Insurance regulation is one of the most complicated areas of legislation, and following the pros and cons of different bills is often a difficult task. Some regulations can actually benefit the free market, while others obviously hinder it. But as often as is the case with legislation, political support for otherwise complex laws can be explained with simple economics.
Generally speaking, most politicians try to support legislation that brings the most money to their districts while spreading the tax costs across the unknowing public. In formal terms this is referred to as the principle of concentrated benefits and dispersed costs. This explains the political support for most programs, legislation, and pork spending, and insurance legislation is no exception.
Case in point: The Homeowner’s Defense Act proposed by Representative Ron Klein (D-Fla.). The bill proposed by Rep. Klein would, among other things, set up a large “catastrophe” fund for state insurers in the Gulf, particularly for Florida. The fund would be a pre-funded bailout of state run insurers in the event of a hurricane disaster. The special fund would allow state insurers to continue charging below-market rates for the risks being taken without having to collect enough assets to stay solvent in the event of a large disaster. The benefits of the fund would come specifically to those living along the coastlines of the Gulf, yet the costs would be spread out across the entire U.S. It should come as no big shock then that the act’s main supporters are a congressman from Florida and Florida Governor Charlie Crist.
Given that one group is getting all the benefits of the bill, it should also be no surprise that many groups would stand up against it, including some very unlikely partners. As reported in a piece in Politico last week, both environmentalist and free market groups are uniting to oppose the legislation. Free market groups like CEI are against the legislation on the basis that it intervenes in the market process and spreads the burden of risk on undeserving parties. Furthermore, the subsidizing of insurance rates for these Gulf States incentivizes building homes in areas at higher risk during hurricane disasters, as well as the construction of less safe homes. Environmentalist groups, despite their different mission, are opposed to the bill on the grounds that it would incentivize building homes in environmentally sensitive habitats, like those where sea turtles lay their eggs.
While these may seem like unlikely partners for just this one occasion, perhaps it needn’t be so. Since so often the legislation free market advocates oppose involve dispersed costs on everyone, maybe we should look more often for support in unlikely places. You just never know when the sea turtles might want to join your cause.