European countries over a ten-year period from 2004-2013. Data on income inequality was assembled using the country level Gini coefficient by year, pulled from the OECD database. Levels of public social expenditure as a percentage of GDP, GDP, and GDP per capita were also taken from the OECD database. Data on union density and dependency ratios was provided by the EUROSTAT database. The regression results suggest that a greater level of welfare expenditure effectively reduces income inequality. For countries such as the United States that preach the value of free market economics, these results should incentivize policy implementations that broaden and strengthen the social safety net for those not receiving the benefits of laissez faire capitalism. My results also show that when a greater proportion of the labor force is represented through unions, income will be more fairly distributed throughout society. Legislators concerned with income inequality should seek to implement policies incentivizing union membership.
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