Hurricanes and public option

When Congress debated whether to create a new government-run health insurance option, critics argued that the program would be fiscally unsound and that it would push private insurers out of the market. An experiment with government-run property insurance suggests that both fears may be warranted.

In hurricane-prone Florida, some residents found it difficult to purchase homeowners’ insurance after Hurricane Andrew in 1992. Because of rate regulations, insurers were hesitant to offer them policies, so the state began to sell coverage as well. Despite plans to keep the public option’s rates higher than those charged by private insurers, thus making the state the insurer of last resort, political pressure resulted in subsidized rates that made the public plan competitive with its private counterparts. Eventually 30 percent of the state’s residents ended up on its rolls—a serious problem given that several analysts, including State Insurance Commissioner Kevin McCarty, believe the plan does not have the reserve funds to pay for a major hurricane.

Meanwhile, private insurance struggled. After state insurance regulators rejected a proposed rate hike, the insurance giant State Farm threatened to pull out of Florida entirely. The company eventually reached a deal with the state allowing it to raise its rates and to refuse to renew up to 125,000 policies.  r