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Market and government reform will solve insurance woes

Apparently a big part of any approaching special session will be discussion about not just how to deal with past insurance issues, but in how to avoid financial problems involving it in the future. If addressed, Louisiana needs to take the proper, free-market approach rather than give into the siren song of big government backstopping insurers.

Many insurers and politicians, including Louisiana’s Insurance Commissioner Jim Donelon if done at the federal level, support the idea of a catastrophic fund run by government that would pay out to insurance companies under conditions triggered by huge claims as a result of a natural disaster. Its most radical form would compel taxpayers from nationwide to pay into the fund, while less extreme versions would create a compact among states, or within states, where only ratepayers would subsidize the fund (which is close to how Louisiana’s Citizens Property Insurance Company works now in catastrophe situations).

But on both philosophical and practical levels, this plan has problems. Philosophically speaking, it violates taxpayers by forcing them to subsidize lifestyle choices made by others, instead of making people responsible for their own actions. Nobody forces anybody to live in a certain place, and it is immoral for people to ask for others with no connection whatsoever to them or their choice to be coerced into contributing to facilitate their ability to reside in a specific location when no common good is derivable from that. To ask others who buy homeowners insurance to do so also is illegitimate, since people should be free to choose what insurer to select (if they can afford it in the first place) and they would be punished even if they went with a company that made wise financial decisions to keep rates lower. (And, the notion is a total nonstarter among peoples in states where living entails lower casualty risk.)

It also invites government abuse. A government-run fund would put tremendous financial power in the hands of government rather than with individuals or corporations. Since government makes the least wise investment decisions (because they do not have to observe marketplace rules and the discipline and incentives to make optimal decisions) it would be less efficient and thus take more resources from the public or ratepayers than would reinsurers (in essence, private sector catastrophic funders). It also could wield these monies in a coercive fashion by its investment behavior, or be lax and allow these funds to be raided for other purposes, leaving the fund short when it is needed.

Practically speaking, catastrophic funds serve only to excuse lazy business practices among insurers, providing the industry disincentives to exercise good judgment and to use resources the most optimally, as the removal of some funds from the reinsurance marketplace would do. This would cause rates to rise overall. It also puts government in the business of competing with the private sector which discourages economic growth and tax revenues from it.

Rather than pursue this end, the best approach begins with the state setting land-use regulations in coastal areas, creating building codes and encouraging hazard mitigation – as explained by the Reinsurance Association of America, some things which Louisiana has started doing. But the key change would be to make reforms that encourage policy-writing in the state – less regulation of the industry in both structure and philosophy.

Structurally, the state is saddled with the Insurance Rating Commission, the only one of its kind which approves all rates above a certain level in addition to departmental review. Either it or the commissioner’s office should be abolished as they are duplicative and, theoretically, it’s better for the commissioner to stay because the Commission, being comprised of appointed officials, allows more room for meddling and agendas to discourage insurers, while the elected commissioner must face the voters who will punish him for allowing rates that are too high or also if they are set too low that would cause insurers to flee the state leading to undersupply of homeowners’ insurance.

Getting insurers to write policies is as simple as understanding that insurers remain in business if they have business on which they won’t go broke. Let rates go to their natural levels and there will be plenty of eager insurers patrolling the state. Greater flexibility in rates, which may anger some consumers because they historically they have underpaid dramatically commensurate to the risk they choose to shoulder in their residential choices and would see rates skyrocket under regulation more faithful to the marketplace, if put in place and not altered in response to populist pressures will encourage enough insurers that the vast majority of the state’s ratepayers will pay no mores, or even less, than they do now.

Only a private sector-oriented approach along these lines can solve permanently the vicious cycle of fewer insurers and higher prices. Resorting to big government schemes like catastrophic funds only means higher prices for most with no stable, ultimate solution for Louisiana taxpayers and ratepayers.

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