Our view on catastrophic coverage: When the government sells insurance, everybody pays
Nov 12, 2007
USA Today, 11/12/2007
Last January, Floridians decided they’d had enough of rising homeowners’ insurance rates. Tallahassee allowed a state-run company called Citizens Property Insurance to expand its coverage of private homes and businesses against damages from hurricanes and other disasters.
The results have been nothing short of stunning. Citizens, once an insurer of last resort, is already the largest property insurer in Florida and the fourth largest in America. (Photo – Andrea: Floridian Tim Haynes checks storm damage in May. / By Stephen Morton, ) Its growth stems from one simple fact: Its rates are based on political, rather than meteorological, considerations. The company has amassed $400 billion in potential liabilities while collecting premiums at a rate of just $3 billion per year. Those premiums are about half of what actuaries say Citizens would have to collect if it were a private business.
This is a good deal for Floridians and politicians who want their votes, but it’s horrendous public policy. Citizens has no way of paying claims after a major hurricane (Andrew, in 1992, caused $23 billion in damage) other than for the state to borrow money and recoup it through tax hikes, insurance surcharges – or a federal bailout.
A plan to help formalize that understanding, as well as encourage other states to go down this irresponsible path, is working its way through Congress. Sponsored by a pair of freshmen Democrats from Florida who face tough races next year, the bill passed the House late last week and is pending in the Senate, where it has picked up important backing from Hillary Clinton, who has her own interest in votes in Florida.
The measure would provide government-backed loans to states, and groups of states, stuck with major losses. Both the history of the National Flood Insurance Program – currently in need of a $20 billion bailout – and specific language in this plan strongly suggest that the likelihood of these ‘loans’ being repaid is about the same as collecting money borrowed by a ne’er-do-well brother-in-law.
The Florida action, as well as the bill in Congress, are part of a troubling trend. As insurance companies have hiked rates in Eastern and Gulf Coast states to reflect their new assessment of hurricane risk, these communities have sought ways to help get taxpayers to foot the bill.
States do have regulatory responsibilities to protect homeowners against abusive or discriminatory practices by insurers. And the federal government may have a role in helping coastal states pool their risks. But for states to get into the discount insurance business, backed up by Washington, is unfair and unwise.
Private insurers not only insure against loss, they help reduce the chances of loss in the first place by demanding higher premiums when they see enhanced risk. This helps to protect environmentally fragile coastal communities.
Backers of an expanded federal role in insurance note that U.S. taxpayers already foot much of the bill for disasters through disaster relief. That is true. And in this respect they walk a fine line between being compassionate to fellow Americans and creating a moral hazard by being so generous.
But the latest approach crosses a new and dangerous threshold. It is one thing to provide assistance to individuals and communities that have inadequate insurance. It is quite another to have state and federal government assume a much larger role in the insurance business, one that encourages risky development at the expense of taxpayers far from the nearest beach.