While I was getting things wrapped up at the office ahead of my vacation, I missed a couple of interesting items on “what to do” about the cost of coastal property insurance.
First, Jay Fishman, CEO of The Travelers, got an op ed into the Wall Street Journal (subscriber link):
The basic tenet of insurance is to spread risk among as many people as possible who are subject to the same kind of risk. We should resist public policy measures that enact the sort of “windstorm socialism”—forcing inland property owners or all federal taxpayers to pay for hurricane risks to which they are not subject.
One way to avoid this outcome is to create a federally regulated “Coastal Hurricane Zone” along the Gulf and Atlantic Coasts—from Texas to Maine. The federal government would not have a financial role but rather would regulate and oversee most aspects of wind underwriting by private insurers, including pricing.
The system we have now, in which states regulate and oversee the insurance market, has historically led to regulatory inconsistency and unpredictability, for insurers and customers alike, in the aftermath of major storms. This lack of consistency has been a key factor in driving insurers out of coastal markets, decreasing supply and increasing cost. Properly designed and executed, a Coastal Hurricane Zone would provide a more stable set of rules that would allow insurers to make long-term commitments of capital to those areas for wind risks, increasing the availability of insurance at efficient prices over time. Consumers would be protected by standardized rights and responsibilities.
RiskProf shared a response he offered the Journal:
Researchers at the Wharton School, Georgia State University and the Insurance Information Institute are undertaking a multi-year study of catastrophe markets and have come up with two principles to guide the analysis. The first is that prices are set based on risk and the second is if there is a social concern about affordability, that this concerned be remedied through general public funding rather than through the insurance industry.
Mr. Fishman’s proposal is consistent with the general principles. [...] Mr. Fishman’s proposal, in contrast to both the Florida situation (where the state is making a bet that no storms occur) and the Mississippi situation (where the instability of the state’s insurance law is driving insurers away from storm prone areas), is eminently superior to the status quo. My only critique of his proposal is that the tax credit would be funded by a tax on “wealthy” people in high risk areas. If affordability is truly a social concern then all should participate in the funding of the tax credits rather than just those in the high risk areas.
This all sounds good. I offer two additional thoughts:
- All of this is predicated on the idea that in aggregate, coastal insurance pricing will be permitted to be at a level sufficient to compensate the folks underwriting the financial risk at a rate competitive with other potential investments. Admittedly, there can be some difference of opinion as to the level of competitive compensation, depending on how you perceive the risk involved, but that aside, I have a certain skepticism that political appointees will have sufficient backbone to tolerate that level of pricing.
- I like the idea of acknowledging that insurance affordability is a social concern, and that societal/governmental mechanisms should be used to address that concern without imposing undue, inefficient burdens on the private market. However, when considering limiting participation in those mechanisms to coastal zones, I would suggest that some consideration be given to whether folks further inland are deriving some benefit from others’ exposure to risk. For example, what sort of a benefit does someone in (say) Lake City, Florida derive from all the economic engine fueled by tourism and investment in South Florida, via (for example) the state’s ability to not have an income tax because of the availability of other revenue sources.
True, some of that can be addressed by defining the cat zone broadly enough, but perhaps that is an element that ought to be considered in any analysis on a societal subsidization scheme.