States Visited

Wednesday, January 28, 2009

Today's Wall Street Journal

I took a peek at the WSJ while waiting on my lunch order and spotted two items in less than 60 seconds that gave me pause.

The first was that ANOTHER former Goldman Sachs executive has been placed in a position of power with the federal government. This time with the Federal Reserve. Anyone care to place a wager that Goldman Sachs received a nice chunk of that $1.2 trillion I mentioned previously?

The second was a story about State Farm pulling all homeowners policies in Florida over the next two years. Currently, State Farm is second in the market with more than 700,000 homeowner policies. Florida, like most states, regulates what insurers can charge - price controls. The regulators in Florida rejected State Farm's proposal to raise rates by 47%, so State Farm said, "Goodbye!"

The article lays out the consequences nicely:

"Policyholders may now be forced to find new coverage in a state where some other large national insurers have also been seeking to pare their risk, given the potential for large losses due to hurricanes. They also could end up paying higher rates with other companies."

"Many State Farm customers could wind up with the state-created insurer of last resort, Citizens Property Insurance Corp. Citizens has grown in recent years to become the largest insurer of homes in Florida. An influx of former State Farm policyholders could increase the financial pressure on Citizens, which has been trying to shed policies."

"Another alternative is likely to be a group of smaller insurers, some of which are relatively new, issue policies only in Florida or haven't been tested by major hurricanes."
(emphasis mine)

The state regulators are making it more and more difficult for insurance companies to operate profitably in the state, so they are leaving. Duh! Who saw that coming? The state-created "Citizens Property Insurance Corp" was apparently already having trouble if it is trying to shed policies and now it gets hit with this. My guess is that more and more residents will be forced to turn to the state for coverage because they cannot afford the risk of unknown companies or the high premiums (probably higher than what State Farm would have charged) of known companies. The state will not charge rates that are high enough to cover the risk so a large portion of the risk will be transferred from the state-created insurance company directly to the state and, therefore, to the taxpayers*.

Incidentally, State Farm was second in the market. Want to guess who is first? That would be the state-created "company."

(sigh) Is there some sort of mental defect in politicians that prevent them from understanding economics? Good intentions will not trump the laws of supply and demand. Ever. When a government institutes price controls, there will be a lack of supply.

*Florida does not have an income tax. It receives, by far, most of its revenues from sales taxes. Sales taxes are regressive, meaning the poor pay a higher effective tax rate than the wealthy. Unless Florida enacts some form of new tax, the poor will be subsidizing the homeowners policies for the majority of policies in the state. Let me go out on a limb here and predict that Florida will begin talks to institute an income tax on the very high incomes, the top 1% or so. You know, following the same blue print that the federal government did when it shoved the income tax down our throats. I think we know how that worked out.

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