The Property Insurance Debacle in Florida

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In Hertford,
Hereford and Hampshire hurricanes hardly ever happen, but they do
in Florida. In Ellenton, Englewood and Escambia earthquakes hardly
ever happen, but they do in California. Each set of localities is
exposed to distinctly different conditions of risk and circumstance.

On Insurance:
Insurance is based on two different but interrelated concepts: the
spreading of risks, but over common pools of risk. Risks should
be grouped into risk-pools with common characteristics and risks.
Mixing different risks into a socialized pool muddies rather than
clarifies the waters. Proposals to nationalize risks are not about
good insurance practices but about socializing risks and attempting
to lay off one’s responsibilities and costs onto someone else. Using
this kind of logic, New Englanders should lament the current high
cost of home heating oil and seek to socialize home heating costs
nationally.

The Florida
problem:
Part of the current insurance mess stems from the legacy
of the populist-political decision to collectivize risks and socialize
costs following Hurricane Andrew. When politicians, without regard
to risks and costs, attempt to make a commodity or service, in this
case insurance, affordable and available, they distort reality and
decision-making, which gives rise to unintended consequences and
future problems. A quote from Tom Sowell:

"When
a government tries to make things more affordable they destroy the
freedom to make choices."

In various
writings, The Austrian economist, Ludwug von Mises observed that:
Government intervention always breeds economic dislocations that
create the conditions for more government intervention.

The current
property insurance debacle in Florida validates both of those observations. 

A Conjecture:
If, in the mid-nineties, the politicians had allowed markets to
work, then I posit the following counter-factual argument:

 A complex
set of discovery and self-organizing processes (the spontaneous
creation of order out of chaos – one of the hallmarks of free-market
capitalism) would have occurred, resulting in ways to reduce actual
risks while discovering creative ways to provide insurance for existing
risks.

The moral hazards
associated with subsidizing below-market prices would not have existed.
Individuals would have had to assume more personal responsibility
and, therefore, there would have been more investments in roof improvements
and supports like: hurricane straps, gusset plates, angle irons,
cross-ties and strong-boys and window protections like: shutters,
protective window films, and pre-cut ready-to-use plywood window
coverings, just to name a few. And, some homes would not have been
built, because there would have been no available or inexpensive
property insurance for high-risk locations. In a similar vein, FEMA
flood insurance creates substantial moral hazards.

In a free market,
individuals who invested in such improvements, should have been
able to negotiate to maintain their private-sector coverage and/or
to obtain discounted insurance rates. In today’s socialized market,
we are all now being taxed (up-charges on our policies) for the
risks (some irresponsible) of others, risks for which the state
should never have assumed responsibility.

If prices,
contract terms and entrance-exit options had not been so tightly
regulated by the state, existing companies would not have dropped
as many policies and new insurance companies would have entered
the market. A choice of insurance companies and plans would have
evolved. The competitive environment would have spawned a new set
of insurance products that we, much less politicians, cannot even
anticipate, The new products would have more responsive to specific
conditions of circumstance and the varying risk tolerance of individuals. 

Further, as
a way to protect their own financial interests, mortgage lenders,
would have been very instrumental in the curative processes noted
above.

Current
situation:
Finally, I argue that the residual bag of insurance
risks in Florida is far larger and more severe today, exactly because
politicians decided to socialize insurance risks and costs in the
mid-nineties. As a result, the decade, prior to 2004, of rather
benign weather was squandered. It was a period when real, long-term
and self-sustaining solutions could and should have been evolving.

Unfortunately,
the state, in attempting to make insurance affordable and available,
created a great deal of stress that still must be relieved before
we can truly have a sustainable market for homeowners' property
insurance in the state of Florida.

The state cannot
make insurance more affordable or available except through solutions
that are draconian, misallocate resources and will, in the long
term, fail. We don’t need more government involvement; we need much
less.

June
8, 2006

Harry
Teasley [send him mail]
is Emeritus Chairman of the Reason Foundation.

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