I have always been skeptical of government-backed monopolies and coercive institutions. Insurance – especially home insurance in hurricane-prone areas – has long been a prime example of such a program. In the final weeks of hurricanes, when winds cause catastrophic damage and torrential rain floods entire cities, the true nature of the insurance industry is exposed – a pyramid scheme that preys on the defenseless and enriches the few at the expense of the many.
In areas prone to hurricanes and floods, homeowners must purchase insurance to comply with local building codes, mortgage requirements, and zoning regulations. This mandatory insurance creates a captive market in which individuals are pressured into purchasing a product they may not need or want. Insurance companies, aware of this captive audience, set artificially high premiums, knowing that homeowners have no choice but to pay. This is not only coercion, but another example of how big government mocks the individual and forcibly regulates his life.
Insurance companies promise to protect homeowners from financial ruin in the event of a disaster. However, in hurricane-prone areas, they regularly deny or delay claims, leaving policyholders with little or no recourse. This is of course not an isolated problem; is planned product obsolescence rooted in the insurance industry’s business model.
Insurance companies operate on the principle of risk pooling, in which multiple policyholders contribute to a common fund that covers the cost of claims. In theory, this could work well for minor incidents. However, in the event of catastrophic events such as hurricanes, the pool is depleted and companies must seek coverage for huge losses. Another element of their disastrous model is that these companies – which themselves rate the risk of damage and loss during hurricane season as extremely high – can cancel their policies at any time for any reasons, yet they do not issue new policies or increase coverage limits during the season hurricane. This leaves many homeowners – who have been paying insurance premiums for years – without any insurance during those crucial months when they need it most.
If you are “covered” – and they don’t file for complete bankruptcy to avoid paying claims – insurers turn to the government for financial assistance, subsidies or regulatory relief. This creates a vicious circle. Insurance companies profit significantly from the premiums they collect and allegedly use those funds to pay claims, but only after paying deductibles and other fees. If the remaining amount is usually insufficient to cover the full extent of the loss, the policyholder is left with significant out-of-pocket expenses. Meanwhile, insurers’ profits continue to grow, driven mainly by artificially high premiums and a captive market.
Home insurance in hurricane-prone areas is a truly unfair requirement for many reasons. At the top of the list is coercion. Homeowners are forced to purchase insurance, denying them the freedom to make their own choices about risk management. Second, the captive market allows insurers to set prices without much competition, resulting in excessive costs for policyholders. Finally, because insurers often put their profits ahead of payouts, when a natural disaster strikes and they “pay out,” their program can leave policyholders with slow and inadequate compensation for damages.
To dismantle this pyramid scheme, we must promote freedom and competition by enabling homeowners to opt out of insurance, allowing them to self-insure or seek alternative risk management strategies. If we eliminated these government-backed monopolies and allowed multiple insurers to enter the market, we could encourage more competition and perhaps lower prices.
Given the frequency and magnitude of recent storms, it is important to recognize an insurance pyramid scheme for what it is: one that exploits the vulnerable and enriches the few at the expense of the many. By promoting freedom, competition and transparency, we can create a system in which individuals are empowered to make their own choices about risk management and insurance, without unfair government coercion.