Rep. John Campbell, R-Calif., has introduced a bill—which I write about at FrumForum —that would put taxpayers around the country on the hook for earthquake insurance in California through a pre-funded bailout of the California Earthquake Authority. I could go on at enormous length about how and why this is a truly wretched idea. The most salient fact is this: the arrangement cannot possibly work as advertised because it so blatantly crashes the established way that insurance works. Rather than spreading risk broadly—as the CEA does right now—the arrangement concentrates it into the United States under the aegis of federal guarantees. But there’s even more to say. In fact, there are at least two other arguments that are worth advancing.
First, CEA, as proven by its recent success in putting together a very big catastrophe bond package, still hasn’t tapped out the potential of the private market. In many ways, the potential for catastrophe insurance is still a young industry. Most of the really sophisticated players are less than a quarter century old. There are a lot of things to be tried that haven’t been tried yet, so one can’t fairly say “the market just isn’t going to work for this purpose.” CEA needs to experiment a lot more and do more things like the recent cat bond issue.
Second, and perhaps as importantly, the need for CEA to “pay later” under the current structure of the Campbell bill—it will have to pay back the federal government—almost assures default in the wake of a major disaster. Here’s why: To bring in the money necessary to “pay later,” CEA would, by necessity, have to raise its rates a lot. Given that people will be rebuilding after an earthquake and believe—correctly to some extent—that another big one isn’t likely any time soon, there’s an enormous chance that many policyholders will drop their coverage as soon as it gets more expensive. The result is that CEA just won’t be able to pay the feds back. The end result would be a bailout for California.
I could go on but the bottom line is pretty simple. Rep. Campbell is forwarding very bad policies. If he wants to retain a shred of free-market credibility, he should just withdraw the bill.
As Ray Lehmann documents elsewhere on OOTS, D.C. Delegate Eleanor Holmes-Norton has introduced a bill that would turn the District of Columbia into a jurisdiction where insurers could keep tax-free catastrophe reserves. The idea originated with former D.C. Commissioner of Banking, Insurance and Securities (and Heartland policy advisor) Lawrence Mirel. It’s by no means a cure-all, but it’s a good proposal. It would add to the District’s economy and, at least at the margins, could reduce the cost of catastrophe insurance. So I’d like to see it become law.
And D.C.—a city with significant governance problems for sure—is a place that could make it work and even has a track record to prove it. Thanks in large part to Mirel’s own efforts, the District has one of the best environments for captive insurance groups in the country. Today, captive insurance is the largest private industry in the District that isn’t either connected to the government or oriented towards serving people who live in or are visiting DC. There’s every reason to believe that reinsurers and even insurers would set up shop—at least at some level—in the District of Columbia if the law were to pass. The District actually has a track record of good regulatory services for insurers and they will take notice.
The quickly spreading Occupy movement— which, full disclosure, I loathe simply because of its angry leftist style — has dedicated itself to abolishing “corporate personhood,” although none of its members, it appears, seem to have much of an idea of what that means or what it would do. To me, however, the lack of comprehension on the part of Occupy protestors is only one problem with the movement. Here’s what I really don’t understand and may never understand. Why do these protestors direct anger towards a sterile legal mechanism?
In other words, if whatever one wishes to oppose — pollution, outrageous CEO pay, taxpayer subsidies to private businesses — were carried out through partnerships, sole proprietorships, mutual concerns or member-controlled cooperatives rather than corporations, the activities would obviously be no less bad. (Yes, member-controlled cooperatives and mutual concerns are corporations of a sort, but I digress.) So why focus attention on the legal structures that underlie the bad acts rather than the acts themselves? Bad things do not happen because corporate charters exist. Corporations — in the abstract, obviously — can’t be evil (or good) because they are simply legal structures. There can and may be good reasons to get angry with individual executives or even to brand certain corporations (e.g. Enron, Fannie Mae, the creators of Barney and Friends) as “bad” or even “evil.” But that doesn’t logically add up to any case that corporations themselves are evil.