More NY Times

More goodies from the NY Times; today, a letter to the Editor. It reads:

As an owner of a waterfront home in Florida, I read with interest the Op-Ed article “Who Will Pay for the Next Hurricane?” (Aug. 25). I agree in theory with risk-based premiums; however, given my experience with buying hazard insurance, I wonder whether these premiums do more to bloat the profits of insurance companies than to provide families a fair price for insurance in hazard-prone areas.

According to a March 1, 2007, Florida Office of Insurance Regulation report, the insurance industry reported $157.4 billion in profit, even after the severe storms of 2004 and 2005. Since 2002, my hazard-insurance premium has increased a whopping 714 percent.

I urge our legislators to look carefully at how such risks are calculated, and how insurance companies invest their profits in calm years so they can pay out claims in difficult years.

Notice any problems with the reasoning? I particularly enjoy this line:

I wonder whether these premiums do more to bloat the profits of insurance companies than to provide families a fair price for insurance in hazard-prone areas.

So, the high premiums in risk-prone areas are just another example of evil insurance companies “ripping-off” the consumer; they have little to do with managing risk. I think not. In fact, you will occasionally here of insurance firms exiting particular risk-prone areas, which is hardly a wise business practice of a company that can supposedly arbitarily overcharge consumers anytime it wants, just to increase profits.

The person writing the letter claims that his premiums have increased by more than 700% since 2002. I have no idea whether this is true, but if it is, it is an action taken by the insurance company to manage risk; that is, afterall, its business. By increasing premiums for higher risk areas and people, the insurance company is aiding society by reducing risk. Higher premiums tend to encourage less risk. For example, a higher premium might persuade a person living in a flood plain to live somewhere else, or the higher premium might encourage a speeder or accident-prone driver to slow down or be less neglectful in his driving.

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