Thursday, May 2, 2013

Dirty Cash: Exploring Potential Solutions to Florida's Hurricane Insurance Woes

The issue of insurance "rates" nauseatingly consumes Florida’s public debate about hurricane risk.  On one hand, the private market wants higher insurance rates to mirror their beliefs about higher hurricane risk.  On the other hand, the Florida public wants lower insurance rates to mirror their beliefs about lower hurricane risk (or lower as compared to other risks).  In order to provide for the public welfare with a stable insurance market the two hands must meet somewhere near the middle. This will not happen without addressing the underlying issues with housing affordability (both costs of ownership and incomes) and building practices.

This ought to be great news for policy makers because it broadens the realm of possible solutions beyond the heavily politicized discussion of hurricane rates and risk.  For example, if the problem were better understood as one of distorted real estate markets and undesired building then perhaps addressing Florida’s tax evasion and money laundering might be helpful in relieving the hurricane affordability-insurability problem.

In the 1970’s and 1980’s Miami became a hub for cocaine trafficking.  Historians argue that this sudden influx of cash into the city’s economy brought forth unto this world the Miami of today, characterized by its modern financial and real estate economy.  At the hight of the cocaine trade, 20% of all real estate transactions in South Florida were paid in cash and caused an inflation of real estate prices.

Current statistics suggest that this tradition of money laundering is alive and well in the state.  According to the Department of Justice,  the Florida of today ranks fourth for “suspicious” banking activity.  The FBI reports that Florida is a national leader in mortgage fraud.   According to the  February issue of The Economist the world’s wealthy use Miami as a hub for “off-shore” banking activity- including tax evasion and money laundering.  The magazine reported that America keeps its “dirtiest” money on “Brickell”- as in Brickell Ave.  Perhaps not so coincidently, South Florida real estate purchases are predominantly  in cash- especially on the luxury end.

Florida’s queationsable financial scruples may significantly be impacting its social and economic systems causing difficulty for the successful implementation of an insurance regime.

In drug exporting countries, policy analyst Ignacio Navarro at the California State University- Monterrey Bay has demonstrated (for example here) that the illegal drug trade significantly contributes to increases in construction and housing prices.  He concludes,
… the strong cocaine export effect on urban construction and housing prices is mostly caused by money laundering that artificially inflates the demand for housing in these urban centers…  Illegal goods impact urban economies not mainly through employment like legal exports do, but through money laundering. This difference has profound implications for long-term economic development as they tend to create boom and bust cycles of real estate prices that can be catastrophic for local economies (and here).
Organized crime and corruption expert Louise Shelley at George Mason University has documented several instances where money laundering into real estate has had negative consequences for society, including some OECD countries:
  • exacerbation of economic bubbles in Japan and Dubai,
  • price increases of South Africa homes, 
  • “over construction of expensive housing and hotels” in Turkey and South America,
  • urban decay in Ohio (the US state), and
  • environmental degradation in Italy.

There is nothing here to suggest that Florida’s hurricane affordability-insurability problems will surely be solved by addressing the legality of how money enters the state.  Nor do I mean to argue that all of the money entering Florida does so illegally.   

I am arguing that Florida's hurricane insurance situation will not be resolved be endless debate about rates because the competing parties have different values at stake.  However, compromise may be found by addressing underlying distortions in the social and economic system.  Florida's tradition of money laundering may be one place to start.

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