HomePublications

PRESS RELEASE: Over-regulated Insurance Market Ensures Disaster in Coastal Regions

September 13, 2007

Media contact: Lura Forcum, Mercatus Center, (703) 993-4960 or lforcum@gmu.edu

Arlington, VA, September 13, 2007-State insurance regulation has created a system that subsidizes insurance for wealthy coastal residents at the expense of relatively poorer non-coastal residents according to Ensuring Disaster: State Insurance Regulation, Coastal Development, and Hurricanes, a study released by the Mercatus Center at George Mason University.

Two main types of insurance regulation subsidize the cost of insurance in high-hurricane-risk areas: wind pools and state guaranty funds. Pools levy assessments on all insurance companies in the state in order to cover the costs of a major hurricane. As of 2007, 1.8 million wind pool policies were in effect with a total liability of more than $500 billion. State guaranty funds pay claims on the policies of insolvent insurance companies, promoting risky behavior by insurers and decreasing public scrutiny of their fiscal stability. Since 1978, guaranty fund have imposed more than $11 billion in assessments to cover insolvent insurers.

Coastal counties are on average wealthier than non-coastal counties, with both higher average home prices and a larger percentage of $500,000 and $1 million homes. This means that the wealthier residents of coastal counties get insurance subsidized by less-wealthy inland residents who do not enjoy the pleasures of coastal living.

Increased development and migration to coastal areas mean that more people and their property are in harm's way when hurricanes strike. Insurance companies need to raise their premiums to offset this increased risk. But regulation keeps insurance premiums artificially low, allowing people to move to the coast even though they might not be able to afford the full cost of insurance coverage in the area. This encourages growth in regions where hurricane and storm damage is most likely-which increases the physical destruction and human hardship that hurricanes cause.  

To correct these problems, states need to make four key improvements.

• Halt the creation or expansion of wind pools in order to prevent excessive development. Phase out existing subsidies and pools over time.
• Provide low-income residents with tax credits or means-tested insurance vouchers as premiums rise to market levels.
• Require states to purchase reinsurance or issue catastrophe bonds to cover potential excess losses, which would force a current expenditure in state governments and oblige politicians who create or expand pools to bear some of the cost.
• Offer actuarially justified discounts for mitigation measures.

"We can't control the weather, but we can control how we respond to it," argues Professor Daniel Sutter, the study's author. "Policy change can help to increase the efficiency of insurance markets and perhaps keep more people out of harm's way for future hurricanes and storms."

Media Contact

• Lura Forcum
  
  lforcum@gmu.edu