Risk distribution for catastrophes must change: Munich Re

A recent Munich Re report says “existing mechanisms for distributing the risk between the private insurance sector, the state, and the federal government should be reconsidered” in light of the hurricane seasons of 2004 and 2005.
The report, entitled ‘The 1906 earthquake and Hurricane Katrina,’ was released in recognition of the centennial anniversary of the 1906 San Francisco earthquake in April. The report notes lessons learned about the San Francisco earthquake are still applicable, given “the 70% odds of a large earthquake striking the Bay Area within the next 30 years.”
The report notes how San Francisco suffered as much from the result of fires triggered by the earthquake as it did from the initial shock waves themselves. Similarly, Hurricane Katrina was devastating not only because of its initial wind damage, but also because of the subsequent water damage that destroyed parts of New Orleans.
The Munich Re report goes on to note that secondary perils following an initial cataclysmic event continue to pose problems for providing adequate insurance coverage.
“Two problem areas have been identified above which would merit reconsideration and revision,” the report states. “The distinction made between wind and water damage in hurricanes and between shock and fire damage in earthquakes.
“Both problems are amenable to an easy solution which involves amending current insurance practice
“Getting the conditions right is more important than government involvement in insurance. A situation like the current one, in which many consumers decide to do without insurance and can rely on the government to bail them out after a major disaster, renders and efforts aimed at proactive loss prevention almost futile.”