US Government intervention in the country’s insurance market is pushing the cost of natural disasters there on to taxpayers, according to a report by Lloyd’s.

The report, Managing the Escalating Risks of Natural Catastrophes in the United States, says government intervention, such as political pressure on how rates are set, is weakening the private insurance market by distorting insurers’ ability to price risk.

It calls for greater co-operation between insurers and government agencies to manage and mitigate risks, and tackles similar issues to those raised in Australia following last summer’s floods.

Hurricanes and other natural disasters have caused economic losses of $US27 billion ($27.9 billion) in the first half of this year, and Lloyd’s Director for North America Sean McGovern says the cost issue has gained urgency as catastrophe losses have risen and the US economy declines.

He says this year is on track to be one of the most costly on record for the insurance industry.

Mr McGovern says the fight over disaster aid following Hurricane Irene shows how taxpayers can bear the cost of disasters, as legislators cannot agree on where the aid should come from and whether it should be offset by cuts to other federally funded programs.

The report lists nine principles for managing risk, the first being that a healthy private insurance market will protect property owners from natural catastrophe losses.

It says government programs to support policyholders often rely on post-loss funding mechanisms to cover catastrophe losses, and the way rates are set hinders the private market’s ability to operate and removes incentive to mitigate risk. 

“In economic terms, government programs may lead to problems by centralising rather than diversifying losses,” the report says. “The loss experience following Hurricanes Katrina, Rita and Wilma in 2005 is a good example of this.”

The report says subsidies can be effective in making insurance affordable “but they must be deployed in a targeted way that allows insurers to continue to accept risks”.