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Wednesday, November 30, 2005

Do Insurers Need a Helping Hand?

The CEO of Allstate Ed Liddy in Fortune magazine Nov. 14, 2005 advocates that private insurers need to be shielded from catastrophic events. He proposes that the federal government be the back stop and set-up a fund for extreme events like the four hurricanes that hit Florida in 2004. It could be funded by a $20 charge to everyone's homeowner's insurance bill and a transaction fee on all real estate transactions. The four hurricanes in Florida last year wiped out every penny Allstate put into the Florida from 1992 - 2004. Allstate is no longer issuing new homeowners' policies anywhere in Florida. Safeco pulled out and State Farm is not taking on homeowners in southern parts of Florida.
I don't agree with Mr. Liddy! The 4 hurricanes that hit Florida in 2004 were not total unexpected catastrophic events. Florida has been hit by multiple hurricanes during a hurricane season many times over the last century. Part of the problem is that insurers continue to insure properties that are too close to the coastline or in flood planes. The insurers should raise the rates to reflect the actual costs of the true risk. There are still many companies insuring properties for homeowners in Florida, though at higher premiums. The insurance industry shouldn't be backed by the federal government. The federal government is vary inefficient and if a government program is needed it should be started and run by the States. Florida currently has a state fund for catastrophic events. If the state of Florida wants to spread the risk more they could negotiate with other gulf states and begin a multistate program. With state run programs the people in that state have a more direct say in how the program is run through the ballot box. Why should all property owner's in the country subsidies the insurance of people who choose to live in an area that gets hurricanes regularly? What would be next we all pay a premuim fee for California earthquakes? This would only lead to insurance rates that don't reflect the true cost of the risk of where you chose to live. This would only encourage people to keep building in high risk areas. My brother-in-law Terry pays a lot higher homeowner's insurance in St. Petersburg, Florida than I do here in Colorado, but he said it best "that is the price I have to pay for living in paradise" and Terry I agree with you.

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