Should government write homeowners' policies?

Should state governments take on the task of writing insurance policies for homeowners? I did an interview with an insurance executive recently on the topic of how insurers are pulling back from what they claim are high-risk coastal cities and states and how states—-okay one, Florida, so far—-are filling the vacuum by creating state-run risk pools.

I spoke with Ross Buchmueller, who is president and chief executive officer of PURE Risk Management, a start-up insurance company with offices in Plantation, Fla., and White Plains, N.Y. Buchmueller has street cred: He was previously president of AIG Private Client Group from its inception in 1999 until 2006. PURE launched this past March, and so far says he has signed up “hundreds” of policyholders in Florida, its initial market.

A quick bit of background: PURE intends to market largely to high-net-worth individuals—-for instance, those with homes to be insured at more than $1 million, expensive jewelry, car collectors with six vintage autos in storage.

So far, Buchmueller says business has been brisk – particularly from the owners of high-end homes -- given that so many insurance companies have pulled out of Florida, and the state legislature enacted language that as of 2008, the state-run risk pool can’t insure homes worth more than $1 million. When insurers began pulling out of Florida, Buchmueller says many of his new customers previously had turned to the surplus market (i.e., Lloyd’s of London) where the rates are, where they were easily paying $17,500 a year for homeowners’ coverage (he says PURE charges less; I won’t go into details lest this come off as an advertisement for PURE).

He believes that the niche he’s targeting -- $1 million-plus homes – is a good risk that the state is passing up. And even though one could argue that Buchmueller is skimming the cream of the market, he says that it's probably good public policy for the state of Florida not to insure homes worth more than $1 million. “Even if they acknowledged what we see in terms of this market being a good risk, it’s a huge burden on taxpayers for a relatively small number of policyholders” to represent the biggest potential risk.

That’s all prelude to the point I wanted to raise: Should government be providing catastrophic insurance? Clearly, the homeowners’ insurance market is screwed up. Insurers are pulling out of coastal states like Florida, and now you have Allstate saying it will stop writing new homeowners’ insurance policies in California, saying the region was becoming too risky between all the earthquakes, mudslides, etc. When the private market fails, that’s historically when governments step in. Florida went first. Should other states follow? The free-marketeer in me says no – that this would become yet one more unfunded liability borne by the government. But I’m starting to wonder. The biggest concern I would have is that governments do a poor job at apportioning true cost-sharing – underwriting standards would be dictated by politicians, not economic judgment.

For instance, I firmly believe that anyone who owns a beach-front home should pay big for insurance (I’m opposed to the government program that allows individuals to build a beach-front home, and insure it cheaply, and then covers the cost when a hurricane wipes it out). Would a state-run risk pool charge proportionally higher premiums for beach-front homes? And I actually think that Florida SHOULD cover $1 million-plus homes. Buchmueller’s probably right – those more expensive homes are better built and are actually less risky. But what Florida has done is allowed Buchmueller to skim the cream, while it insures everything else.

What do you think? Should the government jump in and provide homeowners and flood insurance? If so, under what terms? Love to hear from folks in the insurance business…

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