This chapter focuses on a proposal to help insurance markets avoid some of the worst current supply-side and demand-side anomalies. Multiyear policies can satisfy two key objectives of insurance – controlling actual losses and providing financial protection against the consequences of those losses – in ways that annual policies, typical of current insurance contractual arrangements, do not.
Using examples of multiyear insurance currently offered in the areas of life and health care coverage, we explore the challenges involved in developing multiyear insurance for standard property coverage under the current regulatory system. We further propose that the government consider modifying the National Flood Insurance Program so it is structured as a multiyear policy tied to the property rather than the individual.
TWO OBJECTIVES OF INSURANCE
Insurance has a dual role in dealing with risk. First, it should cause individuals, as well as private and public sector organizations, to continue to adopt protective measures when the benefits from such measures exceed their costs, thus reducing future losses from health, safety, and environmental risks. Second, insurance provides financial protection through claims payments following an unexpected loss. Let us consider how each of these objectives is related to multiple time periods.