Florida Citizens favours affluent homeowners

Florida Citizens favours affluent homeowners

Floridian insurer of last resort Citizens effectively subsidises the well-off in the state, claims research produced by the Coase-Sandor Institute for Law and Economics.

The research, titled "The Perverse Effects of Subsidized Weather Insurance", claims that, when linked with similarly regressive policies implemented by the National Flood Insurance Program (NFIP), Florida is encouraging development in the riskier areas along the coast.

Omri Ben-Shahar of the University of Chicago Law School and Kyle Logue of the University of Michigan Law School cited US Census Bureau data to prove that the population of Florida's coastal regions had quadrupled between 1960 and 2008, with, as of 2012, 79% of the state's insured property exposure on the coast, equal to $2.8trn.

"The Article demonstrates two primary distortions arising from the government’s dominance in these insurance markets. First, the subsidies are allocated differentially across households, resulting in a significant regressive redistribution, favouring affluent homeowners in coastal communities. … Second, the subsidies induce excessive development (and redevelopment) of storm-stricken and erosion-prone areas."

The study held the NFIP out for particular criticism, stating that the policy count increased from 1.9m in 1980 to more than 5m in recent years, with below-market rates being charged for protection against flood. The study cited a 2007 Congressional Budget Analysis which found that the median range for homes insured under NFIP was $220,000 to $400,000 compared with the then US median of $160,000.

The 2012-Biggert-Waters Act was meant to phase out such subsidies but was holed below the water line when legislators realised that phasing out of subsidies entailed increasing flood protection rates. High-profile cases of low to middle income households facing more than 100% increases in their rates were used to demonstrate the unfairness of the Biggert-Waters Act.

However, the Coase-Sandor study found that about 40% of subsidised coastal properties were worth more than $500,000, and 12% were worth more than $1m.

Using policy-level data in Florida, the study found that the wealthier coastal regions, such as Monroe County, the home of Florida Keys, received the biggest subsidies.

In conclusion, the study's authors said that their conclusions, that a 1% increase in average home values correlated with a 0.571% increase in the value of subsidy, might understate the problem.

The study found:

"The estimates we derived for the correlation between wealth and subsidy probably understate the true magnitude of the pro-affluent advantage. First, one of our measures of wealth—policy coverage limit—is capped by Citizens’ rules, which means that we are not measuring the true wealth of the people who buy maximal coverage, and are therefore deriving downward-biased correlations. Second, Citizens’ report of the subsidies—the indicated rate changes—understates the subsidies’ true magnitude. Citizens does not take into account some of the costs of providing insurance—costs that private insurers would incur in running an insurance scheme. Specifically, when Citizens calculates the amount of the indicated rate change, it does not build into it the cost of reinsurance—an insurance reserve necessary to protect it against the risk of pricing errors or unexpected spikes in losses."

A pdf of the study can be downloaded from:


Ben-Shahar, Omri and Logue, Kyle D., The Perverse Effects of Subsidized Weather Insurance (May 7, 2015). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 714; U of Chicago, Public Law Working Paper No. 499; U of Michigan Law & Econ Research Paper No. 15-002. Available at SSRN: http://ssrn.com/abstract=2549320 or http://dx.doi.org/10.2139/ssrn.2549320

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