Posted by: bridget | 20 February 2007

Florida Gambles with Insurance Premiums

Since the 2004 and 2005 hurricane seasons, homeowner’s premiums in South Florida have nearly tripled.  The state is implementing a bail-out procedure of sorts, under the theory of making insurance affordable.  If a catastrophic storm were to hit, the state government would pay for a significant portion of the damage; most of the money would be raised by increasing premiums on non-coastal homeowners and on auto insurance.  This has the effect of making low-risk people subsidise high-risk people.  The federal government would also be asked to give emergency funds.

Those who live in inland Florida are much less wealthy than those who live in South Beach or Boca Raton.  Obviously, damage to expensive homes will result in higher insurance premiums.  (Florida’s homestead law also encourages people to put a lot of their assets into their homes: there is no limit on the value of a home that is protected from seizure of assets after a lawsuit.)  This has the effect of making the poor subsidise the wealthy.

A person who chooses to live within a few miles of the ocean takes the risk of a hurricane; if that risk is financially unsound, the best way to change that is to move further inland.  Ultimately, the money to cover (not unexpected) damage to coastal areas has to come from somewhere: it can either come from those who assume the risk, or those who arrange their lives to not assume the risk.  Market forces will eventually work to ensure that people are living in low-risk areas.

The idea of the federal government bailing out South Floridians who choose to live two blocks away from the beach in a hurricane-prone area is senseless.  This does nothing but require other Americans to subsidise the silly lifestyle choices of their counterparts in South Florida.  Insurance is a state regulated industry; there is little reason for the federal government to be involved at all.  If an area of our (very large) country is prone to disaster, then perhaps people should not live there, or, they could afford the risk involved.  Of course, nonsense like this  (previously blogged) has the very predictible effect of raising insurance premiums.

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