The role of the state in insurance

The role of the state in insurance

The question of the role of the state arises particularly in two cases.

The first concerns social insurance. Most states choose to set up national health, pension or unemployment insurance systems, when in theory the private sector is capable of intervening. Insurance companies say that as risk experts they will be better able to meet needs. But states often see it as a major societal issue and prefer to have public institutions to manage these challenges. Questions of the relative efficiency of markets and the civil service, of social justice, of commodification of essential goods, are important debates to which each country must find an answer. In most cases, a private protection system complements the public offering.

The other scenario is that of major risks, such as terrorism and natural disasters. The question of terrorism insurance has arisen increasingly since September 11, 2001. The American State then set up a specific guarantee mechanism, the TRIA (Terrorism Insurance Act), officially temporary but which has already been extended. (and amended) twice and is still in effect today under a different name, TRIPRA (Terrorism Risk Insurance Program Reauthorization Act). The principle is simple: from a certain threshold, the losses of insurers are covered up to 90% by the US state. For its lawyers, the logic of state intervention goes beyond the simple logic of potentially considerable cost, and also stems from the fact that terrorism represents a sovereign risk of socio-political destabilization. In fact, most countries or regions offer state guarantee systems that complement or support private provision (Tastet, 2014). But voices are raised against what they see as "a public subsidy to the private sector" for a risk "which is no more severe than others, such as natural disasters" (Rhee, 2013).

The article by Zarai (2014), an underwriter at reinsurer Africa Re, illustrates the dilemmas posed by terrorism. In Kenya, insurance only offered coverage for fixed assets of the real estate type, as the inclusion of movable assets (people, cars, things) brings too much uncertainty, as it is not possible to determine in advance how many people will be in the wrong place at the wrong time - this is the risk of accumulation. But political violence in the 2007 presidential election created new demand, and the insurance market adapted amid a lack of state intervention. Insurers turned to reinsurers for sufficient capacity, and the latter looked to the London market for financial cover. In the 2013 terrorist attack that killed 67 people in Nairobi, the targeted shopping center was covered, and $ 115 million was donated to help with reconstruction. But the cost of Terrorism and Political Violence coverage then tripled, due to the extremely cautious approach of the London markets. According to the author, this approach was too cautious due to the poor local knowledge of London underwriters. The presence of a national guarantee of the TRIA type in the United States could then encourage the distribution of contracts more appropriate to local needs.