Professor Martin Grace argues that the so-called “double deductible” problem in Florida is more of a problem of high deductibles, where doubling just worsens the problem. Why are deductibles high? Professor Grace notes that for some time now, insurers have not been allowed to charge adequate rates, so rate regulations have provided the incentive for the private insurance industry to reduce their Florida windstorm exposure. Since less risk is privately insured, more risk is borne by policyholders and government in various forms, including higher deductibles and state run risk pools.
Florida provides an interesting case study of dysfunctional regulatory policy. As Professor Grace so capably documents, the regulatory process has effectively undermined the viability of private insurance and substituted in its place an ad hoc set of risk sharing arrangements which no one particularly likes and very few people understand. Unfortunately, it appears that things may get worse before they get better. The New York Times published an article about the “double deductible” problem the other day which enumerates some of the short term measures and longer term reforms that are under consideration. One idea which has been floated is to provide a cash grant of $500 to everyone who has suffered unpaid insurance losses during the course of this hurricane season. While such a measure may alleviate some of the short term financial “pain” for affected consumers, from a longer term perspective this is not sound public policy, since policies like this undermine consumer incentives to make prudent risk management decisions (see “Catastrophes and Moral Hazard: The Case of Florida Windstorm Risk“). Actually, this is a classic case of a policy which may have favorable political implications but carries with it rather undesirable economic consequences. Furthermore, Mr. Tom Gallagher, who is the head of the state’s Department of Financial Services, wants to get rid of multiple deductibles and substitute an alternative policy that would enable consumers to insure against aggregate losses and therefore only pay one deductible. There’s nothing wrong with this idea so long as insurers are able to charge a premium which reflects the added risk and cost associated with such a policy. However, why stop there? Why not provide consumers with the option to choose between a policy based upon the current policy form, and the alternative policy proposed by Mr. Gallagher? This would encourage self selection, and therefore allow for more efficient and fair pricing. Besides offering consumers greater choice, such a policy reform would also promote market efficiency and enhance the insurability of Florida windstorm risk. In order to “fix” the Florida insurance market, regulatory reform needs to address pricing issues as well as policy forms. If not, then over time consumers and the state will continue to suffer from an insurability problem.