Florida’s move could be a very bad thing, but the story at least could have pointed out that the state now will also collect new premiums to offset the added risks. I’m mean, they’re stupid in Florida, but they’re not crazy. And did I mention the governor down there is a Republican who went by the nickname of “Chain Gang Charlie?” Read the Journal and you’d think the system was designed by the Columbia School of Social Work.
Listen, this risk-shift idea, coined by Yale’s Jacob Hacker, is not a small issue. He writes about a shift from government onto the backs of American families. Less well-noted is the shift from the private insurance sector onto the government. You probably have heard of the Terrorism Risk Insurance Act and the National Flood Insurance Program, but you probably haven’t heard of insurance-related agencies in your state, the California Earthquake Authority, the Pennsylvania Medical Care Availability and Reduction of Error Fund and the like. Those are all basically mechanisms by which the government takes risk off insurers’ hands or subsidizes the industry in some other way.
What other industry gets this kind of treatment?
You don’t hear Ford saying, “Well, we’ll make everything but the air bags and catalytic converters; that’s the State of Michigan’s job.”
In fact, I could make a better case for giving Ford a government subsidy. After all, a big part its problem is the government’s failure to reign in the spiraling cost of health insura…health insh…heh….
Hmm. I think I’m starting to see a pattern.
As I’ve said elsewhere, I’ve also had the benefit of being off the daily newspaper treadmill, studying insurance for more than a year. And, like I said, the Journal’s story is fine.
But insurers hold $4.3 trillion in assets, stocks, bonds, real estate, etc. That ridiculous. The Gross Domestic Product—the market value of the nation’s output of goods and services—is $13 trillion, in case you were wondering.
Insurance isn’t supposed to be an “industry” at all; but something that spreads risk so people can do something productive, like buy a house, provide medical care or make things.
And yet, it’s every household’s third or fourth largest expense. We’ve got 47 million people without health insurance. The Gulf Coast recovery is a disgrace. Thousands still live in FEMA trailers; many are fighting insurance claims. And FAIR plans are being swamped with new risks they can’t handle.
Point is: Insurance is a great business story. The Journal’s fine. The Audit wants—the nation needs—more.
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Yes, the purpose of insurance is to share risk; it's to shift risk from one class of insureds to another. When the level of claims from one group of insureds (in the case being discussed low lying areas in "hurricane alley) rises significantly over a multi-year period, the cost of insuring them must go up or insurers must: a) lose money, b) raise rates for other customers or c) stop insuring that group. Obviously, for alternative (a) few companies will choose to lose money over a protracted period. Regarding (b), if companies with large exposure in hurricane alley were to raise rates nationally to make themselves whole, they would lose market share to companies with less exposure in the hurricane region and, as a result, increase their risk. The state solution equates to alternative (c) and takes place when states, like Florida, refuse to allow rates to reflect risk so insurers abandon the state and the state steps into the breach. Skipping the eternal debate about any governmental agencies long run ability to efficiently provide service, I'd only point out that definitionally, as single state or even single type of event focused insurance company (federal flood insurance is the latter) retains a much higher risk profile than an event and geographically diversified insurance company.
The Wall Street Journal may have left some good points out, but your article ignores the economic facts caused by a confluence of much more expensive, concentrated real estate investment in hurricane alley and an apparent trend increase in hurricane activity.
Posted by LongTimeNYT reader![[TypeKey Profile Page]](http://www.cjr.org/nav-commenters.gif)
on Wed 13 Jun 2007 at 06:05 PM