Tuesday, October 16, 2007

Florida's Bid To Make You Pay For Their Beachfront Home Insurance

Last Wednesday's Wall Street Journal's lead editorial, entitled "The Politics of Disaster," concerned Florida Governor Charlie Crist's lobbying to help pass the 'Homeowners' Defense Act.'

This bill, pushed by Florida Democratic Representative Ron Klein would, according to the Journal editorial,

"force the U.S. Treasury to issue below-market loans to state-insurance programs, while also creating a kind of Fannie Mae of disaster reinsurance, a federally chartered organization called the "National Catastrophe Risk Consortium."

According to Treasury Assistant Secretary Phillip Swagel, "Taxpayers nationwide would subsidize insurance rates in high-risk areas, which would be both costly and unfair."

I wrote about this trend early on in this blog, in a post here, and more recently here.

Honestly, I don't know whether to laugh, or cry about what the Floridians are attempting with this bill.

Basically, we have the following series of events.

Over years of benign hurricane seasons, people flock to the Southern Atlantic and Gulf Coasts, putting homes and businesses in harm's way. Then the hurricanes begin to return, and the losses mount.

As private insurers left the oceanfront markets, state governments, albeit foolishly, stepped in with their own funds.

Of course, if you know anything about insurance, you immediately realize that a state such as Florida, tapping its own resources, cannot self-insure against its hurricane risk. The very storms that are to be insured against by the state's taxpayers will damage the state's economic ability to generate income to....pay for that damage, via insurance claims.

So, having established an under-funded state insurance program, the state is now turning to the rest of us Americans, via federal legislation.

This means that even though you may not enjoy an ocean view from Key Biscayne, the other Keys, or the Florida Gulf Coast, you're going to paying for one soon.

There are several aspects to this story that should frighten all of us.

First, there's one state's attempt to force the rest of the country to subsidize their citizen's inability to afford insurance for the area in which they have chosen to build homes and businesses. Perhaps if they had to pay full freight, they would have located elsewhere, mitigating the entire problem.

Second, there's the unwise federalization of what has historically been a private insurance market. What business activity has the federal government ever performed better than the private sector that it replaced?

As I noted in the earlier linked post,

"The net effect of today's mess of homeowners insurance in hurricane areas is to make all Americans ultimately pay the tab for the difference between what local politicians feel they can ask their ocean-front-dwelling homeowners to pay for insurance, and what private insurers would actually demand for those risks. So you and I, if you don't have a beachfront home somewhere between North Carolina and Texas, pay a form of rent to those who do, but we never get to enjoy their view.

Common sense says that if it's too expensive for a person to afford privately-offered insurance to replace the value of a home built so near the ocean in hurricane territory, then the home shouldn't be built. Not that 'someone else' should step in and pay to make it affordable. How long can we, as a nation, afford this sort of economic idiocy?

This sort of market price signal distortion, on such a grand scale, is bound to come a cropper at some point. It's a good argument for simplifying the insurance market to become a national one, rather than 50 local ones, each hostage to local political appointees who try to beggar their neighbors by capping risk prices in their own states, and attempting to force the insurers to recover the true risk premiums 'somewhere else.'

The way things are looking, this would seem to cast doubt on the wisdom of investing in property and casualty firms anytime soon, if one expects consistently superior total returns."

Third, since the legislation intends to make the Federal loans to the state insurance funds 'forgivable,' you know what this means. Through the Federal treasury, we will all be subsidizing ever-riskier building in a variety of natural disaster zones, since there will be no check on the activity.

So there you have it. One state's dissatisfaction with the reasonable reaction of the private, publicly-owned insurers to their citizen's risky home- and business-building in the path of hurricanes has led us to this. A bill to replace the astute risk pricing and rationed capital with the boundless debt capacity and more (endlessly) forgiving insurance practices of the Federal government.

The only positive about this story is that it might warn one off investing in property and casualty insurers until this matter has been settled, one way or another.

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