Université de Lausanne
Faculté des HEC
Département d'économétrie et d'économie politique

Cahier de recherches économiques du DEEP No. 09.10

Thomas von Ungern-Sternberg

The benefits of introducing a mandatory state hurricane insurance scheme in Florida

October 2009

Abstract
As a result of its hurricane exposure, Florida is probably the part of the industrialised world most prone to natural catastrophes. Over the last 20 years the Florida legislator has tried to maintain a situation, where the private insurance sector plays a major role in providing hurricane-insurance. Its attempts to keep such insurance affordable have, however, led to a situation, where the public sector still ends up bearing a large part of the risk. Drawing on the experience of various European countries with mandatory state run catastrophe insurance schemes, we argue that the cost of hurricane insurance for the population could be substantially reduced, if Florida created a similar institution. The massive reduction in sales costs, loss adjustment costs and general administrative costs would allow such a system to work with premiums that are on average 25% lower. The problems of adverse selection which plague the current situation would of course (by definition) be eliminated.

Keywords: hurricane insurance; mandatory insurance; regulation; market failure; Florida

JEL classification: L51; L88