Coming Soon To A Pocket Of Yours

It was with absolutely no sense of satisfaction that I watched Ike illustrate the reason not to locate on coastal islands, and wipe out Galveston. As previously noted here, sharing the cost of rebuilding hazardous living isn't fair to those who didn't choose that risk.

I love the ocean too, walking on the beach at sunrise is one of the greatest of pleasures, but I'm not asking you to take a chunk out of your kids' college funds to send me there. After Hurricane Rita took that chunk through insurance payments, insurance companies in Texas chose to opt out of insuring hazardous living on our coast. The state stepped in, but part of its footprint is a piece of your insurance wherever you live. To insure in Galveston, owners had to sign up for the state plan; part of the state plan, though, involves a bailout from the insurance companies.

If the "insurance" premiums charged by the state don't cover the losses, what then? Among other things, make the insurance companies pay anyway:

Insurance companies are not completely out of the picture in Galveston and the coastal counties. All carriers licensed to sell property insurance in Texas are required to participate in the state insurance pool and pay assessments based on their market share in the rest of the state. The wind pool also has rights on a $500 million state catastrophe reserve fund and reinsurance worth $1.5 billion.

These resources, plus customer premiums, have given the state insurance pool a total of $2.3 billion to cover all of this year’s claims. But smaller storms this year have reduced the total to $2.1 billion.

When that money is depleted, the insurance pool can impose unlimited assessments on insurance companies. They, in turn, can recover the money through state tax breaks, spread over several years. The resulting decline in tax revenue could drain millions from the state’s general revenue fund.

In a related story, the Times describes the devastation on the Bolivar peninsula across from Galveston. The Times talks with several people who rode out the storm there, including Deeann and Frank Sherman and Robert Isaacks. They are now taking certain facts into account about living on the coast:

“We take a chance living on the beach — everybody does,” said Robert Isaacks, the Emergency Medical Services coordinator for Crystal Beach.

Mr. Sherman said his car repair business could not be insured because it was not elevated above ground. He tried to insure his home this year, he said, but insurers rejected the home because of the aviary the couple built out of bullet-proof glass, to protect it from storms.

The Shermans said that their life on the coast had been rich, but that it was over. They will sell their land on Bolivar to someone “younger and braver,” Ms. Sherman said, and go elsewhere. “There is a passage in the Bible that says, woe be to those who live on the coast,” she said. “I’m taking that to heart now.”

The fact that insurance companies refused to insure property located on storm-wracked coasts is not an instance of market failure. A market failure supposedly occurs when the price of goods and services do not reflect the true costs of producing and consuming those goods and services. That's clearly not what happened here. The market is practially shouting at people, "Don't build something you can't afford to lose where hurricanes periodically crash ashore." (Emphasis added.)

The plan that is taking money out of our pockets to subsidize irrational risk has some of the qualities of our ongoing bailouts in the financial community. While there is some appearance of letting us off, factors built into the package overreach practical considerations. Losses are covered that do not merit coverage. Like violating the law to create investments that cannot return a profit, the Texas legislature created a sham. Insurance companies refused to use their assets to cover inevitable, avoidable loss. They were sucked in by legislators who were trying to create an illusion, the illusion that you the standard low-risk policy owner was being shielded from losses.

Sitting in a house on a hill, with a windbreak between me and any storm that comes by, I am going to have to help pay for the homeowner who located on those shifting sands in Galveston. Even though in 1900 the worst natural disaster in our country's history wiped out the original town, my insurance cost will be affected. I am involved despite my own caution - and all of us are involved in our new $85 million insurance company, AIG.

If nothing else will make us get involved in politics, this should.

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Incidentally, another little adventure is looking less and less like a good idea, since those geniuses have chosen Galveston for the location of a laboratory doing research into some really deadly germs. Still feel like a walk on the beach?

Biosafety experts at the University of Texas Medical Branch say the $175 million Galveston National Lab and their other high-security research labs are sturdy enough to withstand almost any natural disaster. They note that Ike, which washed away whole sections of Galveston, left the university's biodefense research facilities completely intact.

But opponents of the new lab, which will research some of the world's most dangerous diseases, say housing it in a major hurricane zone is just asking for accidents. Biological agents stored at the lab, which is less than a mile from the sea wall, could leak out after damaging winds or flooding, they say – or could be looted by rioters in post-disaster mayhem.

"What happens if there's a hurricane that's even stronger than what they've designed for?" asked Edward Hammond, a lab safety watchdog. "Lab accidents happen despite our best efforts to build systems that are immune to them. The location seems to almost dictate that, at a minimum, you'll have a big setback in the research agenda nearly annually."

Where do we get these ideas? Irrational exuberance seems to be catching.