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2.10.08

Same overregulation folly as federal govt looms for LA

It’s unfortunate to hear that recent hurricanes will cause thousands of dollars of out-of-pocket expenses for some Louisianans who sustained damage to their homes. But tinker with this situation too much and you’ll get the same government intervention and overregulation that caused the present liquidity crisis in the mortgage industry.

We got the same old populist sentiments at a House Insurance Committee meeting with tirades about the “named storm” deductible now growing more common with homeowners insurance in the state. Some consumers complained that the policy of having a deductible at a percentage of the home’s value meant even with damage in the thousands of dollars they would receive no proceeds from insurance companies. Some legislators seemed all too eager to regulate the practice.

But once again this turns into a story about people wanting others to subsidize risk for them, to gain benefits others pay for. Currently (although this may change given a new law), if a company writes a policy in Louisiana, it has to charge the same deductible everywhere. Thus, this artificial requirement would cause people where I live to pay more on policies for their level of risk than those around the coast where a named storm is much more likely to cause damage for their level of risk.

I’m happy to do this, because I recognize that is the concept of insurance – you pay to mitigate a potential calamity, knowing it may never happen to the extent that you receive more than you put in. However, you from around here and I should be unhappy if it’s not largely the free market setting these rates, because then political considerations courtesy of state over-interference artificially raise our rates in favor of others.

Further, nobody put a gun to the head of people who bought policies with the named storm deductibles. If they chose not to read their documents of listen to their agents when that part came up, it’s nobody’s fault but their own. And if they were gambling that in getting this kind of policy they could secure a lower rate without suffering a storm, too bad; they could have paid a higher rate for a lower deductible. And if that extra cost would have priced them out of the market, there is such a concept as renting.

The problem is, as Insurance Commissioner Jim Donelon pointed out, regulation such as forcing lower deductibles no matter how calculated likely will drive insurers out of the state, because neither can you point a gun at insurers and make then write policies that lose them the revenues to keep them operating. (One change Donelon supports does make sense – just a single named storm deductible incident per year; after all, if a storm damages property, chances are that property will not be repaired by the time another named storm strikes not long off in the future.) And if that happens, then everybody will start piling into the state’s insurer Citizens Property Insurance Corporation whose coffers if emptied as was the case with the 2005 hurricane disasters then calls upon all state ratepayers or even taxpayers to make up the difference.

Which creates the same situation now being faced in Washington. Heavy-handed federal laws forced private lenders and the government corporation that backed mortgages to lend money to riskier individuals than the market would have afforded. Now that risk will have to be subsidized by taxpayers, perhaps to the tune of hundreds of billions of dollars, unless future markets bring a lot of luck. Anything but a light hand on the insurance issue in Louisiana might please grandstanding politicians, but would cost the citizenry plenty.

2 comments:

Anonymous said...

Let us not forget our so called fiscally conservative Governor is seeking federal money to give people who have high deductibles.

T. Wong said...

Red herring alert:

"Heavy-handed federal laws forced private lenders and the government corporation that backed mortgages to lend money to riskier individuals than the market would have afforded."

Absolutely not true. Even the lenders subject to the Community Reinvestment Act had few worries of enforcement actions of late. Of those that loaned between the redlines, their originators did not need the CRA to get them into the "redline" areas. The folks there were easy pickins. They were happy to be there. Bogey up an appraisal. Make the loan. Get your commission. Let AIG or whomever worry about collecting it.

You cannot and will not find any data linking CRA, the only "heavy-handed" federal law that applies, to any significant portion of the recent troubles. You might find suits alleging higher fees/interest disproportionate to the extra risk. That's about it.