Want low prices? We need political-risk insurance
Dino Falaschetti and Christopher Douglass | Special To The Sentinel
January 29, 2009
On Tuesday, State Farm announced it will no longer insure property in Florida. State Farm's decision follows the Florida Office of Insurance Regulation's rejection of the insurer's 2008 request to increase rates on property policies. The increase would have been enormous; Orange County customers could have seen an average increase of $1,000 in their annual insurance premium on a $300,000 home.
There's something weird about this. Large insurers have been dropping their prices in recent years, not raising them. Usually, large insurers can offer a better deal because they can use their geographic reach to spread risks wider.
When the wind blows in Missouri from a tornado, it usually doesn't blow in Florida from a hurricane. So, in years when there is little tornado activity, but hurricanes strike Florida, premiums come to Florida to cover losses. Insurers can balance these risks for the greater good, if we let them.
But insurance isn't working in Florida. The larger companies, including State Farm, have requested the highest rates and are trying to write fewer insurance contracts in Florida. What's going on? Why aren't the large insurers offering lower insurance premiums to Floridians?
It comes down to fairness, but not the type of fairness you might think. It's not an issue of large insurers being fair to their customers after a catastrophe; the courts have seen to that. It comes down to whether we are committed to long-term, not short-term, fairness.
Insurance is never fair in the short term. In any single year, Floridians might see State Farm use their premiums to settle claims in Missouri. That's not fair.
But over the long term, it is fair. If the actuaries have done their work well, the tornadoes in Missouri (and the earthquakes in California) will balance out against the hurricanes in Florida.
Unfortunately, when politicians get involved, fairness is usually more about narrowing the benefits and spreading the costs. It's not their fault; they need to get re-elected, and denying requests from insurers to increase premiums helps. Many will vote for candidates who promise to leave other states with all of the risk -- not candidates who promise to efficiently balance those risks with other states.
Choosing a short-term solution can lead to long-term problems. We often hear that Florida's problems come from insurers not wanting to be in a risky place. But what kind of risks are they worried about? Risk of the next catastrophe or risk that politicians will change the rules after the next catastrophe?
Large insurers are pretty good at balancing the risk of wind between Missouri and Florida. But there is no way to balance against a political landscape that leaves them with almost certain losses; they can only try to get away.
Until we find a way to provide insurance against political risks, we will probably see more insurers leaving Florida. Without insurance against political risk, insurers won't be around to provide lower-priced insurance against natural risks.Full Source HereB-b-but I thought insurance was supposed to be a charity...! Either we'll have to force those greedy corporations to sell policies at a loss, or we'll have to just tax rich people more.