Regulating the Business of Insurance: Federalism in an Age of Difficult Risk

Natural disasters and terrorism events of a massive scale are difficult risks. They are difficult (or, if large enough, impossible) to insure, and they present enormous risk-management challenges. Indeed, we are now in an era when difficult risks are the dominant feature of the risk-management landscape. These kinds of risks are inevitably multi-jurisdictional in nature, and managing them effectively requires a cohesive, comprehensive national catastrophe policy involving ex ante prevention and mitigation measures, effective risk allocation through insurance mechanisms, and ex post victim-compensation strategies. Although our nation is not yet close to establishing a much-needed and increasingly discussed national catastrophe policy, most significant points in current risk management strategies involve significant federal coordination and control. In our judgment, it would be peculiar - and less effective - if ex ante risk-reduction and loss-mitigation strategies and ex post victim compensation programs were the province of the federal government, but risk allocation and distribution decisions that are made in insurance markets were left primarily to the regulatory authority of the states. In other words, we suggest that a regulatory model that defers to the states with respect to the regulation of the insurance aspects of difficult risks is no longer viable, and an enhanced federal role in insurance regulation specifically - and in risk management more generally - is both necessary and appropriate with respect to difficult risks