So how did we get here?
Higher premiums serve to discourage investment and development in disaster-prone areas, such as Florida with it’s hurricane season, however the higher prices are not politically popular and may appear unfair when the seas are calm and the weather clear. That may cause the government to attempt to drive prices down artificially, which serves as a market signal for more investment and development on the high-risk lands.
In Florida, politicians created a state-run insurance company with artificially low property insurance premiums backed by an implicit guarantee which encouraged people to build, like the celebrities building elaborate mansions on beaches in hurricane paths. This distortion in the marketplace drove many private insurance companies out of the state, leaving the state of Florida as the largest insurance provider.
When natural disasters hit, like a hurricane, the damage costs are higher, and thus insurance claims greater, than they would have been if the original premium signals had been obeyed and the beach houses not been built. Read the rest of this entry »