Monday, June 29, 2009

Frustrating News

Do you every hear a news story that makes you think people are losing their minds? NPR recently ran such a story on the insurance issues in Florida. In 2007, Florida's state government decided to freeze insurance rates by offering reinsurance for $0.02 on the dollar when the private market was charging $0.25. The idea was if (when?) Florida gets hit by a big hurricane it will sale bonds to cover losses.

Interesting idea except for 2 issues: 1) You eventually need to pay off the bonds. 2) What if you need to raise money when the credit market is frozen or near frozen?

That a state government made a bad decision isn't surprising, what is truly shocking is the proposed solutions. One Florida congressman wants to shift the same bad idea to the federal government. Having the US government sale bonds in the event of major disaster. That just moves the problem to a different balance sheet. I suppose that solves the problem for the state of Florida, but it doesn't solve the problem at all and made me want to scream at the radio.

A more rational approach is to determine the real cost of reinsurance and adjust the $0.02 upwards to meet it. If Florida thinks $0.25 per dollar is too much try a number in between, there is a lot of room between $0.02, and $0.25.
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