The Case for a Standardized Loss Allocation System

July 19, 2011

In the aftermath of a hurricane landfall, there often isn't enough data or experience relating to the losses to make known for certain whether a given loss resulted from wind or water.  Each time an indeterminate loss situation (total home destruction) takes place, protracted legal battles and custom-made agreements are currently the only way to resolve disputes over who should pay for losses.  Researchers suggest a solution: a standardized loss allocation system, say Scott Richardson, former director of the South Carolina Department of Insurance, and Eli Lehrer, vice president for Washington, D.C., operations at the Heartland Institute.

  • Under such a system, federal and state regulators and private parties would agree in advance to distribute losses in specific ways.
  • Rather than adjusting claims individually, a standardized loss allocation system would, in the case of a total loss, distribute claims based on a formula between wind insurers and the National Flood Insurance Program.

A standardized loss allocation model could solve the indeterminate loss problem implicit in the current loss allocation system for flood insurance in the United States.  It is not a final or perfect solution to the problem.  In the long term, private companies should underwrite all or almost all flood risk.  Given the current unwillingness of primary insurers to do so, however, it seems likely that any system will ultimately rely on reinsurance provided either by the government or by the private sector, say Richardson and Lehrer.

Source: Scott Richardson and Eli Lehrer, "Solving the Flood/Wind Problem after Hurricane Losses:  The Case for a Standardized Loss Allocation System," Heartland Institute, June 2011.


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