Extreme weather events and natural disasters are colorblind. Hurricanes, tornadoes, and wildfires strike red states like Florida and blue states like California. In turn, we should let the market do its job, allowing businesses and households to make decisions about mitigating the risks of extreme weather events. That approach will mean the federal government doesn’t have to keep borrowing from future generations to deal with the unknowable.
Where will hurricanes strike? Will the mountain ranges of the West and the East experience more wildfires because of rising temperatures? Will tornadoes become more powerful across the central regions of the country? Are all geographies of the United States becoming more vulnerable to extreme rain events and flooding because of rising global temperatures?
We don’t have conclusive answers about weather and climate. But that’s not the point. What matters is that the market absorbs all information on a daily basis and allows consumers, both business and also households, to make decisions about what might happen regarding the weather. The market is the collective wisdom of the nation. The market works.
In southwest Florida, residents are facing skyrocketing rate increases for homeowners and vehicle insurance. Two devastating hurricanes have struck the region in the past seven years. Along the coast, homes were destroyed and cars suffered severe flood damage. Property and casualty insurance companies suffered economic losses, and reinsurance companies also lost money. To reduce risk, traditional PC companies off-load risk to reinsurance companies. The PC companies pay premiums to the reinsurance companies, and risk is spread.
But homeowners are being priced out of the market for home insurance. Some are relocating. Some are just rolling the dice and not buying insurance or are underinsured. The market is working. People are free to make their own choices. Government interference is not necessary.
The problem?
Some homeowners are barking for the state to bail them out with lower-cost insurance provided by a state-owned company. This is a terrible policy approach that voters should reject. Why should a middle-class family living in the Orlando area, which is not as vulnerable to hurricanes and flooding, subsidize insurance for households that reside in Naples, Florida, located on the Gulf of Mexico and which has been ground zero for recent powerful hurricanes? I live in Naples. It is among the most affluent communities in the U.S. That’s relevant because the less wealthy should not subsidize the more wealthy. People who choose to live in Naples must take personal responsibility for their choices.
Many businesses and consumers don’t realize that PC insurance companies are raising prices to recoup losses incurred in prior years. Insurance and reinsurance companies must generate profits. Otherwise, they will exit the insurance industry. If there is no insurance industry, everyone is on their own and could be wiped out by the next extreme weather event. Moreover, if the state becomes the insurer, inefficiencies and cronyism will follow as will higher tax bills to pay for state-provided insurance.
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After current rate increases, insurance companies will be made whole. Insurance rates for 2025 should return to typical premium increases. That, of course, assumes that 2024 is not a year of more hurricanes and wildfires. PC companies have more information than business and households. They make price decisions on that data. If business and households disagree, they can underinsure, roll the dice, or relocate.
Regardless, let the market work. It is the most efficient pricing mechanism. The market maximizes individual choice and in America, free choice matters.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society.