The Miami Herald points to the recent spike in business property insurance costs as threatening the continued strength of the South Florida economy. "The massive collapse of the hurricane insurance market for Florida businesses has morphed from an economic headache just weeks ago into a clear and growing threat to the region's economic vitality, experts say." MiamiHerald.com | 07/22/2006 | 'A crisis' for business in Florida (July 22, 2006)
Unlike homeowners, commercial property owners have no "insurer of last resort" provided by the State of Florida. Some businesses are "going bare," others are accepting higher deductibles or deliberately under-insuring their business properties. Others are talking about moving their operations out of South Florida. For some, lender restrictions leave them fewer choices.
The binge of building in the storm-threatened South Coast has for years depended on cheap insurance, short-sighted building codes and zoning decisions and deliberately subsidized federal flood insurance. See, e.g. Unintended Consequences: Government Policies Increase Hurricane Damage: Climatologists (July 26, 2006). It may not have seemed cheap at the time, as state and federal regulators and aggressive competition kept the cost of development and rebuilding low.
(read more below the fold)
Hurricane Katrina and Rita reminded insurers and reinsurers of the vulnerability of the coastal zone to really big storms that cause massive catastrophe losses. As a result, the "weak hands" have folded and left the game. Some insurers have been closed by the Insurance Department for lack of sufficient reinsurance, and others have voluntarily reduced their policycount and raised premiums, with the approval of the Insurance Department. Reinsurers, many of them European and Asian giants beyond the regulatory reach of local politicians, have brought back market discipline. See "Unintended Consequences: Reinsurance shortages shutter Florida insurers" (July 21, 2006)
Economic discipline is sometimes hard for the local economy and local politicians to accept. In similar situations, other states have given in to the temptation to install "quick fixes" to counteract natural free market forces. Those quick fixes may tax the general population to subsidize coastal insurance, may saddle insurers with the deficits of "residual market" plans, or may attempt to "lock in" insurers at inadequate rates or unreasonable terms.
Any of those choices only postpone the inevitable bill for costs of over-building in harm's way. The temptation is real to put those costs off to a later administration, to a time after the next election, after the next fiscal year. The temptation is real to "whistle past the graveyard" and hope that the next big one won't hit while you are underinsured or "bare." But the future eventually catches up, and yesterday's expedience becomes today's disaster.
As Knowledge Problem points out, the future has arrived in Queens, where years of politically expedient decisions to put off investment in electric generation and conservation infrastructure have caught up with hundreds of thousands of customers left for days without light, air conditioning or refrigeration during a lingering heat wave. Risk Prof comments: "Political institutions do not care about capacity (until it is too late) as long as prices are low. This is exactly the same problem Florida has for insurance and reinsurance capacity." RiskProf : Queen's Blackout is Related to Florida Hurricane Crisis (July 26, 2006).
Thanks to: RiskProf : More on Business Property Insurance in Florida (July 24, 2006)
Posted by dougsimpson at July 26, 2006 05:24 PM