finem respice

There's No Such Thing As A Risk Free Lunch (Revisited)

Submitted by ep on Fri, 07/03/2009 - 00:40
who will pick up the tab?

The investigative powerhouse of Fox Business has suddenly discovered that years of government tampering with the Florida insurance market has effectively destroyed the ability of Florida residents to cost effectively mitigate their hurricane, wind and flooding risk. Apparently, a bunch of state legislators were not quite as good at pricing risk as they (or their constituents) imagined.

Long time readers of Going Private and finem respice will have had about 18 months on Fox Business in realizing that the combination of incentive mismatch in the political class, populist pandering and anti-market nonsense has caused quite a bit of damage.

Back in February of 2008 I quipped:

The always observant readership of Going Private will have little difficulty sharing my frustration with prominent public figures who, in their often dangerous zeal to fulfill the promise of Lake Wobegon for all their constituents, somehow believe that they can fundamentally alter or suspend the laws of mathematics, obtain return with no risk and otherwise lower the expense of daily endeavors by merely legislating that it should be so. Of course, these efforts center around a particular type of moral hazard, namely, short-term political gain funded via the issuance of a big bond with a brutally compounding PIK tier and denominated in units of "later economic disaster."

I was referring, of course, to the Florida Hurricane Catastrophe Fund, the long slew of anti-insurance practices by Florida's legislature, and the folly of the state-owned insurance company, Citizen's Property Insurance Corporation. And now? The Florida taxpayer is on the hook and failing that (and that will fail) the federal government will have to bailout the state.

Florida, not surprisingly, is quite keen to socialize hurricane risk across the country with a national Catastrophe fund. Why shouldn't all of Alaska's citizens pay their fair share of Hurricane risk, after all? Meanwhile, those credit default swaps on Florida bonds are looking quite good.

[Art Credit: NASA "Untitled," Photograph (Unknown Date), Unknown Provenance. Hurricane Fran, the 1996 Cape Verde-type storm menaces the coast.]

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