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Florida's Public Option
Florida has a public option for property insurance. Here is Randy Holcombe writing at The Beacon:
After Hurricane Andrew hit Florida in 1992 some Floridians were having difficulty purchasing homeowners’ insurance. (The reason: rates are regulated, and at the regulated rates some properties are too great a risk.) So, the state government formed Citizens Property Insurance Corporation, which is owned and operated by the State of Florida.
As originally envisioned, Citizens would charge rates above those charged by private insurers, to make Citizens the insurer of last resort. Nevertheless, Citizens found plenty of customers.
After two bad hurricane seasons in 2004 and 2005 property insurance rates in Florida rose, and in his campaign for the office, current Governor Charlie Crist promised voters that if elected he would see that their property insurance bills “dropped like a rock.”
One tactic he used was to change Citizens’ rate structure so it was competitive with private insurers. His idea, like President Obama’s idea with health insurance, is that with a public option, private insurers would have to keep their rates in line or risk losing customers to the government insurer.
...Today about 30% of homeowners’ policies are written by Citizens, which is the largest property insurer in the state. It’s about to get bigger too. The largest private insurer, State Farm, had a rate request rejected last year, and now is pulling out of the state altogether (for property insurance; they’ll still insure your car)....
Everybody in Florida knows Citizens is a fiscal time bomb. Already, every Florida insurance policy (on homes, boats, cars, etc.) pays a surcharge that goes to Citizens, but Citizens still doesn’t have sufficient reserves to weather a major hurricane. When one comes, Florida taxpayers will be on the hook for the bill.
The legislature knows this, and actually passed a bill last year that would have done a great deal to solve the problem by partially deregulating rates private insurers could charge. State Farm would have stayed in Florida had that bill taken effect, but it was vetoed by the Governor. The public option is displacing private insurance.
In Florida, the public option has meant a substantial socialization of insurance, subsidization of the public option by those who take a private option, and the creation of a fiscally-unsound public insurance company despite the subsidy.
Posted by Alex Tabarrok on October 31, 2009 at 11:49 AM | Permalink
Comments
Fortunately health insurance economics is different than property and casualty in a state like Florida. As described, Citizens is not pricing risk correctly and this will become evident when a hurricane hits. There's no similar analogy in health care. Claims are steady. No health insurance company is prepared for some future cancer wave or anything like that. So, like AIG in Sept 2008, if one were to hit, it would become a public problem anyway.
Posted by: bill at Oct 31, 2009 12:17:52 PM
Interesting, and the situation should be fixed by placing CPIC on actuarially sound ground, but this is irrelevant to the health insurance case.
The reason is simple - insuring a property has a fixed amount of risk - the value of the insured home (taking liability for injuries out of the discussion). Health insurance has no such fixed risk - the cost is only predictable at an aggregate level that requires large risk pools to fund.
In addition, the Florida risk is associated with location - on the coast == high risk of damage. Individuals don't generally have health risk associated with location, although there are counter examples to that as well. If you argue that health risk is by age cohort, then we go directly to rationing (which is, of course, necessary, but we have the opportunity to do it differently than the "rationing by lack of wealth" that we do today).
The only logical mechanism to pay for health care is thru single-payer mechanisms like every other industrialized nation implements and that we implement for certain groups thru Medicare, the VA, etc. That option is sadly not on the table here - instead we have this bastardized version, and yet this version at least starts us on the road to providing health care to all citizens.
Now if the intent was to talk about the moral hazard of politicians playing games with public benefits, I don't think you need to look too hard to find that, and tarring the current version of health care reform with that brush seems unnecessary.
Posted by: Marty Aavik at Oct 31, 2009 12:30:49 PM
More on the Florida Property Insurance problem, from the James Madison Institute, at this link
Property Insurance
Posted by: jjm at Oct 31, 2009 12:35:58 PM
Professor Tabarrok --
There are serious problems with subsidized/socialized property-insurance schemes like Florida's. Most important is moral hazard ... people build houses in stupidly high-risk locations because they can insure them cheap.
Do you believe that there are comparably-serious moral-hazard problems with health insurance? If so, what are they and what is your evidence?
Specifically, do you have evidence that people expose themselves to greater health risks than they would if the greater risk were priced into the health insurance rates they paid?
Posted by: pireader at Oct 31, 2009 1:01:59 PM
Awesome example, from start to finish (or impending doom). The gov't has no competitive advantage (except losing money) in insurance. Stick with public goods and leave the rest to COMPETITIVE markets...
Posted by: David Zetland at Oct 31, 2009 1:05:14 PM
Phew, that was a close brush with cognitive dissonance bill. Good to see you work through things.
Posted by: Gary at Oct 31, 2009 1:28:07 PM
pireader,
A moral hazard problem has existed for a long time, but in the other direction. It's pretty much set in stone what property insurers will pay, but with health insurance doctors or hospitals can dictate the procedures. As medicare rates were arbitrarily reduced, doctors took up the slack in ordering more procedures.Insurance companies try to reduce this, but it involves a lot of paperwork on both sides. In particular, going through an employer involves a ton of unnecessary transaction costs separating the consumer from the end costs.
A public option doesn't really change much, other than to accelerate this type of system. As long as we keep doing health care this fashion, costs will continue to skyrocket without that much improvement in care.
Posted by: mw at Oct 31, 2009 1:52:18 PM
Is there an externality to this public insurance product such that the citizens of Florida would want to subsidize insurance? What would the state's economy be like if they didn't subsidize insurance? Is this a rational choice for citizens, knowing that there are costs and benefits being distributed across an entire statewide population? Are the citizens of Florida so stupid that they should not be entitled to choose the mix of products and services they wish to subsidize?
Posted by: Bill at Oct 31, 2009 3:09:43 PM
If private health insurers pull out of America entirely, won't they leave behind a larger pool of profitable healthy people for the public insurance plan?
In other words, isn't a direct comparison between national health insurance and single-state property insurance completely meaningless?
Posted by: zota at Oct 31, 2009 3:46:02 PM
No, Better, No, and Yes.
Posted by: Russ R at Oct 31, 2009 3:58:26 PM
There are plenty of examples of fiscally unsound government programs of questionable effectiveness operating in the same space as private business.
Can we find any historical evidence that the US government has been able to create and maintain programs that, over a span of decades, remain solvent and are generally seen as good solutions? What about other countries?
Posted by: Nathan Frost at Oct 31, 2009 4:07:13 PM
Can we find any historical evidence that the US government has been able to create and maintain programs that, over a span of decades, remain solvent and are generally seen as good solutions?
Let me fix that:
Can we find any historical evidence that the US government has been able to create and maintain programs that, over a span of decades, remain solvent and are generally seen outside the Beltway as good solutions?
Much better.
Posted by: anon at Oct 31, 2009 6:24:53 PM
Highway system, national defense, FBI, Weather system, gps/communications, FDIC, Coast Guard, National Parks, AEC, Corps of Enginers. YMMV.
Posted by: steve at Oct 31, 2009 7:33:39 PM
Well, State Farm is a liberal anti-growth proponent of climate change propoganda, seeking to dictate how people live their lives, taking away their liberty:
State Farm's Position on Climate Change
:
State Farm is concerned about the prospect of global climate change, its possible impact on severe weather patterns, and the challenges this presents to the business of insurance.
:
What are we doing about it?
We are working with organizations all across the country – organizations like the Institute for Business and Home Safety (IBHS) and Protecting America – to help protect our customers from the human injuries, property destruction and financial impact that can result from natural disasters. We must make sure the homes built and repaired today are better able to withstand the forces of nature.
In addition, we believe that all businesses should operate in an environmentally responsible manner, and we have long engaged in a variety of internal efforts to reduce our use of energy and other materials, recycle, and focus on renewable resources.
Clearly the politicians and the people understand State Farm is just using climate change fear as a way to charge too high premiums to make too much profit, and they are using the public option to correctly price property insurance in Florida because climate change is just liberal ideology designed to take away the liberty of Floridians.
After all, unless the Florida public option is charging inflation adjusted premiums lower than the premiums in 1992, the premiums are based on reality, not on the bogus climate change lies.
Posted by: mulp at Oct 31, 2009 8:28:46 PM
To some extent the Florida property insurance public option makes sense - the taxpayer at large subsidizes expensive coastal properties that will be destroyed when the next Hurricane Andrew hits. But:
1- The owners of these properties also tend to be the wealthiest, meaning they will end up kicking in the most (even though FL does not have income tax, these people pay more sales taxes, implicit corporate income taxes, etc.)
2- These same areas massively subsidize the rest of the state, primarily through tourism, without which there would be no Floridian economy.
Property insurance of any kind is not comparable to health insurance, but especially not homeowner's insurance.
Posted by: bbass at Oct 31, 2009 8:46:27 PM
historical evidence that the US government has been able to create and maintain programs...
Nope! No evidence at all! In fact, as far as I can tell, this "Federal Government" of which you speak is just another lie based on bogus liberal ideology.
Posted by: zota at Oct 31, 2009 8:53:48 PM
This is why I can't support Charlie Crist, its bad enough when democrats act socialist... when republicans do it, its unconscionable.
Posted by: Doc Merlin at Nov 1, 2009 3:51:46 AM
The ONLY insurance company which is actually good for the people who buy into it is a fiscally unsound one.
Posted by: Neal at Nov 1, 2009 7:41:59 AM
For liberals, driving the private insurers out, underpricing premiums, and making up the difference with taxes (on the rich) has been and remains the plan. Florida isn't a problem, it's the prototype.
Posted by: Larry at Nov 1, 2009 11:14:27 AM
Several people complain that health insurance and casualty insurance are fundamentally different so we cannot learn anything from Florida. That is wrong. Via Citizens, Florida has underpriced the public option and is attempting to make up the shortfall by taxing otheer insurance companies.
That is exactly the plan for the Public Option proposed by Pelosi. That will be followed by driving other health insurance companies out of business placing the full load on the public option and the government. We already know England and France are rationing and trying mightily to reduce the expense of providing health care. Only a fool would think that will not happen to any public option the US creates.
Larry is correct: Florida's public option is the prototype.
Rick
Posted by: Rick Caird at Nov 1, 2009 2:09:16 PM
RE: steve: "Highway system, national defense, FBI, Weather system, gps/communications, FDIC, Coast Guard, National Parks, AEC, Corps of Enginers [are government programs that, over a span of decades, have remained solvent and are generally seen as good solutions]"
If we believe that these are successful government programs, I wonder if the organizational patterns exhibited by these programs could be adapted for a public health care option; this would at least give us an optimistic baseline to compare with the current health care system.
RE: Neal: "The ONLY insurance company which is actually good for the people who buy into it is a fiscally unsound one."
What makes you say this? Isn't it reasonable to defend oneself against some possible (ruinous) worst-case scenario with regular insurance payments that are inexpensive relative to said worst-case scenario? Or are you arguing that our predictive models are inadequate for insurance companies to make good enough predictions about how large their cash reserves must be to handle a possible "worst-case scenario spike"?
Posted by: Nathan Frost at Nov 1, 2009 9:41:14 PM
Basically, government regulation of industry always creates problems that government is the only business left to solve.
Socialism is bad, because the socialistic solultions we have in place are not ever considered as causes of the predicament we find ourselves in. Big Businesses should not be surprised at the government, which they have been in bed with since the 50's, to be altering the conditions of the agreements they have been benefiting from all these years.
They helped create this monster, they are complicit. Capitalism has not been alive or well in a long, long time.
Posted by: dave at Nov 2, 2009 3:22:43 PM
Mr. Caird excepted, people seem to be missing the point.
Citizens is an excellent example of what will happen with a public option in HC. If/when medical care doesn't suddenly become inexpensive pols will be under too much pressure to keep rates low. The public option will charge rates below actuarially adequate levels and the taxpayer will subsidize. The difference between property and health insurance is irrelevant.
Posted by: Allen at Nov 2, 2009 3:52:12 PM
There are two parallels to be drawn here:
1. The government option cannot compete fairly since it pays no taxes, gets free capital, can pass its shortfalls onto taxpayers (just like Citizens in Florida).
2. Regardless of what the current health care takeover bill says, none of it is binding on future legislation. Even if the current government option is set up to compete "fairly", there is no reason to believe that this will always be the case. Citizens was *supposed* to be the more expensive insurer of last resort. Its no longer that way.
Posted by: Peter at Nov 2, 2009 10:04:38 PM
