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OpenMarket: Insurance

  • Wildfires in California: A Growing Residual Market?

    May 22, 2007
    We may be seeing the emergence of yet another residual market for insurance, this time against wildfire. Even though fires have declined a great deal in the United States--and really don't pose a social problem anymore--the wildfire probelm has gotten worse. Particularly in California, many people, most of them rich, have taken to building homes on wooded hillsides. In the dry environment, these hillsides can become fire traps. As a result, the Associated Press reports, companies are getting tougher about writing policies and even withdrawing from some markets altogether. Unlike hurricane zones--which contain lots of lower-income people who may not have the means or ability to leave in the short...
  • Property Insurance Becomes a Legislative Casualty

    May 18, 2007
    The Florida legislature recently passed a bill regulating property insurance rates in response to complaints that premiums in certain hurricane-prone areas were too high. Now a rational person might suggest that property insurance premiums in hurricane-prone areas probably should be high, but I wouldn't expect such clarity of thought from someone like Gov. Charlie Crist. For a summary of the mess the Sunshine State has made of its insurance market (and thoughts on how to fix it), read Eli's op-ed in today's Tampa Tribune:
    If Tampa Bay area residents don't like Florida's property insurance environment, they only have to wait. Things will get worse. With Gov. Charlie...
  • Charlie Crist: Populist

    May 8, 2007
    Florida continues its populist jihad against private insurance companies. On top of last year's legislation letting the state-owned Citizens Property Insurance Corp. compete outright for private customers while freezing rates, the latest crop of legislation goes further down the path towards socialized property insurance. Citizens is already Florida's largest insurer and will now grow even larger. The new laws also make it harder for companies operating in Florida to wall off their subsidaries and create "pup" insurance companies. Gov. Crist, who calls himself a conservative Republican, seems to love this. "I hear some groans from insurance lobbyists," Crist has said. "'Tough!' This is what's right. We work for the people." His...
  • The Collapse of Private Insurance: Part XXVII

    April 18, 2007
    A federal jury verdict yesterday in Lousiana requiring Allstate to pay several million dollars it didn't expect to further underlines the inherent problem with our mixed public/private homeowners' insurance system. Allstate has every reason to contend that everything stems from flooding (covered by government) while homeowners, faced with National Flood Insurance Program coverage that has a $350,000 cap, want to have as much non-flood damage as possible. With a house totally destroyed, it's really just guesswork as to who is right. In this situation, private insurance companies have every reason to cut back on coverage. Louisiana's state government was the state's fourth largest property insurer before Katrina. In the wake of this decision, it may well become the largest.
  • The Tip of the Iceberg

    April 9, 2007
    I have a piece in today's National Review Online about the new bill that would provide optional federal chartering (OFC) for insurance companies. OFC, of course, would let insurance companies do what banks have long done and subject themselves to federal rather than state regulation. This could have good consequences if it lets insurance companies escape burdensome state regulations and move towards risk-based pricing for insurance policies. I still haven't even seen the final legislative langauge myself and, as I say in the piece, I think the devil is in the details. But the Sununu-Johnson bill is only the tip of the iceberg. There are other ways whereby we can move our insurance system towards risk-based pricing. Mutual recognition of state insurance charters would accomplish many...
  • Is Bad Regulatory Competition Better than No Regulatory Competition?

    April 6, 2007
    I had an interesting conversation about regulatory competition in the context of insurance. A lawyer I was speaking with argued that any regulatory competition structure—even a deeply flawed one—would help move towards a more liberal, less regulated insurance market. He told me that even a “bad” Optional Federal Charter for insurance companies would get things going in the right direction. (OFC would let insurance companies subject under federal regulation and sell the same product throughout the country without worrying about complying with every state regulatory regime.) Although I'm not altogether sold on this position, it does have some solid academic support. The literature on regulatory competition—in particular Dale Murphy's...
  • So Where do the Shipping Disasters Take Place?

    April 3, 2007
    They take place at home. Let me explain. In studies of regulatory policy, the international flags-of-convenience system for shipping often gets cited as an example of regulatory competition-in-laxity. Ever since some poorer nations like Liberia and Panama started registering foreign-owned ships under their own flags and subjecting them to lax or non-existant inspection standards, such standards have become more liberal around the world. For a variety of reasons (most prominently, the fact that "standards" were often ways of subsidizing domestic unions and shipbuilders) this is a good thing. But it's also a proveable fact that, even after adjusting for just about every variable under the sun, convenience-flagged ships prove more dangerous than their brethern regulated by first-world countries.  A new...
  • An interesting idea for insurance choice

    April 2, 2007
    In the next few weeks, I'm going to be writing a good deal about the idea that insurance companies should have the ability to do what banks have done since the Civil War and subject themselves to federal rather than state regulation. For a variety of reasons, the structure of what's called Optional Federal Chartering will decide whether it's good or bad. Structured properly it could make a big difference for consumers. Federal chartering could result in less regulation, more choice, and prices that better reflect risk. Structured the wrong way, it might actually make things worse by adding another level of regulation to an industry that already faces too much. A lot of the details about the "right" and "wrong" structures remain unresolved in my mind. Thus -- while the right federal chartering bill could do a lot of good right now -- I think there's a decent case for some...
  • Thoughts about McCarran-Ferguson

    March 26, 2007
    Senate Minority Whip Trent Lott, angry with the whole insurance industry over the situation in his home state of Mississippi, has announced that he wants to do away with the 1945 McCarran-Ferguson law. Friends on the Hill tell me he's quietly gathering support. It won't move forward for now, but I could see things changing. Right now, the McCarran-Ferguson Act grants insurance companies a limited antitrust exemption. The law lets insurance companies share risk and rating data in a way that other private companies typically couldn't. (The law also implicitly mandates state insurance regulation.) I'm skeptical of most antitrust law and, in the insurance industry in particular, there are real consumer benefits to allowing companies to share data on price...

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