A landslide of bad ideas
Landslides are a problem for which the United States has yet to come up with an answer. A recent essay by Penn State University law professor Christopher C. French – titled “Insuring Landslides: America’s Uninsured Natural Catastrophes” – offers a grim tale not only of the $3.5 billion in damage that slides cause across all 50 states, but also just how little of the damage is covered by insurance.
According to French, the primary causes of the underinsurance for landslides are the “earth movement” exclusions contained in most standard property insurance policies and the fact that the surplus-lines market has done a poor job of providing the needed stand-alone policies. Compounding the latter problem is that surplus-lines coverage often excludes damage sustained to a policyholder’s land.
To remedy the insurance shortfall, French prescribes a not-insignificant amount of state intervention. He proposes creating a state-sponsored landslide insurance programs or, in light of the bleak legislative prospects for such a proposal, having states bar insurers from writing landslide exclusions into their homeowners’ policies.
Both of these suggestions are undesirable, and the first is completely implausible. A state-sponsored “all-risk” catastrophe policy has been imagined and proposed many times before. The idea would be to get a big enough pool of insureds to offset the expense of the additional coverage. It’s the same basic premise as the Affordable Care Act.
Of course, like the ACA, such a program would almost invariably be made to sell its policies at actuarially unsound rates. Private insurers already face a number of financial pressures that challenge their ability to pay catastrophe claims, including taxes, overhead and marketing expenses and investors’ demand for returns. But there are nothing like the incentives on government insurance programs to underprice coverage and then demand taxpayer bailouts when catastrophe losses threaten to render them insolvent. In the absence of huge political will to establish such a program, a federally sponsored pool is a non-starter.
French’s second policy recommendation, to prevent insurers from excluding landslide coverage from their homeowners’ policies, is more realistic and, therefore, bears further consideration. Two of his arguments bear special consideration because they are offered as responses to counterfactual objections to his proposal.
First, he argues that, because insurers are already regulated heavily, proscribing insurers’ ability to exclude landslide coverage is no more than another in a long list of regulatory actions to constrain insurer activity. Secondly, he argues that, because many lines of insurance already see cross-subsidies, there’s no especially good reason not to require them in coverage for landslides.
That states already exercise power to regulate how insurers structure and price their products tells you only that regulators can do so, not that they should. Generally speaking, states that have opted for less regulatory involvement have enjoyed the benefits of competition wrought by greater flexibility. Our recent study examining the troublesome legacy of California’s Proposition 103 makes that much clear.
There’s also the less abstract lessons that can be drawn from California’s experience with earthquake insurance. A long explanation of the saga can be found here. Briefly, in 1985, with support from insurers, the state of California decided to mandate that insurers offer earthquake insurance to all residents who purchase homeowners policies. When the 1994 Northridge earthquake struck, the earthquake offer’s link to homeowners’ policies led to a collapse in the state’s real estate market, as insurers refused to issue homeowners’ policies in an effort to avoid shouldering more earthquake risk.
Neither insurers nor regulators could have envisioned such a scenario when the two coverages first became linked. But in light of that experience, and particularly considering the still-unknown effects of climate change on severe weather (including the possibility of more landslides), it’s not difficult to imagine that requiring landslide coverage in homeowners’ policies could have a similar impact on real-estate markets in states that adopted the requirement.
Setting aside the philosophical question that French poses about individual rights and autonomy, it’s counterintuitive that, in a period during which underwriting precision continues to improve, easily differentiated risks should be pooled together. If landslide coverage is so important to cross-subsidize, why not bundle it with truly dissimilar risks? The size of the risk pool would increase and the cost of the coverage would go down. Genuinely “all-risk” policies have never gained traction because consumers’ wants and needs have never justified a cross-subsidy.
French’s underlying goal is unfettered access to affordable landslide coverage. That’s a noble goal, even if the solutions he offers are untenable. For shining a light on this underdeveloped part of the nation’s risk management system, he deserves attention and thanks.
