David Frum

01.16.13

The Beach House Bailout

Eli Lehrer slams Democratic Representative Frederica Wilson's proposed Homeowners' Defense Act as a "zombie-like bill" that should be opposed by fiscal conservatives and environmentalists alike.

Insurance everywhere works by pooling together similar risks. While only a handful of insurers are truly global in scope, almost all of them spread their risk around the world by buying "reinsurance" (insurance for insurance companies) that allows them to pool the risk of a hurricane in Florida with, for example, the risk of flooding in the United Kingdom and a cyclone in Australia. Since these events will almost never happen at the same time, reinsurers can profit by earning premiums for one type of risk even as they pay out huge claims for another. All other things being equal, a broader pool lowers premiums.

But, by consolidating risk in the United States, Wilson's bill does the exact opposite of good insurance practice. To simply break even in the long run, its new mechanisms will have to charge more than the private sector and thus, nobody would have any reason to do business with them. The most likely outcome, however, is that it will charge less than it needs to break even and thus end up leaving taxpayers with the bill. The most similar effort that now exists, National Flood Insurance Program, began with similar promises of responsibility but was was recently the recipient of a $9.7 billion bailout and will owe taxpayers around $30 billion once it finishes paying all claims for super-storm Sandy. And taxpayers are hugely unlikely to get any of that money back.

And, through these profligate subsidies, the proposed programs would do immense environmental damage by providing huge incentives to build in the most disaster-prone areas the country. The only winners, its likely, will be real estate developers who own-disaster-prone land and insurance companies that would like to shed responsibility for actually taking on risk.