Hurricane Eye on Insurers

Throughout the hurricane zone that follows <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />America's Atlantic coastline from Texas to North Carolina, a populist furor has gripped politicians intent on punishing private property insurance companies.

Although the particulars differ from state-to-state, it appears clear ongoing bipartisan efforts have transferred so much hurricane risk to the government that taxpayers will end up footing an ever-larger percentage of the bill when a storm hits. As hurricane season begins, it seems ending this trend toward “windstorm socialism”and protecting taxpayers may ultimately require a massive federal overhaul of how America deals with insurance.

Florida, which bears more than half of America's total financial risk from hurricanes, has led the charge toward state control of the property insurance market. With the support of Republican Gov. Charlie Crist, the state legislature has let quasi-public Florida Citizens Property Insurance Corp. compete directly with private companies for most business while simultaneously keeping Citizens own prices below market levels.

Citizens, already the state's largest property insurer, could well see its market share exceed 50 percent by year's end. Florida legislation also requires companies to issue policies when they otherwise wouldn't, tells them how to structure their in-state operations, and even dictates the data in annual mailings to customers. The situation doesn't look much better elsewhere.

Louisiana Gov. Kathleen Blanco has backed a post-Katrina rebuilding program (The Road Home) that, in addition to its many management problems, turns insurance buyers into chumps by cutting state grants for anybody wise enough to buy insurance before Katrina. More recent efforts in Louisiana have offered $100 million in corporate welfare to insurance companies and may increase the role of the state's own version of Citizens under the guise of “privatization.”

With the support of Republican Gov. Haley Barbour, Mississippi likewise has passed legislation that bails out its own quasi-public wind insurance system while keeping prices below market rates.

There are a few bright spots — such as a South Carolina program that helps residents self-insure against hurricanes and make their homes more storm-resistant — but the overall trend seems toward greater government control over the insurance market under the guise of sticking it to the insurance firms. One can say the same for all of these populist schemes: They can't last.

While post-Katrina premium increases have produced significant short-term profits, the insurance industry lost money issuing homeowners' policies along the Gulf Coast 17 out of the 20 years before Katrina. By design, insurance companies lose money on property insurance premiums and make it back through investments. State-backed insurance plans have few or no investment options and, even without government-mandated lower-than-market premiums, simply could not survive a big storm.

Although every state has a mechanism to stick its own taxpayers with the bills for the inevitable collapse of these systems, politicians will have an understandable reluctance to make their own electors pay up. One study has estimated a bailout of Florida Citizens would cost $14,000 per household.

Thus, all-government solutions loom. Mississippi Democratic Rep. Gene Taylor has introduced federal legislation to add windstorm coverage to the existing federal program for flood insurance. For those who favor a greater government role, his bill makes logical sense: The current system gives private insurance companies an enormous incentive to show damage stemmed from water rather than wind and thus stick federal taxpayers with the bill. Passing the bill, however, would only add to the $28 billion liability the flood program already poses. Proposals for national catastrophe insurance, which would do much the same thing indirectly, have also attracted some support. In either case, federal taxpayers would ultimately end up paying the bills for people who choose to live in high-risk areas.

While Florida Citizens and its smaller cousins have no way out of this mess, federal legislation could make things better. The greatest hope lies in efforts that would give insurance companies the choice banks have had since the Civil War to organize themselves under federal rather than state law.

A new bill, proffered by Sens. John Sununu, New Hampshire Republican, and Tim Johnson, South Dakota Democrat, would do just this. Without burdensome state regulations, insurance companies could re-enter some markets and reduce taxpayer liability. This proposal — called Optional Federal Chartering — could provide an alternative to the failure-prone, state-run systems.

Although the Johnson-Sununu proposal carries the risk that the federal government could make things worse, it offers a real breath of fresh air for an industry shackled by overregulation.

Quite simply, overheated populism has made a mess of many American insurance markets. Right now, the wrong federal action could easily make matters worse. But the right moves could produce a new, more vibrant market for insurance throughout the nation.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />