NU Online News Service, Sept. 28, 2:00 p.m.EDT

An added financial burden from natural disasters is being placedon U.S. taxpayers because of government intervention in theinsurance market, according to a report released by Lloyd's ofLondon.

The report (Lloyds.com/usnatcatreport), “Managing the EscalatingRisks of Natural Catastrophes in the United States,” calls forgreater cooperation between government, insurers and planners inthe U.S. to ensure that a greater emphasis is placed on managingand mitigating risk.

According to the report, the private natural catastropheinsurance market often is unable to function properly when, forpublic-policy reasons, government-run insurance programs or poolsoffer insurance that does not reflect the true price of therisk.

Lloyd's says in the report that insurance is not sustainable ifit is offered at rates below what is required by sound, risk-basedactuarial practices.

When insurance is not risk-based, according to the report, thewrong price signals are sent and there is little or no incentive tomitigate risk. In turn, this leads to wider adverse impacts onsociety, such as ruin of vulnerable environments and a reliance onemergency funds to help rebuild communities after catastrophicevents.

The problem is illustrated by the current fight over disasteraid for Hurricane Irene, Lloyd's says. Lawmakers can't agree onwhere the aid should come from and whether it should be offset bycuts to other federally funded programs.

Data from the Census Bureau shows that 35.7 million people wereseriously threatened by Atlantic hurricanes in 2008, compared with10.2 million in 1950, the study reports.

It adds that if there is a healthy private-insurance market, thegovernment will be relieved of some of its financial exposure tonatural disasters. This would enable it to focus assistance on themost needy in a more targeted and sustainable way.

By developing alternative strategies to tackle the costs ofnatural disasters—for example by promoting risk-mitigationinitiatives—the government can work alongside insurers to encouragea better attitude to risk in society, Lloyd's says.

“The private insurance market has a crucial role to play inhelping communities and economies recover from disaster,” SeanMcGovern, director, North America at Lloyd's says in a statement.“We need to go back to first principles and redraw the boundariesbetween government intervention and the private market. The cost tothe U.S. taxpayer is huge and is not sustainable.”

The issue has gained more urgency as catastrophic losses havemounted and the U.S. economy has declined, notes the report. In the2011 first half alone, economic losses from natural catastrophes inthe U.S. totaled $27 billion, according to the InsuranceInformation Institute. This year is on track to be one of thecostliest on record for the insurance industry, Lloyd's says in thereport.

Lloyd's points out that there is a need to develop a betterunderstanding of the potential costs of natural disasters to thoseaffected and to the wider economy.

Both the insurance industry and the government need to helpindividuals and communities understand the steps they can take tomitigate the potential consequences of catastrophes and adapt tothe future impacts of climate change. This could significantlyreduce the impact and costs of natural disasters.