Thursday, August 2, 2012

Do you think they Yada Yada'd over democracy?

Let me start with a question, "Does Florida have a property insurance problem?"  I envision the coastlines alive with a chorus of Floridians and insurers worldwide shouting, "YES!  There is a problem.  Absolutely."

Now I'll try a new question, "What is the Florida property insurance problem?"  I imagine the resounding one syllable "yes," giving way to loud white noise as everyone chimes in with different responses.  Bickering and brawling ensues.  Some, ponder the question more astutely, and suggest that really, Florida does not have an insurance problem at all- it has a vulnerability problem, a climate change problem, a moral hazard problem, an actuarially unsound problem, an affordability problem, an overreaching regulatory problem etc etc and so on and so forth.

Defining the Florida property insurance problem, or lack thereof, is an exercise in expressing political objectives.  Different political interests need not see eye to eye on a problem in order to agree on a solution.  Likewise, interests need not agree on a solution in order to agree on a problem.   In some ways this can be beneficial in the democratic process as it allows for negotiation and compromise.  But when solutions become substituted for formal policy goals, a breakdown of the democratic process can ensue.  Ratemaking or rates becomes a means for achieving any number of political agendas. A token to dispute over instead of discussing underlying issues.  It's like yada yada-ing over the democratic process to arrive at a prefered conclusion.

For example, writing in the Insurance Journal on behalf of R Street, a free-market advocacy group, Ray Lehmann, finds it encouraging that several "strange bedfellows" share the position that Citizens should raise rates.  From the R Street perspective, raising Citizens' rates will solve the Florida property insurance problem.  Lehmann outlines four different problems described by 4 different groups that believe that their risks should be incorporated into Citizens rates.
  1. Florida Insurance Council: Moral hazard risk that arises from "subsidies" and fiscal risk that arises from uncertainty about bonds after a storm
  2. Americans for Prosperity (a free-market advocacy group): insolvency risk and rating uncertainty
  3. Several Environmental Groups: Environmental risk
  4. Florida Insurance Consumer Advocate: Assessment risk
My last question, are any of the above risks described by the interest groups, risks that Florida homeowners wish to insure against?  I hear rustling of papers and a maybe a few murmurs.

Indeed, recent outcry against the Citizens Board's decision to raise rates suggests that a very many people have no interest in paying for insurance to cover these risks.  Being forced to do so, particularly without understanding what it is they are paying for, may suggest a failed democratic process.  Perhaps it is this that politicians are alluding to when they suggest that raising rates is "nothing short of immoral."


  1. This may be a silly libertarian question, but why should this be a political issue at all? Wouldn't it make most sense to let private insurance companies decide what rates are needed to insure such properties and then let people decide whether they want to live in "coastal property" knowing that they will need to spend that much money or risk paying for damages themselves [in the case of those without mortgages]?

    1. Ratemaking is inherently a political process as different interests come together to decide on a chosen rate and by extension a shared perception of risk. One may argue, as I believe you might be, that the scope of interests involved in the political process ought to be narrowed to exclude everyone but private insurance companies. This would not remove the politics from the decision making process, only the types of people allowed to participate. This is one option that may be in line with some group's values. However, public policy in this country is to use insurance as a means to promote the general welfare and therefore there is a public interest in the ratemaking process. As well, it is stated policy to provide "affordable" insurance (amongst other rate goals). We can debate what that means in practice. In many people's eyes it does make "most sense" to allow insurance companies to set their own rates because it would better allow these groups to meet their goals such as, libertarian ideals whatever those are perceived to be. On the contrary, in many people's eyes it does not make most sense to allow them to set their own rates because doing so would hinder the ability in meeting their goals, such as state or national economic growth however that may be measured. It is democracy that promotes the ideal that both groups ought to be able to participate in the political process of decision making about risk and rates. FYI- By politics I mean, the process of bargaining, negotiating, and compromise to meet desired ends.

    2. In my initial comment, I was thinking of a different use of the term political. I by no means intended this to be a unilateral decision making process. Rather, it would be one decided between involved parties [mainly the insurers and the insured, though I could see others being involved as well—that’s for another time to discuss]. They would either have to come up with a mutually agreeable price or forego the idea of insurance as something not worth the cost. This is not something that would necessarily happen through negotiations. Rather, it would likely occur through market based decisions, as insurance companies would determine the lowest price they could/would charge and consumers would decide the maximum they would pay. When I hear the term “political” together with “general welfare,” I translate that to government. It is there that I have a problem with “political” solutions. Unless the taxpayers as a whole have a vested interest in someone living on the coast, I’m not sure why there should be governmental involvement at all. Barring that premise, how does insuring those with coastal property promote the “general” welfare. It certainly does nothing for the majority who live inland on safer, though duller, pieces of property. That leads to the issue of what is “affordable,” which you correctly put in quotes. It seems that what happens is that one party becomes able to afford insurance for their beautiful beachfront property because another party helps pay for it without any benefit. This leads, I believe, to inefficient uses of resources.


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