Insurance companies face a difficult dilemma in coastal states. Living under the constant specter of a major storm event, many insurers provide are faced with the difficult choice of providing wind coverage in high-risk areas, where chances of profit are low and political scrutiny is high. The insurance systems of many states are marred by over-regulation and a lack of adequate competition.
Providing wind coverage in coastal areas is essentially a no-win situation for insurers, and as a result the majority of wind policies have shifted to state-run insurers of last resort. Some states are now considering whether they will allow their insurers of last resort to utilize hurricane models to determine rates, a mechanism used by many large insurers (“Insurers Criticized For New Rate Models,” July 1).
In order for an insurance industry to grow and thrive, it needs to be able to adapt to new challenges and develop under the fires of competition. Insurers need to be able to react to risk and charge premiums that allow them to remain solvent. Hurricane models provide the best available information for predicting future risk while also discouraging homebuilding in risky coastal regions. Competitive freedom encourages new insurance providers to enter the market, which will lead to a greater variety of products at lower prices. Wind insurance coverage is difficult enough without adding excessive regulation to the industry.
Matthew Glans ([email protected]) is a legislative specialist for The Heartland Institute.