Howls over hurricane insurance

Right about now, when hurricanes such as Dean storm through the Caribbean, US coastal areas are reminded how vulnerable seaside building can be, and how costly if destroyed. And yet, development in these areas continues, hurricane or no hurricane.

One reason is the lure of the water and warmer climes. That's next to impossible to turn off. But a more controllable factor is government interference with the market price of hurricane insurance. This manipulation can be corrected, though the trend is not very encouraging.

Insurance rates are based on risk, and high rates act as a brake on risky behavior. Since hurricane Katrina, premiums in many coastal areas have more than doubled. Those rates are based on forecasts of more intense and frequent hurricanes, and on projected losses from growing development, which is becoming ever more luxurious and costly to replace.

The premium increases, not surprisingly, have created a backlash among property owners. They have revolted, if not with beach rakes and umbrella stakes, then with demands that state governments – which regulate private insurers – do something. Governments, though, are loath to give up revenues generated by coastal development and are mostly responding by taking on more of the burden.

There are two types of hurricane insurance. Protection from wind has generally been the domain of private insurers. The federal government provides protection from floods when private insurers don't – which is most of the time.

So far, the Feds have not been able to run a financially sound flood protection program. It's more than $20 billion in debt, partly because its premium structure is not sufficiently priced for risk. The same properties flood multiple times, and are repaired multiple times. But what incentive do owners have to move or retrofit (build on stilts, for instance) when they enjoy taxpayer subsidized premiums?

There's a message here for the states tackling the wind side, if only more of them would listen. As private insurers from Texas to Massachusetts find themselves overexposed, they are raising rates or fleeing. States are stepping in by expanding state-backed "insurers of last resort."

In the last five years, the liability of the Massachusetts program has more than quadrupled. In Texas, it's almost tripled. It's up sixfold in Rhode Island, and fourfold in North Carolina.

Florida, the most hurricane- prone state, is of particular concern. Its state-backed insurer has become the largest property insurer in the state by keeping rates below market. It's expanding into commercial properties and rolling back planned rate hikes. Meanwhile, lawmakers significantly raised the limit on claims to the state catastrophe fund – which insures insurers – to $30 billion. Should a "big one" hit, the state would be in financial trouble.

Florida wants Congress to create a national catastrophe fund that also covers wind. But the idea has problems. One is willingness of states to share Florida's outsized risk.

It's not possible for the whole Sunshine State to move to safer ground. But in moving away from market pricing and private insurers, Florida and other states give up incentives for safer building and less building in hazardous areas.