More Consumer Disadvocacy

Our friends the consumer disadvocates are at it again. (Fla Sun-Sentinel, Report ) This time they want to take away the catastrophic risk market and give it to the state of Florida.  The claim is that private insurance companies are charging too much and providing too little coverage.  

One major problem with this assertion underlying the report is that insurers are restricting coverage.  Actually, this is true. However, the reason why is because Florida restricts the price at which one can sell insurance.  When prices are below the market price, there is a shortage as people want more than the industry will supply.  If firms could charge what they wanted, there would be more insurance than there is now and we wouldn’t have a need for state run insurers.  However, these same consumer advocates fought to keep insurers from raising prices.  They are a major reason the Florida market is in the difficulties it is in today.

So, let’s put the state in charge of all wind coverage.  Now some insurers would probably like this as they can sell simple home policies that cover the occasional loss from the kitchen fire (or worse) and the occasional burglary or slip and fall.  However, let’s think about this more carefully.  If the state takes on  the risk, it means the people take on the risk.  So we are just transferring the problem away from the combination of the consumer and the insurer to the combination of the taxpayer and the state.  Guess what!  I think there is a really high correlation between the consumer and the taxpayer.  How does this benefit the consumer we ask the consumer advocate?

Well, the argument is likely that we trust the state to do well by us consumer taxpayers and we don’t trust the insurer because it has a profit motive.  Ok, but what is the motive of the state?  Is it pure?  Is it likely to charge low premiums?  Will it give certain groups differential treatment based on their political power?  Will it use generally accepted actuarial principals?  Also, how will it finance the wind risk?  To be prudent it will have to purchase reinsurance from the same companies that insurance companies are buying it from or the state can go naked increasing the risk to the state of having to raise future taxes or incur greater indebtedness.  Rating agencies lie S&P will know this and they will lower Florida’s sovereign debt rating which will increase the cost of borrowing for all state projects backed by the full faith and credit of the state.  If Florida decides to sell a bond backed by premium receipts from insurance consumers rather than on the full faith and credit, then the rating agencies will also rate these bonds low.  To make the payments, the state will have to increase the cat premiums to the insured.  So how is that any different from the insurance company charging more for cat risk?

update via Best Week 4/13/06: 

The Florida Hurricane Catastrophe Fund is facing an estimated $1.3 billion deficit and is likely to use assessments and bonds to make up the shortfall. And the fund, which acts as a state-run reinsurance program for hurricane losses, also is considering "various financial products" to provide additional liquidity heading into the 2006 hurricane season, according to the State Board of Administration.

The latest total residential property losses in Florida are estimated at $9.26 billion, with cat fund losses reported at $3.77 billion, according to the SBA. This is a $1.2 billion increase in reported losses, and more losses and further adverse loss development are anticipated. (emphasis added)

If the consumer advocates think there is a free lunch they are wrong.  One need not make the argument that government run firms are inefficient compared to private business to show the lack of the free lunch here. 

What is interesting about this whole plan is that Florida already has a significant presence in the hurricane market in Florida.  The state isn't doing a stellar job as it is.  FEMA’s  supposedly break-even flood insurance program is in deficit too.  Both deficits are because the government did not charge sufficient premiums. The state will have to raise taxes, use surpluses, or surcharge all policy owners to pay the losses caused by the last two years worth of hurricanes.  There is just nothing in our experience to suggest that new state plan will be any better than any other bankrupt state plan.