Economist Insight: Hurricane Insurance
If prices are rising, that should be a signal to people and businesses to avoid settling in risky areas. The economic centre of the hurricane business is Florida, which is both the most vulnerable part of America and the most valuable. In 2004 the total value of insured coastal property in Florida was $1.937 trillion, compared with $1.902 trillion in New York. Unfortunately, the signal is not getting through to homeowners in Florida, because the government is cushioning the blow. Insurance companies in America may not set their own prices. The rates they charge customers (and indeed the models on the basis of which they calculate their rates) are regulated by state governments. "Communism survives in three parts of the world," says Mr Muir-Wood: "North Korea, Cuba and the American insurance market."
Thanks to subsidised insurance, the risks of living on Florida's coast are not reflected in property prices. In 2005"”the year after the most damaging hurricane year ever"”six of the nine metropolitan areas with the fastest-rising house prices in America were in Florida. The state's population is expected to rise by 52% between 2003 and 2030, as against 21% for the country as a whole. The insurance industry is not impressed. "You've got to send a proper price signal," says David Unnewehr of the American Insurance Association. "You can't subsidise development through insurance."
What would Florida look like if the price signals were getting through? More like Grand Bahama, probably, which is covered by the British insurance market. The Queen's Cove canal estate in north Grand Bahama, which has been flooded three times in six years, is no longer insurable. People are moving out and new houses are being built on stilts.