Florida’s response to Hurricane Ian illustrates how governments are making it harder to adjust to climate change by subsidizing the insurance market.
One of the classic rejoinders to worries about climate change is the claim that people can move out of highly vulnerable areas into safer areas. Maybe the world will not be willing to accept hundreds of millions of climate-change refugees, but within the US, perhaps people can move from storm-prone Florida to the northern Midwest, or to wherever might prove appropriate, including safer parts of Florida. The US, after all, has a longstanding tradition of individual mobility. And many parts of the country have the space and infrastructure for additional residents.
For such migration to have any effect on the costs of climate change, however, price signals have to be active and relatively undistorted. That is, some set of market prices has to be giving people impetus to leave one place for another. And policymakers have not been letting insurance markets perform their proper work in this regard.
Currently the market for Florida property insurance is in a pretty bad way. This year six relevant insurance companies went insolvent, and for Florida underwriting losses have run more than $1 billion for each of the last two years. Not surprisingly, insurers have been cutting back their coverage in the state or leaving altogether. The end result is that homeowners are finding it much harder to get coverage and finding it much more expensive when they do. None of this should come as a surprise, given the immense damage wrought by Hurricane Ian and previous storms.
The rising prices for insurance are a potential market signal. And such a prod, if and when it comes, is a harsh one. Who wants to have to dig up roots and leave home because they can’t get homeowner’s insurance? Still, that is what at least one part of adjustment to climate change looks like. And there are greater burdens in this world than moving from Naples, Florida, to Minneapolis, Minnesota, or even northern Arkansas.
Yet politics is stifling market adjustments. Florida has a state-run insurer of last resort, called Citizens Property Insurance Corp. Not surprisingly, that insurer has financial problems of its own, and in May Governor Ron DeSantis oversaw an additional $2 billion in reinsurance support for the company’s efforts. In other words, the state government is stifling the market signals that might induce some of the state’s homeowners to leave for drier pastures.
But don’t put your hopes in the Florida gubernatorial election. DeSantis’s Democratic rival, Charlie Crist, has criticized the governor for not doing more on the property insurance front and has proposed 90-day emergency insurance coverage for residents. That would stifle market incentives all the more.
It is easy to see why political incentives are leaning this way. Some people will pay exorbitant prices for insurance, or give up their homes and not leave the state — and then vote against incumbents. Even if some people leave the state with a minimum of fuss (and do not vote in the meantime), a declining population and tax revenue is hardly a recipe for political success.
Note also that property insurance typically does not cover damage from flooding, which is especially relevant in current circumstances. Florida property owners thus are likely to be applying to the federal government for aid. That will in turn raise the question of whether any politician can play tough when the potential for discontent is so high. Will President Joe Biden hold firm where DeSantis has not, or will he prefer to step in as the savior for Florida?
Storms are the primary issue today. But insulation from market signals is a more general problem for climate-change issues. There is a risk of drought in many parts of the country, for example, including the Southwest. And many of those same parts of the country have underinvested in water conservation because they have received water subsidies for so long.
Climate change is typically considered an example of market failure, and it is easy to see why, given that individuals and institutions do not fully internalize the costs of their carbon emissions. Yet markets may be able to handle climate change better than their reputation suggests. There are many modes of market adjustment, and one of them is prices, including prices for insurance. The sorry truth is that, right now, politics is not allowing markets to operate. Americans are getting some of the worst features of markets while being denied their better virtues.
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