A Good, CommonSense Editorial On Our Current State Wide Insurance Problem

[pwhitford]

Commentary

Hurricanes and Stubborn Human Behavior

By Donald D. Brown

October 25, 2011

It is a little recognized fact that in Western Cultures we tend to focus on symptoms
rather than the root cause(s) of our problems.

This tendency to focus on symptoms rather than the cause can also be seen in many
other aspects of western culture, not the least of which is "Public Policy" - which
brings me to what I want to cover in this article. When it comes to the Florida
property insurance market, Florida's leaders have, with the very best of intentions,
crafted a solution (HB1A - 2007) to the wrong problem (high homeowners premiums).

So, if high homeowners premium are not the problem then what is the problem?

The problem is 1) the severity of hurricanes, not the price of insurance and 2)
stubborn human behavior. (More recently sinkhole claims could be added to the list
of Florida's problems).

We all pay more than we'd like to protect our homes against hurricanes. But the
price of our insurance is just the symptom of a much larger problem-Florida's enormous
vulnerability to hurricanes. Until we are able to reduce the cost of hurricanes,
we're just spinning our wheels.

Every "solution" that tries to treat the hurricane problem as an insurance problem
is doomed to failure.

High insurance rates are the symptom. The severity of hurricanes coupled with our
stubborn behavior of building in places where the severity is greatest, and expecting
to shift all or part of the bill to someone else - that's the problem.

Whether we exhibit good behavior or bad as long as we do nothing to reduce the high
cost of hurricanes, we're on the hook, whether we pay before the storm (insurance
premiums) or after the storm (taxes and "assessments").

Hurricanes

Solutions to complex problems are made far more difficult when the problem is not
properly defined. In our case scientific developments have made it far easier for
us to predict hurricanes but we are yet powerless to alter their direction or intensity.

Given how destructive hurricanes can be to both human lives and property, the demand
for faster and more precise warnings is ever increasing; to provide these, we need
more accurate forecast guidance with longer lead times. Over the past few decades,
we've made significant progress in short-range predictions of tropical cyclones.
This is most notable in track forecasts: today's average 72-hour forecast position
is as accurate as a 36-hour track forecast was 15 years ago. However, there's little
improvement in our ability to predict hurricane intensity in terms of maximum surface
wind speed during the same period, and our skill at predicting tropical cyclone
formation or rapid intensity changes is quite limited.

With more than 50 percent of the U.S. population living within 50 miles of the coast,
[FN1] and with 180 million people visiting the coast annually, the risk to our Nation's
coastal areas continues to grow. As the U.S. coastline continues to develop, more
people will be at risk and impacts are likely to increase. In addition, annual U.S.
hurricane losses average about $10 billion and a recent historical analysis of hurricane
damages from 1900 to 2005 suggests a doubling of economic losses from land falling
hurricanes every ten years. [FN2] The need for substantial improvements, above and
beyond current research efforts, in hurricane track and intensity forecast capabilities
has never been greater. [FN3]

The bottom line is that science has not developed to the point that we can do much
to change the direction or intensity of hurricanes.

That leaves us with the problem of "human behavior."

Stubborn Human Behavior

What I am speaking about in this context is the stubborn human behavior of building
in very dangerous places while expecting that someone else will pay the bill.

The truth is that Florida is America's #1 catastrophe problem. If a hurricane is
to hit the eastern coast of the U.S., there is a 41% chance it will hit Florida.
The exposure is huge and can only grow in the future despite the real estate collapse.
According to AIR Worldwide the total value of insured coastal exposure in Florida
in 2007 was $2,458,600,000,000. That's nearly $2.5 trillion and represents a $522B
increase since 2004, up 27%. When compared to our gulf coast neighbors Florida's
coastal exposure is nearly twice as large as Texas ($895.1B), Louisiana ($224.4B),
Mississippi ($51.1B) and Alabama ($92.5B) combined!

Even more disturbing is the fact that in 2007 Florida's insured coastal exposure
as a percentage of statewide-insured exposure was 79%, more than any other state.
A closer look reveals that in 2007, residential structures accounted for $1.24 trillion
or slightly more than half (50.4%) of all coastal exposure in Florida, far more
than any other state. Interestingly New York is at $660.4B, Texas at $388.3B, Massachusetts
at $373.3B and our gulf coast neighbor of Louisiana at only $96.9B.

Despite the recent crash in the real estate markets and higher unemployment, according
to the University of Florida, Bureau of Economic and Business Research, Florida
will add millions of new residents in the years ahead, putting more strain on the
state's fragile property insurance market.

In 2010 Florida's population was estimated to be 18.773 million and is projected
to grow to as much as 23.821 million by 2035. Florida's demographics and land use
policies make it nearly certain that catastrophe losses in the state will rise in
the future.

In addition to Florida's status as one of the most catastrophically exposed places
in the world, Florida is also America's most dysfunctional, but not necessarily
most uninsurable, property insurance market. Rate suppression and, arguably, the
most burdensome regulation in the nation, not hurricanes, are the principal source
of the dysfunction. The hostile regulatory environment is ultimately anti-consumer.
In reality, rate suppression leads to reduced consumer choice, less competition
and a weakening among some insurers.

[Price does far more than compensate a seller for his goods or services. More importantly,
it communicates the appropriateness of certain human behavior. When government conspires
to deprive insurance consumers of the proper pricing signals it not only distorts
the market, it actually increases the danger that consumers will engage in behavior
that, if properly informed, they would never consider. An argument could be made
that depriving consumers of the proper pricing signals creates "life safety" issues
(building in very dangerous places).]

Since its creation in 2002, total exposure to loss in Florida's Citizens Property
Insurance Corporation has increased by 163%, from $154.6B to $406B in 2009. Continued
growth since 2009 makes the problem even worse. Recently it has been reported by
Citizens staff that Citizens' policy count is growing by 5000 to 7000 policies
a week.

There is one final aspect to human behavior that I would suggest plays an important
role in the problems Florida faces. It is based on the recognition of a fundamental
truth about human nature and is best described in a quote by Frederic Bastiat:

"Self-Preservation and self-development are common aspirations among all people.
But there is also another tendency that is common among people. When they can,
they wish to live and prosper at the expense of others."

"This fatal desire has its origin in the very nature of man - in the primitive,
universal, and insuppressible instinct that impels him to satisfy his desires with
the least possible pain."

The state is one storm away from a major economic and financial crisis. When this
happens, there is the expectation that the federal government will come to the rescue.
Even if the federal government steps in to pay claims (which is by no means a certainty),
it is doubtful that there will be a viable market the day after. Emergency assessments
used to fund future capacity may not be viable if Florida citizens balk at increasing
their exposure to additional losses (increasing assessments to fund future capacity).

Also, there is no guarantee that the level of bonding needed to fund future losses
will be available when needed. Subsequent season capacity may not be available and
certainly not enough will be available to avoid major problems.

A New Approach is Needed

A new approach to solving the problems in Florida's property insurance market is
needed. The gimmicks and schemes passed in the special session of January 2007
have failed. Today we are not only vulnerable to hurricanes; we are also vulnerable
to an economic catastrophe that is "man-made". The willingness of our government
to pander to the fatal desire of some to "...live and prosper at the expense of
others" must be checked.

Tough problems require strong leaders. We need leaders that are willing to tell
us the truth, not just what we want to hear. For once we need to "count the cost"
before we continue to build in very dangerous places.

1 http://www.ofcm.noaa.gov/p36-isrtc/fcm-p36.htm [http://r20.rs6.net/tn.jsp?llr=q69aiodab&et=1108333705138&s=395&e=001Wrb18q1wciCLi7TagH8AaFRwSJsHuBXpTzkjJttU_MHqmW45EDgWISl7KGbHJFO8H_yC0JYhH0wJF4HcoGBTK9q1cFE7q6XamDUiEUECbxjRhVt8bh9Wb8rdNJwA6jvSpRCrQr6NY-PXgPR9UaPklQ==]

Tropical Cyclone Research: "Interagency Strategic Research Plan for Tropical Cyclones"
(February 2007)

2 Pielke, R. A., Jr., J. Gratz, C. W. Landsea, D. Collins, M. Saunders, and R. Musulin,
2007: Normalized Hurricane Damages in the United States: 1900-2005. Accepted for
publications in the Bull. Amer. Met. Soc.

3 http://www.nrc.noaa.gov/plans_docs/HFIP_Plan_073108.pdf [http://r20.rs6.net/tn.jsp?llr=q69aiodab&et=1108333705138&s=395&e=001Wrb18q1wciDLhZXjG9f9cwBdahM68I7DQrl9HrdSu9M5H68PYELafPbVgoJ9Z38Fxq4_1ljMX9iUKTOQJOtAZQWtvxxff2x88Jvq3FOpeFnZAj4Nvzb-R-axe_Fa3KMeC8th1koZE-Tdrmxj8FxZjsGhlzqc-vq4]

"Proposed Framework for Addressing the National Hurricane Research and Forecast
Improvement Initiatives" (July 18, 2008)

About the Author:

Don Brown is an insurance agent in DeFuniak Springs, FL, a Senior Fellow at The
Heartland Institute, former member of the Florida House of Representative and Chairman
of the House Insurance Committee

SOURCE: http://www.donbrownflorida.com/2011/10/hurricanes-and-stubborn-human-behavior/
[http://r20.rs6.net/tn.jsp?llr=q69aiodab&et=1108333705138&s=395&e=001Wrb18q1wciDwLLVXS8aDjUxlPZIhh8VKV529QJmFFCU1wKJyu7moB7At2-rgfdp8hrYJwkgXVX8W1nw3uaHyIspg84v4yEuaLUweg1o3lSpcyAReu4LVM05ZbXMHVkmYohyFkRAlj_MpSMFnJeoYUrCuh-RSWIqElflQblyFB2eITmfjE6l18N1bx07ISS4m]

[Ralph W]

Commentary
By John Stossel
Sept. 20

As you watch those pictures of houses under assault from Hurricane Isabel, doesn't it make you wonder: Why do people build their homes so close to the water? They must have known a hurricane might do this. Why would they take such a foolish risk?

California

Well, people take the risk, because our government encourages us to take it. I know all about this, because I did it myself.

In 1980, I bought some beachfront property on Long Island, N.Y., and built a house there. It was a big investment for me. The down payment took just about all of my savings, and I knew what can happen to people who build on the edges of oceans. But I took the risk because the government made me a promise.

An Offer Too Good to Refuse

The promise was national flood insurance. It made my house and my neighbors' homes possible. After all, no bank will give you a mortgage unless you have insurance.

Private insurance companies were reluctant to sell insurance to those of us who build on the edges of oceans, and were they to offer it, they'd charge an arm and a leg to cover the risk. But this wasn't a problem for me, because you offered to insure my house. I know you didn't do it personally, but you, as a taxpayer, are the guarantee behind federal flood insurance. Should a big storm wipe out half the coast, you'll cover our losses â€" up to a quarter-million dollars. Thanks â€" we appreciate it â€" but what a dumb policy.

The subsidized insurance goes to affluent homeowners on both coasts â€" from Malibu Beach, where movie stars live, to Kennebunkport where the Bush family has a vacation home, to Hyannisport, where the Kennedy family has a summer home, to the Hamptons, where I bought my house.

The insurance premiums were a bargain. The most I ever paid was a few hundred dollars. Federal actuaries say if the insurance were realistically priced, it would cost thousands of dollars. Why should the government guarantee water's-edge insurance? Why should the government be in this business at all?

A decade ago I spoke with James Lee Witt, who ran FEMA, the Federal Emergency Management Agency, for President Clinton. FEMA's current director is busy with this week's hurricane, but his agency's policy hasn't changed much, so let's look again at the discussion I had with Witt.

Witt told me he thinks the flood insurance saves federal tax dollars. "If this insurance wasn't there, OK, then people would be building in those areas anyway, OK? Then it would cost the American taxpayers more dollars if a disaster hit that community and destroyed it," he said.

He said it's cheaper than offering additional disaster relief.

Should We Subsidize Insurance for Drunk Drivers?

That's government logic for you. Since we always spent huge amounts of taxpayer money bailing out people with disaster relief, politicians 35 years ago said, why don't we try to recover some of that money by selling flood insurance?

As so often happens, the program had unintended consequences. The cheap insurance encouraged more people to build on the beach, so the insurance risk is now huge. Today, $645 billion in property is guaranteed by Uncle Sam.

Geologist Orrin Pilkey at Duke University says this policy is simply "stupid." Pilkey has been one of the most persistent critics of the government's policies. He says both disaster relief and federal flood insurance just encourage people to stay in harm's way.

"We've got to get around this 'sympathy at all costs' for people who are suffering from natural disasters," Pilkey said.

Witt disagreed. He said, "Should we just walk away and say, 'We're not going to help you'?"

If I were a drunken driver who kept wrecking my car, should there be federal car insurance to make sure I have cheap car insurance?

Washed Away

Witt pointed out that the government did require me to put my house on stilts. That was a good thing because 16 years ago, most of my beach just washed away. It wasn't even a hurricane, just three days of big surf and suddenly I didn't have waterfront property. I was over the water. Still, the house survived because of the stilts, and what a view I had then.

Uncle Sam didn't even raise my insurance premiums. In fact, he spent millions more of your tax dollars to rebuild my beach. Up and down the coast, the Army Corps of Engineers dumped sand on hundreds of beaches.

This seems like a dumb policy too, since a study of replenishment projects found the new sand usually washes away within five years. But the government does it anyway â€" and you pay for it.

I asked Professor Pilkey what he thought of people like me who build houses on beaches? "I think you're a vandal and extremely costly to our society," he said.

A few years ago, I got a call from a friend. 'Happy New Year,' he said, 'your house is gone.' And it was. During a fairly ordinary storm, the ocean just dug up the sand under the pilings and took the whole house away.

There it was the next day on the front page of the newspaper. I'd always wanted to make front page news, but not like this. It was an upsetting loss for me, but financially, I made out fine. National flood insurance paid for the house and its contents. I could rebuild my house, and the government would insure me again â€" and again. I didn't rebuild. I'd learned my lesson; I sold what was left of my land. But the outrage is that federal flood insurance exists at all. There is a quarter-million-dollar limit on each payment, and as long as I build my house in accordance with zoning laws and ordinances, there is no limit on how many times the government will pay if a house keeps washing away.

Give Me a Break.
http://abcnews.go.com/Business/Insurance/story?id=94181&singlePage=true

[Dog Walker]

It would only take a simple change for the Federal Insurance Programs to work, whether it is Flood Insurance or some other sort of disaster insurance that private insurers won't cover.

We will insure your home against floods and storms.....once.  If it is more than 50% destroyed we will pay you the full value of your house AND LAND and then that land will be owned by the Federal government.  No one can build there again.  Our coasts and river valleys would gradually be cleared out of buildings where there should never have been buildings.

Nothing more to insure, no more need for beach re-nourishment, no more need for hundreds of miles of levees along the rivers.

Only sparrows (and insured humans) are dumb enough to keep building nests in the downspout.

[Garden guy]

It would only take a simple change for the Federal Insurance Programs to work, whether it is Flood Insurance or some other sort of disaster insurance that private insurers won't cover.

We will insure your home against floods and storms.....once.  If it is more than 50% destroyed we will pay you the full value of your house AND LAND and then that land will be owned by the Federal government.  No one can build there again.  Our coasts and river valleys would gradually be cleared out of buildings where there should never have been buildings.

Nothing more to insure, no more need for beach re-nourishment, no more need for hundreds of miles of levees along the rivers.
+1000
Only sparrows (and insured humans) are dumb enough to keep building nests in the downspout.