There's a wealth of material to ponder in today's NYT "Sunday Review" and "Sunday Business"; I'll limit my musing to a piece on home insurance. The authors are from the Wharton School, and thus should have face validity. Not so much.
Here's where they go off the rails, so far as I'm concerned (a frequent theme here): they ignore community. Their theme is essentially this, household insurance in places of known higher risk should *alone bear the burden*. When I took the course in grad school, the title was "Risk and Insurance", and was conducted from the economics department, not the B school. The point of the course was to study the implementation of shared risk. The MBA crowd is solely concerned (modulo the occasional and optional Business Ethics course) with profit. That makes a difference.
First, premiums should reflect risk. This makes transparent the magnitude of the hazards one faces and could limit new construction in high-risk areas. Residents would be encouraged to reduce risk by getting discounts for, say, elevating a house or strengthening the roof.
This sounds fair, on its face. But there is a problem: if insurance companies (or public providers, for that matter) are allowed to exercise market segmentation at will, the process is no longer insurance, but prepaid consumption. The result of unfettered segmentation is to shift all of the cost (and source of profit) for any risk solely to those who are subject to that risk. Recall the recent "Your Good Mother" essay? The rich get richer and the poor whither. Insurance, from the point of view of economics, is all about shared risk, not individual risk. Individual risk is just prepaid consumption.
The justification for this predatory behavior is stated:
Those who live in nonrisky areas are subsidizing the choices of others. Take residential flood insurance. Most insurers refuse to cover the risk, so the National Flood Insurance Program, run by the Federal Emergency Management Agency, was established in 1968 with subsidized rates for those then living in flood-prone areas.
This approach is little different from allowing health insurance companies to ding subscribers with pre-existing conditions. If you live on the Atlantic beaches, you're far more likely to get hit by a hurricane. But those in Fly Over Land are far more likely to get hammered by baseball sized hail storms and tornadoes. Neither group can, just to avoid the condition, simply move to Safe Land.
The authors bury the point in an otherwise benign paragraph:
... the need to provide shareholders with an attractive return.
But shared risk is socialistic, or tribal, or communal. We all have some sort of risk associated with where we live. We can't just load up the SUV and head out for Safe Land.
How, then, to persuade folks from building in risky places? Is there sufficient acreage for a burgeoning population to live only where natural (and man made) disaster is less than average? Well, of course not. The arithmetic can't work. If all the folks in hurricane land and tornado land and earthquake land moved to Safe Land, the price of housing in Safe Land (wherever that may be, and likely in my neighborhood, as it happens) goes through the roof, so to speak. Not to mention the cratering of wages, with the influx of those needing employment. Back in the 18th and 19th centuries, there was more than enough room for the population, mostly subsistence farmers. We have since industrialized, urbanized, de-industrialized, and urbanized some more. The USofA population has more than doubled since WWII, those halcyon days of 90% maximum marginal tax rates. I suppose we could engage in the sort of back to the land re-education that Mao imposed. Doing so would certainly mitigate the risks of these Gray Swan events. And mitigate the rent seeking behavior of insurance companies.
Pulling up stakes and moving house (as the Brits put it) used to be just a matter of loading one's few possessions into a conestoga wagon and heading for Indian Territory to steal a few acres. Those days are long gone, and acting as if such action is the solution to any current problem is just plain evil.
We do need to make it more expensive to live in known dangerous places. But just as we have, nominally, a progressive tax paradigm, we should have a progressive insurance risk penalty. Those with McMansions on the beach should subsidize those living in shotgun shacks, not the other way round. Those who've been living in some risky place for some number of years, say 20, don't get dinged so much, but those who've entered recently (or in the future) when the risks have been clearly documented pay more. Local zoning and building codes are the major lever to pull to make building in vulnerable areas more, even wildly so, expensive. I don't know about you, but I don't see the commissioners of Miami Beach voluntarily curbing the building push. It was housing in Florida which was the epicenter of The Great Recession. Since increasing housing activity is viewed, even by Lefties who should know better, as the solution to The Great Recession, what to do? I highly recommend Carl Hiaasen's thinly veiled novels on the evil of development. "The trailers imploded, exploded, popped off the tie-downs and took off like fucking aluminum ducks." That's from "Stormy Weather", written in the aftermath of hurricane Andrew. You must read it, if you haven't.
It can be argued, of course, that wind insurance and flood insurance are sops to the slothful. That's the authors' point. Too simplistic by half.