What Would We Do Without the Government to Help Us?

I now turn my attention to Sandy, and specifically the idiocy of governments (but I repeat myself).  Specifically, the states of Delaware, New York, New Jersey and Connecticut have forbidden insurers from applying hurricane deductibles:

Delaware regulators aren’t allowing property insurers operating in the state to apply special “hurricane deductibles” that can saddle homeowners with thousands of dollars of additional repair costs.

Delaware becomes at least the fourth state hit by superstorm Sandy to prohibit use of the special deductibles. The state’s ruling follows similar moves in New York, New Jersey and Connecticut.

Delaware Insurance Commissioner Karen Weldin Stewart said Friday her office informed the property-casualty insurance industry that the storm wasn’t fierce enough at the point it landed in the state to allow them to charge the deductibles.

The department acted on data from the National Weather Service that showed the storm didn’t have sustained hurricane-force winds when it made land in Delaware, “therefore companies may not impose a hurricane deductible on Delaware claims,” the department said in a news release Friday.

The hurricane deductibles are a feature of many standard homeowners’ policies in coastal areas, and would apply to damage from such things as fallen trees or wind-borne debris—expected to be a source of much of the damage.

Typically, the special deductibles are calculated as a percentage of the dollar amount of coverage on a dwelling, according to the Insurance Information Institute, a trade group. Terms vary by carriers, and deductibles can go as high as 5% under some policies.

Such special hurricane deductibles have become more common over the past decade as insurers have sought to have people with property in the riskiest area pay more of the cost of hurricane damage. Each state sets its own rules for when the deductibles can go into effect.

Because, of course, ex post invalidation of contracts always leads to such great outcomes.  The short run effect is a transfer of wealth from the shareholders of insurers to their policyholders.  Socially-though crucially, not politically-that’s zero sum.

The long run effects are more pernicious.

First, don’t cry to me, citizens of Delaware, NY, etc., if you can’t get hurricane coverage in the future, or find it much more expensive.  Insurers will either raise premiums or withdraw from the market altogether to mitigate the risk of ex post expropriation.

Second, insurance premia and risk sharing will no longer be able to vary with hurricane risk in a discriminating way.  This will tend to encourage overbuilding in vulnerable areas, and to induce the insured to take too few precautions to secure their property against hurricane damage: deductibles force the insured to bear some of the risk, which gives them an incentive to take actions to mitigate damage.

So the effects of these actions will be a one time wealth transfer, and wealth destruction in the future.  The typical outcome of politicized processes.

But it gets better! And by better, I mean worse.  For by undermining the private insurance market, these state governments will increase the demand for government “insurance” provided ex post, in the form of transfer payments to compensate the uninsured who suffer future hurricane losses.  Which means more deadweight losses from moral hazard, and the distorting effects of taxes to pay for these transfers.

But from politicians’ perspective, this is probably all feature, no bug.  For it involves the creation of a new client class, and gives them the opportunity to play Santa Claus in the future.  That’s because politicians are all about exploiting the seen (the public acts of “charity” and “compassion”) and counting on voters not understanding the unseen costs of these allegedly empathetic policies.

One last Sandy comment.  Can we truly be sure that is really Mayor Bloomberg doing such stupid sh*t, and this isn’t an extended Mel Brooks gag?  I mean, Mel and Bloomberg do look pretty similar.  My favorite is Bloomberg’s (or is it Brooks’s?) refusing National Guard assistance in Brooklyn because . . . I sh*t you not . . . the NG has guns.  And guns are bad!  Not that there are looters or thugs or anything like that in Crooklyn that might take advantage of the current circumstances or anything.  I am shocked Bloomberg hasn’t disarmed the NYPD.  (Though I’m sure he has his own armed escort-and did when he was just a filthy rich private citizen.)  But there’s always time for that after he’s vanquished the Biggie Soda and transfat menaces.

New York would indeed do better to have William J. Le Petomane as mayor.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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