Multiple Challenges Make Expanding Private Insurance Coverage Difficult, U.S. Government Accountability Office Explains

Feb 4, 2014


In response to a request by members of Congress to study the possibility of private insurers providing more comprehensive insurance, the U.S. Government Accountability Office (“GAO”) issued a January 30, 2014 report addressing (1) what perils homeowners policies typically cover and exclude, (2) how exclusions impact homeowners and taxpayers and the potential benefits of more comprehensive coverage, and (3) what additional perils insurers might be willing to cover and what challenges are associated with expanding policies. 

In creating the report, the GAO reviewed homeowners insurance policies and conducted interviews with the National Association of Insurance Commissioners, other industry organizations, and consumer advocates and risk experts, among others.  Feedback was also solicited from the Federal Insurance Office.

Notably, the GAO report indicates that insurers could face critical regulatory challenges in offering more comprehensive coverage.  One of these might be the uncertainty of state regulatory approval for higher premiums that more comprehensive coverage would likely demand.  According to insurers interviewed as part of the report’s research, convincing regulators to approve rates that insurers deem appropriate for certain risks has been difficult.  However, one regulator who was also interviewed said that the inability to charge higher risk-based rates might not be an issue, inasmuch as loss experience is a critical factor that drives rates.  If insurers faced greater losses by covering more perils, they would likely be able to justify and gain approval for higher premiums. 

Other industry participants said that different rate-setting and approval processes could make it difficult for insurers to sell more comprehensive policies with risk-based rates across states.

Of course, offering coverage for a broader set of perils would require insurers to have the capital necessary to pay claims without risking insolvency.  Notwithstanding, insurers may not be willing to maintain the higher capital levels needed for insuring against higher risk events if that capital could be used for other insurance or investment purposes. 

Industry members said that the unpredictability of catastrophes could prevent insurers from accurately calculating and setting aside the sums necessary to cover losses.  One insurance regulator suggested that, even if insurers could charge rates that reflected the full risk of disasters, they still may not be able to offer coverage for additional perils.

For additional coverage to be possible, insurers would need the ability to conduct actuarial analyses and accurately model risks involved with greater homeowners coverage, the GAO explained.  Some industry participants interviewed thought this capability may already exist or could be developed for floods and earthquakes–the two perils they said hold some promise for greater private insurer involvement.  In order to offer coverage for flood or other perils, insurers would have to be able to charge risk-based rates, a critical part of meeting their policy obligations to consumers and staying solvent, leading to increased concern over higher premium costs, policy affordability and consumer demand.

Insofar as natural catastrophes, those interviewed said that mitigation efforts, effective building codes and sound land-use policies could help reduce risks.  Others highlighted how building codes set by states can differ, which can lead to inconsistencies that make it difficult to ensure properties can withstand loss events.  It is important for the insurance industry to encourage consumers to become better informed about their risks and insurance so that they could take available steps depending on where they live to mitigate losses, respondents added.

The catastrophic nature of flood and other natural losses may require a continuing role for federal and state government in financing coverage.  The GAO recently reported on strategies to encourage greater private-sector involvement in flood insurance that included the possibility of insurers charging homeowners full risk rates with the government providing targeted subsidies to help with affordability.  Yet another option is the combination of greater private-sector involvement and the government acting as a reinsurer by providing a backstop to private insurers for losses over a certain amount.

To access the report Web page and full report, click here.



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