Charlie Crist: Rest of America Should Subsidize Insurance for Florida

May 31, 2008

Florida Governor Charlie Crist, who has actually been mentioned as a possible vice presidential candidate for Republican John McCain, is backing, along with some giant insurance companies, a plan that would have the federal government in effect raise taxes on the rest of America to subsidize insurance for residents of Florida.

Here’s how:

As hurricane season begins, Democrats in Congress want to nationalize a chunk of the insurance business that covers major storm-damage claims.

The proposal — backed by giant insurers Allstate Corp. and State Farm Mutual Automobile Insurance Co., as well as Florida lawmakers — focuses on “reinsurance,” the policies bought by insurers themselves to protect against catastrophic losses. The proposal envisions a taxpayer-financed reinsurance program covering all 50 states, which would essentially backstop the giant insurers in case of disaster.

The program could save homeowners roughly $500 apiece in annual premiums in Florida, according to an advocacy group backed by Allstate and State Farm, the largest writers of property insurance in the U.S.

But environmentalists and other critics — including the American Insurance Association, a major trade group — say lower premiums would more likely spur irresponsible coastal development, already a big factor in insurance costs. The program could also shift costs to taxpayers in states with fewer natural-disaster risks.

It gets better:

Critics cite that debt forgiveness as an example of how states with little or no hurricane risk can end up footing the bill for damage in flood-prone areas. “For years, federal flood-insurance backers told us the program was financially sound, but the storms of 2005 left it $17 billion in the hole,” said Steve Ellis of nonpartisan budget watchdog Taxpayers for Common Sense.

Even some analysts hired by lobbyists for the federal program acknowledge it has its risks. “If you charge something less than the private-market cost for homeowners’ insurance, that creates a potential incentive to increase exposure on the coast” — in other words, to build in risky or flood-prone areas — said David Chernick of Milliman Inc., an actuarial firm hired by ProtectingAmerica.

While the Democratic Party is meeting this weekend to discuss the issue of whether or not to seat the Florida/Michigan delegation at the convention because they broke the rules by having an early primary, many in that discussion have pointed out that allowing Florida and Michigan to be seated would basically encourage states to break the rules in the future. In other words, you would be rewarding states for breaking the rules.

Yet many of these same Democrats will back a flood insurance program that has a similar moral hazard problem: bailing out homeowners who are flooded and thereby encouraging them to rebuild in risky areas again (not to mention the fact that housing investment in these areas tend to have higher marginal environmental damages than investments in other locations, which is like taxing hybrid cars to subsidize SUVs).

This, like the farm bill, shows that parties would abandon their principles for politics. Republicans will claim to be for small government until it is a handout that their constituents are getting at the expense of somebody else. And Democrats will claim to care about the little guy and protecting the environment, but will support policies that tend to benefit higher-income individuals (e.g. those who tend to own beach front property) and harm the environment (but it does make government bigger I guess).

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