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 http://economictrends.blogspot.com/2005/09/paying-for-katrina.html 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?)