The article in today’s Tampa Tribune regarding a Federal Wind Insurance debate comes as no surprise. Amazing how big Insurance is adopting Enterprise Risk Theory to further its interest. Since large corporations in the insurance field are not so much interested in how they make money, just that they make as much as safely possible, it is no wonder they are making the case for Federal wind coverage.
Just so everyone understands what is happening, large insurance companies following Hurricane Andrew became fascinated with an actuarial model that better suited "safe" return of capital. This economic theory has been described as Enterprise Risk Theory, where the tolerance of risk to the corporation is measured against the business model. I will write on this more later because one blog is simply too short for an in depth analysis. The main concept to remember is that risks of large losses have to be minimized if the corporation cannot, for any reason, "stomach" the large variances. So what do the oligopoly of State Farm, Allstate and Nationwide do regarding the wind risk along coastal states? They leave, raise rates and then start a national debate about government taking on the risk that they do not, but do not want new competitors replacing them.
What "free enterprise" champions they are!! Policyholders want one stop shopping for their insurance. They also want to know that they will be able to get insurance, so there exists some strong argument for the coverage. However, it is amazing that an industry built on spreading risks, and making money from it, transfers the variable catastrophic risks to the government—which is really the people—whenever it is to their advantage. In the long term, we have to promote new entrants into the insurance market willing to accept these risks. We must also continually implement public policy, laws and codes that lower the severity of loss by catastrophic damage. The one thing we should be hesitant about is expecting government to act as well as a private insurance company. Government is not private enterprise.
