Screw em', we need Florida

From the Wall Street Journal comes this story:

As hurricane season begins, Democrats in Congress want to nationalize a chunk of the insurance business that covers major storm-damage claims.

The proposal -- backed by giant insurers Allstate Corp. and State Farm Mutual Automobile Insurance Co., as well as Florida lawmakers -- focuses on "reinsurance," the policies bought by insurers themselves to protect against catastrophic losses. The proposal envisions a taxpayer-financed reinsurance program covering all 50 states, which would essentially backstop the giant insurers in case of disaster.

Reinsurance: Another word for government bailout.  Subsidy.

The program could save homeowners roughly $500 apiece in annual premiums in Florida, according to an advocacy group backed by Allstate and State Farm, the largest writers of property insurance in the U.S.

And cost homeowners elsewhere how much more?  And generate how much new unwise develop met in hurricane prone areas?

But environmentalists and other critics...

...please add me to that list...

-- including the American Insurance Association, a major trade group -- say lower premiums would more likely spur irresponsible coastal development, already a big factor in insurance costs. The program could also shift costs to taxpayers in states with fewer natural-disaster risks.

The AIA seems to have hired some logical people (aka economists).

...The proposed plan is roughly analogous to the National Flood Insurance Program, which has been criticized for encouraging construction in risky floodplains.

Like this.

Nevertheless, in recent weeks the Senate voted to renew the flood-insurance program, and also to forgive $17 billion in debt incurred after Hurricane Katrina.

That sound you just heard was my head slamming against my desk in frustration.

Critics cite that debt forgiveness as an example of how states with little or no hurricane risk can end up footing the bill for damage in flood-prone areas. "For years, federal flood-insurance backers told us the program was financially sound, but the storms of 2005 left it $17 billion in the hole," said Steve Ellis of nonpartisan budget watchdog Taxpayers for Common Sense.

Even some analysts hired by lobbyists for the federal program acknowledge it has its risks. "If you charge something less than the private-market cost for homeowners' insurance, that creates a potential incentive to increase exposure on the coast" -- in other words, to build in risky or flood-prone areas -- said David Chernick of Milliman Inc., an actuarial firm hired by ProtectingAmerica.

Also overheard: 'We know it's a bad idea, but crap, the idiots in states that don't face hurricane risks won't know the difference.  So screw em'.  We need Florida.'

Comments

[robertdfeinman]

Sounds like you may be interested in reading James Galbraith's new book:

Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, by James K. Galbraith. New York, London, Toronto, Sydney: Free Press, 2008.

[David Zetland]

I'd accept it IF they required all residents to buy actuarially-fair insurance for flood, etc. based on rising sea levels, bigger storms, etc. That would at least increase marginal signals of "don't live here" to residents of dangerous places -- even if they were getting a cheaper rate (across the board) due to the gov't subsidy.

Of course, that idea would be killed by lobbyists. :(

[Paul Hindsley]

With these policies there will always be winners and losers. Since I am moving to Florida next week, I hope that I will be a winner!

On a more serious note, while I am very skeptical that these types of programs would be well designed, I do think that there should be a better way to pool risks for different types of natural hazards across various regions of the US. In addition to reinsurance, new types of financial instruments have been developed which also do some of this (ie insurance linked securities).

[Bob Murphy]

Great post! (I just want to make sure my comments aren't purely negative all the time.)

[Bill]

You'd accept?
You'd require?
WHO ARE YOU?

"don't live here"
Is this another illegal alien problem?

well designed govt program.
Now thats an oxymoron

[John Thacker]

Sen. McCain somehow managed to win the Florida primary despite opposing this (and somehow still got Gov. Crist's endorsement before the primary, with Crist really pushing this program and wanting him to support it.) So apparently this isn't absolutely necessary to win Florida, but I guess it may help.