Wouldn’t we all like to have a beach house? A large number of Americans have a dream of living near the sea, but few of them have the financial ability to purchase a home along the pricey coast. For one thing, there is the cost of buying property in such a high-demand market with such a limited availability of space. In addition, there’s the high cost of insuring a home that is built in an area where it is likely to be damaged by natural catastrophes.
It is expensive to purchase insurance along a coast and there is a legitimate reason for that: homes built within a stone’s throw of the sea, or other large bodies of water, are far more likely to experience damage — damage that insurers ultimately pay to repair. So, in order to cover their likely costs of repairing homes after storms, insurers attempt to charge “actuarially sound rates,” or the amount of money they will likely need to pay out on a policy. For most people wishing to live on the beach, this actuarially sound rate is far out of their financial reach. Oh well, I guess you’ll just have to live inland in a nice quite neighborhood… unless you happen to live in a state with a government-funded insurance facility.
When discussing “moral hazard” the term has particular significance in the realm of insurance. When insurance costs are suppressed and the rates do not reflect the relative riskiness of the insureds’ choices, people could end up making decisions that put their lives and financial livelihood in harm’s way.
When insurance premiums are high — usually as a result of greater risk (such as a precariously placed home or a car garaged in a dangerous neighborhood) purchasers are often prompted to mitigate their risks or make safer choices in an effort to reduce their insurance costs. Some will add storm shutters to their home, choose a safer neighborhood with less crime, or raise their home to prevent flooding. However, when those costs are skewed by government intervention, either by offering government insurance or forcing insurers to keep rates artificially low, the consequences are often that people will make choices that are likely to end in disaster.
As we at CEI have been saying for years, there is a reason that insurance for coastal properties is generally more expensive than other places: it’s riskier. When insurance commissioners force insurers to charge low rates for these properties or set up a state-run community funded program to provide insurance, they are making building on the coast a viable option for many more people. The results are exactly as predicted: more people have been building along the coasts and other environmentally sensitive areas.
The latest evidence is a study released last week from the Insurance Research Council (IRC), which concluded that state-run residual markets, such as those in Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina, and Texas, have provided the means for development in some of the nation’s areas that are most likely to experience natural catastrophes such as hurricanes, flooding, etc.
The programs were created as insurers of last resort, meant to provide coverage to residents where none was available. However, as the study shows, the “insurers of last resort” have quickly become competitors on the market.
For instance, in Florida, where 79 percent of the state’s total exposure is on the coast, the IRC found that the percentage of coastal exposure held by the state-run Citizens Property Insurance Corp. has doubled the past five years to 20 percent.
“The plan’s jump in market share over the past few years indicates [Citizens] is acting more as a competitor in the insurance market than as a market of last resort,” the study said.
Population growth in the states outlined in the report has grown “substantially,” which has “fueled the increase in demand for insurance” though private insurers have pulled back from many coastal markets due to the inability to get rates that match the risk, the IRC said.
If state legislators want to protect their residents from physical and financial harm, if they want to revive the economy and protect “environmentally sensitive” geographical regions, the best step they can take is to get out of the insurance business.