This is the subject of my latest column for Bloomberg, here is an excerpt:
First, whenever possible it is best to use private insurance, such as homeowner’s insurance and flood insurance, to protect against loss. One of the functions of insurance is to make the losers at least partially whole after the fact, but another is to make risky decisions that are too expensive to consider in the first place.
This second type of insurance is very important in Florida. The state is vulnerable to hurricanes, so insurance market rates should be allowed to adjust to higher levels, especially for buildings that are at risk. High prices in an area are a sign that construction and renovations should not take place there. As fewer people live in vulnerable areas, the cost of hurricanes will decrease accordingly.
That sounds harsh, but “incentives matter” is the first and foremost principle of economics, and sometimes incentives should be allowed to work. Unfortunately, Florida has a state-run insurance policy of last resort that continues to bail out homeowners.
Political debate often surrounds the issue as whether it helps poor, struggling homeowners. And indeed they may lose something terrible because of storms. But regardless of what you think of these rescue methods after the fact, with better motives ahead of time, that problem will come up less.
Economists are better at designing the former institution than judging all the claims on the public purse post.
Advice that can always be heeded.
Source link