Friday, February 16, 2007

Can you spell "c-o-n-t-r-a-c-t"?

Today’s Wall Street Journal contains a wonderful editorial piece about State Farm’s decision to withdraw from offering homeowners insurance in the state of Mississippi. As the article explains, the decision was based on the state attorney general’s actions in challenging as "unconscionable" the exclusions in homeowner insurance policies for flood damage.

My readers with long memories will note that I covered this very issue long ago, in “Paying for Katrina” (September 10, 2005): See At that time, I merely suggested that insurers would raise premiums for everyone based on the imposition of additional, unanticipated costs that were not part of the original insurance bargain. However, State Farm and Allstate, which only withdrew from coastal markets in Mississippi, have decided to go one step further.

Their decision is a rational one. The potential for governmentally-enforced extractions from insurers whenever populist sentiments need to be mollified is hard to predict in advance, and thus difficult to reflect in rates. Along a similar vein, what would you be willing to pay these days for an oil well in Venezuela? Hugo Chavez’ designs on private property might indeed implicate your willingness to part with hard-earned capital. Insurers likewise have responsibilities to their shareholders/policyholders (in the case of mutual insurance companies) not to break the bank by operating in unstable climates. Sadly, this unstable business climate is right here in the U.S., not in some third-world developing country.

This should provide a valuable lesson: remember to mistrust populist demagoguery. It eventually comes around to hurt the very people who may be fooled into believing it. I imagine those financing their homes are not so pleased to find that they are in breach of their mortgages when their insurance lapses on account of cancellation. (Could bankers then become the next targets?)

Happy Friday.


Anonymous said...

State Farm is simply doing what private insurers do. they deny coverage promised to policy holders. this is also happening in health care. Actually, Paul Krugman, John Bates winner, wrote a good article in the New York Times pertaining to a large private health plan.

I did read your article on Katrina. It's too bad the poor cannot hire an attorney to help them stand up to the large insurance plans. It's the classic case of the rich against the poor. Isn't it convenient how expense flood insurance is for those poor income people hit by hurricane katrina.

You said it in your Katrina article. Someone must foot this bill. If the private insurance companies will not do it the government will, won't they?

I suppose the government won't if the tax cuts and increased spending trends continue. I suppose then more democrats will get elected to help even out the inequality portrayed on TV during the Katrina aftermath.

By the way, Ben Stein wrote a fascinating article on American Inequality. For the past year, I've pondered how is it the stock market is fairing well despite social security problems, rising health costs, and two Wars. Here's the link.

Anonymous said...

I've often wondered if parts of the United States could be viewed as "third-world." So who is next on the list for withdrawn coverage-- blight zones or blight cities like Detroit. Now when one buys a home, the decision must take into account future disasters since Insurance no longer insures. This is the beginning of the end for the economy in the South. The future Civil War won't be called a civil war though, but will be the biggest race riots known in history.