Most state natural catastrophe programs do not charge premium rates that reflect the full risk of loss, according to a new report by the Government Accountability Office (GAO).
GAO said that six of 10 states charged rates that do not fully reflect risk of loss, potentially discouraging private market involvement.
State natural catastrophe programs in Alabama, California, Florida, Louisiana, Mississippi, North Carolina, New Jersey, South Carolina and Texas were reviewed for the report.
GAO also found that while most states were taking steps to address mitigation, support of public policy goals varied across the programs.
Officials of nine of the 10 state programs reviewed told GAO they are addressing or considering mitigation, including providing mitigation credits or attempting to develop a more effective mitigation plan.
According to GAO, public policy goals are: charging premium rates that reflect the risk of loss; encouraging broad participation; encouraging the private market to provide natural catastrophe insurance; and encouraging mitigation.
GAO also found that some state-run programs do not use reinsurance or capital markets to protect against catastrophic losses because they are structured to post-fund losses. As a result, many of these programs are at financial risk.
The report also identified four proposals contained in past proposed legislation that would increase the federal role in natural catastrophe insurance and could affect the reinsurance industryÃ¢â‚¬â„¢s participation in natural catastrophe insurance market.
These proposals include: facilitation of risk transfer; guarantees of state pre- and post-event bonds; a federal lending facility for qualified state natural catastrophe programs; and a federal reinsurance program.
However, GAO found that the proposals would involve trade-offs that would have to be balanced. For example, while these proposals could lower premium rates for and increase public participation in state natural catastrophe programs, they could discourage private market participation and mitigation efforts and increase taxpayer exposure to potential costs.