August 27, 2007

An Ill Wind Blows: Insuring for Hurricane Risk

Jay Fishman, CEO of The Travelers, offers an interesting perspective on the current state of hurricane risk. (As the piece appears in the Wall Street Journal, availability is limited to subscribers.) The article is entitled, "Before the Next "Big One" Hits." That's ironic, of course, because nothing meaningful will be done until well after the next big one hits. Nonetheless, Fishman's perspective is worth examining.

Fishman looks at the current chaos governing state regulated coastal property insurance from Maine to Texas. Not surprisingly, he sees a lot of problems. With over half the American population living within 50 miles of the coast, with coastal development continuing at an alarming pace, and with the prospect of bigger and more powerful storms developing in our oceans, many carriers are running for higher ground. Fishman believes that they might be more inclined to stay if the rules governing property insurance had some federal oversight. That's an unusual perspective, coming from a CEO.

Bring in the Feds
Fishman would like to see a federally regulated "Coastal Hurricane Zone" running from Texas to Maine. The feds would regulate and oversee wind underwriting by private insurers, including pricing. A federal role would increase consistency from state to state and offer a more stable set of rules - rules that might provide insurers with the confidence to make long-term commitments and investments of capital. Premiums would be subject to regulation: if they exceed the payouts over a period of time, property owners would receive a rebate. If the rates prove inadequate, they would be allowed to rise. A federal presence might pre-empt the current absurd situation in Florida, where tax payers enjoy depressed rates for coastal coverage, with the prospect of mortgaging the future when the next big storm hits (see our "Risk Management for Dummies" posting here). A federal role would benefit consumers by providing more transparent pricing and standardized "rights and responsibilities."

Fishman recognizes that some coastal risks exceed reasonable rate making. In these situations, he recommends temporary, transitional subsidies, extending 10 or 15 years. Here, those unable to pay the rates associated with the risk would receive a tax credit; on the other hand, those able to pay might face a surcharge to help balance the books. This is Robin Hood in a rain slicker, perhaps, but it's an idea worth further scrutiny.

Wind and Water
Risk mitigation under global warming's unprecedented and poorly understood circumstances must go beyond the pricing and wording of insurance policies. Fishman would like to see a proactive approach with some serious traction in two key areas:
- establishment and enforcement of credible building codes
- improved land management, with the preservation of coastal wetlands a major priority

Fishman is careful to call all of this "wind underwriting." He clearly is not contemplating an expansion of standard policies to include water damage. (Did someone say Dickie Scruggs?) From his CEO perspective, risk transfer must be both reasonable and profitable. The fact that he welcomes a federal role in developing the rules is a clear indication that the current situation is untenable. The free market for coastal property insurance is floundering on the rocks. Fishman is not alone in looking to the federal government to build the needed lighthouse.



Two items:

First I find it hard to belive that 50% of the US population lives within 50 miles of an ocean coast.

Second we don't need more government regulation. We need less. Let insurers anaylse building codes and individual buildings and set their rates accordingly. Insurance is shared risk. Those whose risk are higher should pay higher premiums. If no private insurer wants the risk then those with the risk can form their own mutual insurance company as they did hundreds of years ago.

As far as flood insurance the government needs to get out of that business and let private insurers set rates. The premiums will be sky high but so is the risk! Again if their is no private insurer they can form their own mutual insurance company.
For a slice off the top I will set it up collect premiums and pay claims. But I won't assume any of the risk. Its a mutual company the policyholders assume all the risk.

Of course if the government wants to get involved in something how about not allowing construction in areas below sealevel on the coast. We know sooner or later what is going to happen. Did anyone anywhere really believe the Big Easy was high and dry? Everybody new it was going to happen, sooner or later. Now the taxpayer is forking over billions for idiots who built or bought below sealevel. DUH. (And of course flood insurance was too expensive. DUH) So now the government steals from me to finance the improvident.

Insurance is a private contract to share risk. It is fine for government to help standardize policy terms to help with comparability. But a free martket kept clear of monopolies and high government barriers to entry will produce a viable insuance market with much better balanced risk/reward than government can create. Remember there was a time all insurance companies were mutual with no profit motive. They existed to spread the risk among large numbers of people with similar defined risk.

Government sets insurance parameters to buy votes. Who cares if they have to raid the public treasury in the in the long run. In the long run we are all dead.


Charles Read

I agree with Mr. Read. Want the pretty ocean view? Pony up the bucks to insure it, or go without.


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This page contains a single entry by Jon Coppelman published on August 27, 2007 12:12 PM.

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