What should be done when a lot of people have built houses, businesses and infrastructure worth tens of billions of dollars where Mother Nature doesn't like them to be? This is the question that Florida is grappling with. Private insurers, burned by huge payouts for damages caused by two recent big hurricane seasons, are pulling out the state. This would seem like a market "signal" for people to get out. But Florida's state government is ignoring this "signal" and is instead creating a risk pool and a state-owned insurance company to cover property owners who can't find or afford private insurance. However, as the Washington Post reports, Florida
…legislators promised as much as $32 billion for insurers, and ultimately homeowners, if a major hurricane hits. This money would come from the state's catastrophe fund, which currently counts less than $1 billion on hand for such payouts, though it annually collects premiums from insurers…
The projected shortfalls could be staggering in the event of a major hurricane strike. If, for example, something like the 1926 Miami hurricane were to hit next year, the state entities by some industry estimates would have to raise an additional $40 billion, or more than $5,000 for every Florida household. The federal government probably would be asked to pitch in to alleviate the burden.
As a reference, keep in mind that the Feds have already paid out over $100 billion in disaster relief in the wake of Hurricane Katrina. If the private market won't insure these properties at an affordable price, is the proper policy just to let these sunk costs sink as inevitable storms wash ashore? Is that even politically feasible?