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
