State Insurance Subsidies for the Wealthy

North Carolina and other states create a situation where private insurance are disallowed to charge rates commensurate with coastal property risk. With the rate restrictions, the insurance companies stop issuing policies since it is a huge liability. To supplant private insurance, NC and other states step in as the insurance provider of last (only) resort. The state provides below cost risk, backed by taxpayers, to coastal property owners. The state, being the rule maker, creates reserves that will likely prove inadequate in a bad year.

The outcome is to subsidize risk by lowering the cost of ownership thus creating moral hazard. With the artificially reduced rates, more people are encouraged to develop coastal properties. This means the taxpayers are on the hook for ever bigger payouts. According to the Wall Street Journal article below, these taxpayer backed policies are up 82% since 2005. Homeowners and taxpayers far from the coast and damage pay to rebuild, generally wealthy property owners, beachfront vacation homes.

Here is a quote from this article

Homeowners insured through companies other than the Beach Plan would have to bail out the Beach Plan only if a "one-in-134-year" storm hits, officials estimate.

Still, critics say the worst-case scenarios underscore deeper problems with insurers of last resort. Many of the pools are in the same uncomfortable spot as North Carolina, with capital cushions that could be wiped out by one mega-storm, or several midsize ones.

In addition, by trying to keep rates affordable for homeowners, the last-resort insurers help fuel coastal development that puts homeowners across the state at financial risk, some critics say.