Insuring Against Insurance

Almost universally in the world today, homeowners’ insurance is short term, which means that it does not cover the risk that insurance companies will raise rates at any future renewal date. But a new proposal would institute long-term, market-based insurance, thereby increasing certainty for homeowners and providing a clearer incentive to curtail development in high-risk areas.

NEW HAVEN -- Most people who save and invest do so for their entire lives. But most of the institutions upon which they rely for their investments and savings are geared to the short term. This mismatch causes fundamental problems.

An excellent example is homeowners’ insurance. Almost universally in the world today, homeowners’ insurance is short term. Typically, it is renewed annually, which means that it does not cover the risk that insurance companies will raise rates at any future renewal date.

Yet we have seen major changes recently in homeowners’ insurance rates. For example, the average homeowner premium in Florida soared from $723 at the start of 2002 to $1,465 in the first quarter of 2007. Such rapid increases represent a risk that is on the same order of magnitude as many of the damage risks that the policies are supposed to address.

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