Why Galveston?

There is much ado about the devastation of Galveston by hurricane Ike. However, there would be little chatter about this if Galveston were not there and Galveston would not be there in anywhere near the form it was in before the storm without some failed incentives for people to build on that barrier island. From the above linked Fox News story:

Barrier islands like Galveston are particularly vulnerable to storm damage because they are made of sand, as opposed to the hard bedrock that underlies larger islands and the mainland.
They also tend to have very low elevations, making it easy for water to wash over and submerge the island.
Many have questioned the wisdom of choosing to build on and develop barrier islands, given their risks.

Why, then, have so many ignored what look to be obviously significant risks?
Perhaps someone has reduced the risks for the folks who have built out Galveston. One way of doing that would be for insurance companies to offer wind insurance.
But any wise insurance company would surely charge such a high annual premium that it would be prohibitive for any one to build on Galveston Island. If they can’t charge a high enough rate they won’t offer the insurance. To wit:

Allstate dropped windstorm coverage for nearly 65,000 policyholders last year, and other companies, such as State Farm, stopped coverage within 2,500 feet of the coast.
In the wake of the disastrous 2005 storm season in which hurricanes Katrina and Rita battered gulf coast states, many private insurers abandoned the coast, forcing their clients to seek “insurers of last resort.”

Yes, there is an insurer of last resort: the Texas Windstorm Insurance Association. These folks note on their web site:

TWIA’s purpose is to provide Texas citizens adequate wind and
hail coverage when it is not available in the insurance
marketplace;and pay insured’s claims when losses occur.
The Texas Windstorm Insurance Association is a ‘pool’ of all
property and casualty (P&C) insurance companies authorized to
write coverage in Texas.
TWIA is neither a state organization, nor a for-profit company,
and therefore does not seek to increase its market share.

Oh, where to begin.
First, here is the failed incentive. The market, yes, the market makes it clear that it does not make sense to build on this barrier island (inter alia). But someone one has decided that even though it is pretty stupid to build here the risks of doing so should be alleviated. Who, might that someone be?
Well, this so called association is not a voluntary outfit*. It was created by the Texas legislature and the referenced property and casualty insurance companies do not participate voluntarily; they are required to by law to participate. As noted* its too low fee structure is set by the Texas legislature; it’s members can be assessed (taxed) for losses and they will charge higher rates to their other customers to recover these losses (more taxes); and what isn’t covered by the initial funding mechanisms will be picked up by the rest of the Texas taxpayers. Hmmm, this is beginning to sound like Fannie Mae and Freddie Mac.
So the TWIA tells us that it is not a state organization. Well, it walks like one, it is funded like one, it is constrained like one, it provides false incentives like one, ….
Like the duck, it is a state organization and no amount of doublespeak is going to change this.
Why Galveston? The state of texas decided it should support stupid investments: construction in areas that have a high likelihood of repeated severe storm damage. There really is no excuse for this.
That the TWIA exists is a perfectly good example of government failure and is a perfectly good reason to impeach, heck, just toss out the folks that implemented and continue to support such wasteful programs.
There is no good reason to replace them either.

* See this article for background: Reforming the Texas Windstorm Insurance Association (PDF)

Risky Business

The 24th Cavalcade of Risk is up at The Digerati Life.
What’s a Cavalcade of Risk, you ask. Well, here you go:

Welcome to the Carnival of Risk #24, where we showcase articles that discuss risk in all its forms, particularly touching on the subjects of risk management, insurance, investing and other articles on business and financial risk.

Just basic stuff we should all understand a bit about.