We learned a lot of lessons from Hurricanes Katrina and Rita, one of which was to consider carefully before building in areas prone to natural disasters. If private enterprise wants to float that risk, that’s a decision that should be left to investors. Unfortunately, Congress is considering federal subsidies and guarantees to get insurers off the hook for underwriting the risk of construction in areas such as Florida, pushed by an activist group funded at least in part by insurance companies:
AllState is funding Protecting America, a coalition of companies and government and community organizations that is supporting the Homeowners Defense Act introduced by Rep. Ron Klein and awaiting committee review on Capitol Hill. Half of Protecting America’s board members have ties to the two largest private insurers — State Farm and AllState — in Florida.
Klein, who represents a district stretching from West Palm Beach to Boca Raton, has championed the legislation as an alternative to the emergency supplemental aid Congress often passes in the wake of a Katrina-scale disasters.
“Although it has become clear in recent weeks that big offshore insurance companies who oppose this bill will say anything to protect their profits, I am here to set the record straight. I believe strongly in the power of the free market, and we have no intent to subvert it or eliminate the insurance industry,” said Klein in testimony before the House Financial Services Committee.
Yet Klein’s legislation provides a guarantee backed by federal credit. The history of Florida’s state-run insurance program, which has nearly $500 billion in liabilities and is running a deficit, suggests the picture of government guarantees is not rosy. State insurance will reportedly face a $14 billion shortfall if a major hurricane hits.
Opponents say the Homeowners Defense Act creates incentives for real-estate developers to take on risky projects while creating liabilities for the federal government. Supplementals, goes the argument, are a one-time expense, while a federal guarantee program would lead to higher overall disaster clean-up costs.
This has created a strange alliance between fiscal conservatives, such as Americans for Tax Reform, and environmentalists opposed to development in “environmentally sensitive areas,” as the Daily Caller puts it. Neither wants to see tax dollars go towards private-sector development in high-risk areas, although ATR is obviously more concerned with taxpayers winding up with the bill.
One good reason to oppose it is that the private markets already support reinsurance and risk abatement for natural disasters. That gets accomplished on a global scale, with a large enough risk pool to keep the reinsurers afloat. Intervening in that market would create a set of artificial incentives that would likely damage it, in the same manner that a “public option” would do the same for health insurance. Eventually, it would amount to subsidies for insurance companies, which would then default during a declared disaster and stick taxpayers with the bill.
Insurers say that the high risks would lead to unaffordable prices for insurance on these development projects, but that’s exactly why risk pools exist — to send pricing signals to investors. If a project is too risky for insurers, then it probably shouldn’t proceed. If it does, then the investors in the project should own the risk as well as the potential reward. It’s not government’s place to protect people from failure, after all, and doing so creates a moral hazard that just produces a lot more risk-taking and bad decisions.