There was a New York Times story published yesterday that, frankly, disgusted me.
It’s a 30,000 foot story about New Orleans. The city is not coming back. The story implies this is a good thing. The author spoke to economists and demographers and delivered a dry piece without the taste or smell of humanity to it.
But that’s not the real story of Katrina. The real story of that storm, and the other 2005 hurricanes, is just now starting to be felt up-and-down the East Coast.
Our coasts have become uninsurable. The MSNBC story linked above focuses on Cape Cod, but the real epicenter of this is Florida. Homeowners are demanding a government subsidy of their risks. Republicans in Florida are complying, increasing the size of the state’s insurance pool, even at the risk of giving more power to Democratic CFO Alex Sink.
Insurance is a funny business. It’s a form of gambling. You place a bet
that something bad will happen to you. The amount you have to lay down
in order to get a specific pay-out is your premium. (To the left is the cover of ReInsurance Magazine, a trade paper.)
Premiums are set in the open market. That
is, high-end risks, called re-insurance, are a poker game
played in places like New York and London, where pools of capital are
put to work laying off the bets of business. Re-insurance is usually
layered, from $10-50 million in losses here, from $100-200 million
there.
The higher the dollar value you’re playing, the lower the premium,
because the lower the chance you’ll have to pay. Say you’re insuring
the risks of a housing development. The odds of a random Mexican
falling off a truck are pretty good, so the first million of risk may draw odds
of 1-20, and cost $50,000. But the odds of a semi-trailer filled with
nitroglycerin blowing up in the center of your development are low, so
the odds at $1 billion in coverage may be 1-100,000. That is, if you want coverage
to $1 billion, that top layer of risk may cost you just $1,000.
Now if we’re going to get a hurricane like Katrina once in every 100
years, you get one price for coverage of those re-insurance pools. If
it’s bound to happen every 10 years, or even 5 years, and we’re expecting future storms to be worse, you’re
talking about 10 times or 20 times the premium for your coverage, and
the higher-dollar pools may cost just what the lower-dollar ones cost.
The house, in the form of the insurance companies, is good at making
things seem worse than they appear. They represent the real players
here, the capitalists. They tend to over-estimate risks, and often
don’t take into account the money they’re going to make while they hold the premiums from, say, sticking them in a hedge fund while the game is
underway. (Investment returns kept insurance rates low throughout the
1990s.)
Both states and the national government stepped in to regulate the
industry at the low-end long ago. They have to approve rate changes on
common policies like autos, home theft, or fire. Not even the most
rabid right-wing Republican wants this to end, because only the very
richest people have enough capital to insure risks — most millionaires
are customers in the insurance game, not players.
So now that Katrina (and the prospect of more to come) has changed the
odds, everyone wants you, the taxpayer, to provide the capital needed
to manage these risks. And Republicans seem happy to give it to them. I
suspect Democrats feel much the same way.
This is how governments can go bankrupt very fast. Governments can’t
get the big returns from their invested capital. And if the real risks
are going up — and they are — then it’s a sucker’s game. And you’re
the sucker.
The fact is we never should have built along the shoreline in the first
place, not to the extent that we have. And we knew it when we did it. The vast majority of people who
live on our shores today are wealthy. I don’t think they should get a
bail-out. Their cries for help fall on deaf ears with me.
How about you? Ready to be played for a sucker insuring people who never should have built there in the first place?
By refusing this bail-out, moreover, we’re going to do two things which are very, very good indeed.
- We take out the returns from building in dangerous wetlands in the first place.
- We force people who do want to build near the coast to take
extraordinary measures to protect the property if they’re to get
insurance. Same with existing developments.
The golden era of levees will be at-hand if we just don’t let the
wealthy suckers who bought condos-by-the-sea soak the government for
insurance policies they know are going to pay out. The economics of
coastal development need to change radically, right now, and the rising
insurance risks are a good way to force that change.
I’m sympathetic to the idea that we shouldn’t be subsidizing insurance in order to make rich guys playgrounds a secure investment. But the Gulf Coast is not all a rich guy’s playground and the insurance issue is NOT restricted to the coast.
There’s not a condo development on the entire Louisiana coast. The two or three pockets of camps are owned by regular folks who live within 100 miles. All the rest are folks who live there,farm, run cattle in marshy areas, shrimp, fish, or work offshore. It’s nothing to dismiss lightly; it’s no irresponsible rich man’s playground.
In addition, and I’m sure this is true all along the coast, it’s turning out to make insurance impossible miles inland. This hits people who pre-global warming were living in safe places inland plying the family trade and living a life that differs only mildly from the life Joe America lives in Peoria–or Atlanta. The real issue here is storm surge, not winds –most coastal or near-coastal housing is adequate for most winds. It’s the water….
An example I am intimately familiar with: Lafayette, La. Lafayette is 40+ miles from the open sea. The right storm, coming at the right bearing could push storm surge as far as the city we are told.
That vulnerability is not due to irresponsible planning and has nothing to do with building 20 story condos on the sand. It has everything to do with global warming and a storm cycle nobody thinks is “natural.”
The idea that it is ok and understandable to hang such communities out to dry because some others are fools needs to be rethought.
Be aware that the strategy that you are suggesting–essentially benign neglect–is precisely the strategy being used now to cut New Orleans “down to size.” No one is willing to build, not because they think they couldn’t find buyers or renters but because they are certain they can’t be insured. That is the single biggest reason that folks aren’t able to come home.
It’s not about the rich fools. It’s about thriving local cultures and regular folks all along the coast.
A real solution is harder than doing nothing or suggesting to your legislators that they do nothing. A real solution involves taking the condos off the beach, reinforced building codes, real wetlands restoration where needed, and deciding that climate change is real and that we can do something about it. (We can.) That involves people in the messy endless work of pushing their neighbors and representatives to act in the common good even if they don’t benefit directly. And yes, it calls for some sharing of the risks and taking on a little more burden. Or at least helping the 50 mile strip along the water opt out of the criminal system that is set to destroy their communities and let them self-insure–and subsidize their reinsurance…
Or you could let them all drown when their time comes.
Like New Orleans.
I’m sympathetic to the idea that we shouldn’t be subsidizing insurance in order to make rich guys playgrounds a secure investment. But the Gulf Coast is not all a rich guy’s playground and the insurance issue is NOT restricted to the coast.
There’s not a condo development on the entire Louisiana coast. The two or three pockets of camps are owned by regular folks who live within 100 miles. All the rest are folks who live there,farm, run cattle in marshy areas, shrimp, fish, or work offshore. It’s nothing to dismiss lightly; it’s no irresponsible rich man’s playground.
In addition, and I’m sure this is true all along the coast, it’s turning out to make insurance impossible miles inland. This hits people who pre-global warming were living in safe places inland plying the family trade and living a life that differs only mildly from the life Joe America lives in Peoria–or Atlanta. The real issue here is storm surge, not winds –most coastal or near-coastal housing is adequate for most winds. It’s the water….
An example I am intimately familiar with: Lafayette, La. Lafayette is 40+ miles from the open sea. The right storm, coming at the right bearing could push storm surge as far as the city we are told.
That vulnerability is not due to irresponsible planning and has nothing to do with building 20 story condos on the sand. It has everything to do with global warming and a storm cycle nobody thinks is “natural.”
The idea that it is ok and understandable to hang such communities out to dry because some others are fools needs to be rethought.
Be aware that the strategy that you are suggesting–essentially benign neglect–is precisely the strategy being used now to cut New Orleans “down to size.” No one is willing to build, not because they think they couldn’t find buyers or renters but because they are certain they can’t be insured. That is the single biggest reason that folks aren’t able to come home.
It’s not about the rich fools. It’s about thriving local cultures and regular folks all along the coast.
A real solution is harder than doing nothing or suggesting to your legislators that they do nothing. A real solution involves taking the condos off the beach, reinforced building codes, real wetlands restoration where needed, and deciding that climate change is real and that we can do something about it. (We can.) That involves people in the messy endless work of pushing their neighbors and representatives to act in the common good even if they don’t benefit directly. And yes, it calls for some sharing of the risks and taking on a little more burden. Or at least helping the 50 mile strip along the water opt out of the criminal system that is set to destroy their communities and let them self-insure–and subsidize their reinsurance…
Or you could let them all drown when their time comes.
Like New Orleans.