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New York Times: Cutting the Cost of Risk

Some states are gambling they won’t experience a major disaster and are canceling reinsurance policies whose premiums are viewed as too high in light of cash-strapped budgets, reports the New York Times. AnalysisOnline explores this topic and looks back at risk stories so far in 2009.

When they need more cash, individuals will sometimes think 'Why not drop insurance?' This is particularly the case if no emergency has occurred for a while that might be covered by insurance.

States are in a similar spot; state budget shortfalls now and for the next year or two at least are legendary (see Center on Budget and Policy Priorities article that reports at least 48 states have addressed or still face budget shortfalls for Fiscal Year 2010 totaling $165 billion or 24 percent of their state budgets).

Many states are tired of paying costly premiums for reinsurance that’s rarely needed, notes the New York Times, which gives the example of Massachusetts; premiums there have reached $80 million a year. If a disastrous storm hits, the reinsurance will pay $900 million in claims, but if there is no disastrous storm, of course, then nothing.

Several states are gambling that a disaster won’t occur; or, if it does, it won’t exceed their ability to pay for it through revenues and by borrowing. California, Florida, Louisiana and Texas are seeking legislation in Congress to have the federal government co-sign on damage loans after natural disasters.

If the disaster occurs and is large enough, this approach could leave affected states and the federal government with a repayment responsibility that might last for decades, the New York Times says.

Playing the Odds

Memories of the 2004-2005 hurricane seasons may be dimming. The 2004 season’s $42 billion in costs was a record that stood only for a year when the 2005 season unleashed more than $100 billion in damages.

On August 6, the National Oceanic and Atmospheric Administration revised downward its expectations for the current hurricane season (lasting through October); it now predicts a 50 percent probability of a near-normal season, a 40 percent probability of a below-normal season and a 10-percent probability of an above-normal season.

But, hurricanes (and storms) are just one kind of disaster that can befall a state

Catastrophe Bond Market

Created in 1997, the Catastrophe Bond Market experienced its third most active year in 2008 amid the financial turmoil that gripped nations around the world, according to The Insurance Journal.

Catastrophe bonds are risk-linked securities that are sold to investors to transfer risk away from a sponsor (or entity likely to incur the brunt of the disaster, New Orleans in Hurricane Katrina, for example). If specified triggers occur, the principal is lost and paid to the sponsor. Catastrophe bonds are an alternative to traditional, expensive reinsurance. When there is no disaster and the triggers don’t occur, investors get what frequently is a generous return.

On the word of a calmer outlook for this year’s hurricane season, the Catastrophe Bond Market has moved to a new high for 2009 with investors betting insurers are less likely to collect this year due to the revised forecast, reported Bloomberg. Buyers of cat bonds may earn as much as 17 percentage points above benchmark rates for taking the risk that a disaster could cost them their principal, Bloomberg said, based on its data.

Reuters provided an update on the Catastrophe Bond Market from GC Securities that illustrates how changing expectations about the likelihood of disasters affects the spreads (or returns) investors might see. As world financial markets calm and if the hurricane season is relatively benign, spreads tend to narrow; but they could widen again, the report notes, if conditions reverse (click here and here).

Risk Stories in 2009 So Far

AnalysisOnline has sought to give perspective to news stories and policy developments related to risk in several different arenas: from San Francisco reportedly having the highest risk of tuberculosis of any major U.S. metropolitan area to the odds of economic risk continuing through 2011 or 2012.

AO has also alerted its readers to the growing world risk of chronic illness, as red-flagged in the Global Risk Report published this year (and annually) by the World Economic Forum, a resource that is one of the finest reads on risk factors affecting nations around the world.

With healthcare such a dominant policy issue in 2009, AnalysisOnline has explored numerous resources and science-based research related to healthcare risk. Some of the most riveting assessments have come from the Robert Woods Johnson Foundation’s State of the States Report, RAND Health and RAND Health Compare (web site), and two valuable resources to aid consumers in knowing what questions to ask health practitioners and how to more astutely assess the risk that certain health threats may pose to them (see AOH article, “Unhealthy Economy Passes it On”).

But, the premiere risk story so far in 2009 is one that is a re-emerging concern as schools gear up for vaccination programs for youngsters upon their return to classes: the Swine Flu.

In April, when there were some 73 confirmed cases worldwide, 40 of them in the United States, AnalysisOnline provided an original resource, “Understanding Risk: The Epidemiology of People” to help readers understand the complexities inherent is risk of disease.

Later in April, when the World Health Organization raised the alert status for swine flu globally and said a pandemic was imminent (when there were 150 swine flu cases in 9 countries), AnalysisOnline gave readers perspective on the terms pandemic, epidemic, and disease outbreak; AOH explained why “pandemic,” as bad as it sounds, does not relate to disease severity, but to how a disease has spread based on WHO classifications. We sought to allay public fears by pointing to news media outlets that struck a well-reasoned, science-based tone in their coverage.

In May, AnalysisOnline examined research on how worldwide industrial farm production processes may contribute to the risk of disease and the spread of swine flu; we presented Pew Center research on the impact of Americans being increasingly disassociated from their food supply; we discussed how the use of antibiotics and other drugs in livestock farming has grown and could contribute to risk by viruses becoming immune to treatments. And we also talked about efforts by government to prepare for a pandemic, aided significantly by RAND Health, have progressed.

Thus, by early June, when the World Health Organization declared the swine flu (or H1N1 virus) had reached the pandemic stage, AnalysisOnline readers had a depth of perspective on the subject beyond many casual news readers.

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