In the wake of Katrina and Rita, many insurance companies are now considering people who live in the Gulf of Mexico, Florida, Long Island, and other such places uninsurable. Hundreds of thousands of homeowners who live in such areas have had their insurance cancelled, and the total numbers of those who are uninsured could reach into the millions.
The lead editorial of the New York Times today outlines a plan by which we could insure homeowners against the next major hurricane that will hit the area. First of all, the way we should manage it is so that we encourage homeowners to build homes in less-risky areas while discouraging local zoning authorities from encouraging development in high-risk areas that would be highly vulnerable to a hurricane strike.
And on top of that, many more homeowners will feel a heavy financial pinch. Katrina caused more than $50 billion worth of losses to the insurance industry; therefore, in many more cases, they have raised rates exhorbantly. Subsidizing insurance companies is not an option -- they would simply pocket the money and raise their profits. So, the editorial suggests making the National Flood Insurance Program the sole provider of homeowners' insurance in costal areas that are vulnerable to hurricanes.
Among other things the editorial suggests are the following:
--Allow companies to amass reserves in tax-deferred accounts for the purpose of preparing for multibillion dollar claims in the event of a major hurricane.
--Build on existing programs that allow states to be a backstop for insurers when the damages reach a certain amount; for example, the State of Florida does this for insurers when the damages reach $4.5 billion.
--Create a federal backstop where hurricane-vulnerable states would pool their resources to provide another backstop for insurers and allow them to offer affordable insurance for homeowners.
The Katrina disaster was a death blow for small government ideology. That sort of ideology championed by Ronald Reagan has turned into a sink or swim mentality where everybody is on their own without any kind of safety net. And for those who believe in the myth of the free markets, the markets totally failed to protect millions of homeowners from losses during Katrina and Rita. And many more times, it has turned into an ideology where people simply pass the buck and assume that problems are not their responsibility.
And many insurers committed abuse of power by charging exhorbant rates for insuring homes from losses as well as making all manner of creative excuses why they should not have to pay. Sound public policy should provide a check against corporate abuse of power while protecting businesses who do the right thing against bankruptcy. This is similar to the racket that exists within the medical field, where people in HMO's hundreds of miles away with no medical training whatsoever try to dictate personal medical decisions to families and doctors.
The practice of taking peoples' premiums and then turning around and refusing to pay them when disaster strikes is nothing more than legalized theft which would get people like you and me thrown into jail if we were to engage in that sort of thing. But this sort of legalized theft occurs all the time. And it is hardly confined to high-risk insurance; Paul Krugman wrote about how Countrywide was stealing money from people by foreclosing on them rather than work with them to pay off their debts. In this regard, corporations have special rights in this country to steal money from people that we don't have.