|
| Insurance Companies-Economics 101 and Policy Revisions. | |||||||||||||||||
| Topic | Utility and consumer choice | ||||||||||||||||
| Subject | Post Katrina, insurance companies are re-thinking their property insurance policies. | ||||||||||||||||
| Key Words | hurricane, insurance, private markets, public insurance, incentives, game theory; public policy | ||||||||||||||||
| Full Article | If you have an InfoTrac
or BCRC access
code, click on the appropriate source to login and view the full text
article. |
||||||||||||||||
| News Story | 2005's storm season with its star attractions Katrina and Rita-following on the heels of the very active 2004 storm season--caused almost $55 billion in damage. This year's storm season is also predicted to be particularly active, though not as bad as last year. In the wake of huge payouts associated with past years' hurricanes, insurance companies are coming up with policyholder incentives as the companies revise their policy offerings. As a result, a state-run self-insurance pool in Florida could see up to 1.5 million policies this year, almost double the number issued last April.
Several insurance companies, most notably State Farm and Allstate, indicate that they will no longer insure property in many coastal states, including Florida, New York, Texas and others. Those companies that continue to issue property insurance are increasing policy premiums by up to 200% in many of these same places. They blame the re-insurers (the companies that insure the insurance companies), but it's all about placing incentives where incentives need to be placed. This year, the National Oceanic and Atmospheric Administration (NOAA) predicts 16 tropical storms in the Atlantic, of which 10 are predicted to be hurricanes. This is bad enough news, but not as bad as last year's 27 named storms. The forecast bodes poorly for insurance companies. Individuals wanting to live on the coast in the path of these storms are at increasingly high risk for property damage, warranting the higher premiums. The danger? Many people expect the government to bail them out when they can't get private insurance coverage for their beach home on the east coast of Florida. If the federal government does step in--at the cost of higher taxes and less spending elsewhere to handle the burden--individuals no longer bear the entire risk of living within well-known hurricane paths. Incentives to build only in safer areas disappear. While many economists call for the federal government to serve as a "stop-gap insurer," picking up the insurance tab during a calamity, they also recognize that FEMA's assistance only encourages individuals to migrate to the coasts. It appears, though, that insurance companies are beginning to remember their economics training and are charging people for insurance commensurate with the risks involved. |
||||||||||||||||
| Questions |
|
||||||||||||||||
| Source | "The price of sunshine." The Economist. June 8, 2006. http://www.nytimes.com. | ||||||||||||||||
| Instructor Discussion Notes | Discussion
Notes These notes are restricted to qualified instructors only. Register for free! |
||||||||||||||||
Return to the Utility and consumer choice Index
©1998-2006 South-Western. All Rights Reserved webmaster
| DISCLAIMER