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Coming Monday: Medicare celebrates a birthday. houston Chronicle | chron.com | Sunday, July 29, 2012 | Section B xxx InSURAnce To fix the mess at TWIA, focus on the fundamentals By Seth J. Chandler successful. One solution is to reduce the magnitude of corre- Texas has been spared a major lated risks. There is an awful lot tropical storm so far this hur- of research showing that we can ricane season, but that doesn’t lessen the damage hurricanes diminish the fact that the state is cause through hardening: very woefully unprepared to deal with tough building codes and other potential losses. If a significant infrastructure improvements. A fraction of possible Category 4 hardened site in Galveston, after or Category 5 hurricanes were all, is currently considered safe to strike, the Texas Windstorm enough to house the smallpox Insurance Association (TWIA) virus. Burying power lines al- would not be able to fully pay lows people to return to their claims in Harris, Galveston, Bra- homes sooner, which reduces zoria and possibly other Texas the losses from a storm. Limiting counties. Since 2009, neither the publicly subsidized insurance state of Texas nor insurers in plans to lower levels of cover- Texas are legally responsible to age and requiring individuals to make up the shortfall. In 2013, obtain private insurance for the let’s hope the Legislature stops excess also reduces the magni- rearranging deck chairs on the tude of correlated risk held by Titanic and explores more funda- government plans. Lessening mental reform. the economic consequences of It’s not just a major hurricane hurricanes could attract private problem or a Galveston problem. insurers back to the Texas coast, Right now, TWIA will not be make state schemes less expen- able to pay with cash on hand or sive, and make people feel more reinsurance funds many claims secure. The biggest bang for the throughout Texas — not just the buck will come from hardening most densely populated counties the densely populated counties. — in the event of a serious storm. A second approach is to try Instead, TWIA will be forced to to decorrelate the risks. Texas borrow a limited sum, possibly at could pool its windstorm risk high rates, to pay the claims. The with California’s earthquake risk, state will then have to impose Washington state’s volcano risk significant surcharges on various or windstorm risk from another forms of insurance over a num- region. Alternatively, Texas could ber of years to pay the loans back. pool its risk in, say, 2013 together Running insurance in reverse with its risks in 2014 and 2015 by and forcing policyholders to requiring coastal residents who pay higher premiums just when purchase insurance from TWIA they have been hit with losses to commit to three-year contracts. is seldom a recipe for economic There are many challenges with stability. each of these plans, but given the Unfortunately, as many coastal absolute magnitude of the issue, states are learning, there is no even modest gains are worth easy solution to this problem. exploring. Even those who like the free mar- And the third approach is, ket must admit past difficulties frankly, to develop a greater toler- in providing complete insurance ance for the high rates that come along the coast for windstorm with insuring correlated risk. at rates that homeowners and Hardening the coast and looking businesses find tolerable. Special for opportunities to pool our ca- and explicit government sub- tastrophe risks with uncorrelated sidization of more complete catastrophes will help. But Tex- windstorm insurance for the David J. Phillip / Associated Press ans on our coast need to let it sink coast has its own financial costs, Ben Higgins sits among debris outside his destroyed Galveston home in the aftermath of Hurri- in that they are holding property political problems and moral cane Ike in September of 2008. If a large hurricane were to hit Texas this year, the Texas Wind- that is unavoidably expensive to shortcomings. And the under- storm Insurance Association may have difficulty paying a large number of claims for damage. insure and budget for the higher insurance engineered into the premiums that result. And their current law, coupled with some likelihood that neighbor B will takes in won’t be enough to pay are correlated, insurers and legislators who deny this reality disguised subsidization, leaves have an accident with her car at claims. reinsurers have to stockpile lots do their constituents no service Texas insureds at serious risk, the same time. So auto insurance Windstorm risk along the of safe, liquid assets in order to by leaving them catastrophically particularly in the more densely works well. Uncorrelated risk Texas coast, by contrast, involves pay claims in timely fashion. And underinsured. developed areas of our coast. means that insurers do not have correlated risk with uncertain keeping assets under the mat- The problem is tough because to stockpile a lot of liquid capital magnitudes. The fact that A’s tress hurts insurers and reinsur- Chandler is Foundation Professor insurance works best where risks in order to pay expected claims. house in Galveston is blown ers in providing a decent return of Law at the University of Houston are known and uncorrelated. The Something known in mathemat- down by a hurricane informs to their shareholders. Law Center, former co-director of its fact that A has a fender bender ics as the law of large numbers greatly the likelihood that neigh- There are fundamental ways Health Law and Policy Institute and with his car in Galveston County makes it unlikely that the amount bor B’s house will be similarly of addressing high magnitude, director of its Program on Law and provides no information as to the of revenue an automobile insurer destroyed. When insured risks correlated risk that can be more Computation. The economy President Obama misses the mark on tax reform By John Diamond the incentive to work and more efficient and simple rate income tax reductions invest at exactly the time tax system as revenues as having the largest positive President Barack our economy needs it. At a share of GDP will have to effects. On the other hand, Obama made news re- the same time, a signifi- rise from current levels. the increase in personal cently when he called for cant amount of spending What would an efficient tax credits and deduc- extending tax provisions hidden in the tax code — in and simple tax system look tions decreased economic that reduce taxes on those the form of tax credits and like? It would start with a growth. This does not bode making less than $250,000, deductions — would be permanent reduction in well for the effects of the while allowing a roughly maintained. tax rates, and a broader tax president’s plan. $800 billion increase in The policy is consis- base that asked a greater It’s tempting to push taxes on wealthier Ameri- tent with the president’s number of Americans to difficult and amorphous cans. propensity to move the contribute to the services policy proposals like tax The president is right to U.S. toward a narrow-base, they’re consuming. That and expenditure reform off be concerned about these high-rate tax system in doesn’t mean the wealthy until after the election year. tax provisions expiring at the name of fairness. But get a break however, it’s But with everyone focused the end of the year, which what’s fair about a tax code essential that reductions on avoiding the fiscal cliff — coupled with planned that permits 46 percent of in tax rates are offset by at the start of 2013, now is spending cuts — would households in the United decreases in spending else- the time to begin laying the cause a poorly timed fiscal States to use government where in the tax code (e.g., groundwork for serious contraction. Unfortunately, services but pay no income by reducing tax credits and fiscal reform, such as plans though, his specific plan taxes? According to the tax deductions that benefit for reducing expenditures, would harm the economy Congressional Budget the rich and others.) reforming entitlements and moves in the opposite Office (CBO), the bottom Economist Alan and moving to a broad- direction from the critical 20 percent of taxpayers Dean Rohrer Viard and I analyzed the based, low-rate tax system. overhaul of the tax system face an average tax rate of 1 macroeconomic effects of In doing so we must necessary for the U.S. to percent; the top 20 percent The president’s plan of GDP are allowed to a permanent reduction weigh the realistic benefits maintain its competitive of taxpayers face a 23.2 maintains our increasingly increase to unprecedented in tax rates on different of short-term stimulus edge. percent rate and the top 1 unworkable status quo. levels (for example, if all of types of income, as well as against the long-term costs If the president’s plan percent face a 28.3 percent U.S. economic growth has the tax cuts expired), CBO the effects of a permanent of additional debt to eco- to extend just the tax cuts rate. slowed in the last several projects that our debt-to- increase in tax credits and nomic growth and future on individuals making It is widely recognized months, as job creators GDP ratio will rise to a deductions. We found generations. less than $250,000 is that a tax system charac- nervously eye an impend- Greek-like 200 percent by that rate reductions led to adopted, marginal tax terized by a narrow base ing raft of tax increases, 2037. Clearly, cutting and an increase in economic Diamond is the Edward A. rates on various types of and high marginal tax new regulations and reforming government growth in the long run and Hermena Hancock Kelly income would increase rates negatively affects shrinking global demand. expenditures should be a (providing that transfer Fellow in Public Finance at significantly, especially on growth and job creation. Disturbingly, even if fiscal priority, but it also payments were reduced), the Baker Institute at Rice dividend income, reducing Just ask Western Europe. tax revenues as a share is imperative to adopt a with dividend and corpo- University.
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