Let me start by saying I'm risk averse: I have $500,000 liability limit on both auto insurance and homeowner's insurance, plus $1,000,000 extra umbrella insurance on top of that. I don't care too much about high deductibles -- the $1,000 deductible on my homeowner's insurance policy will only set me back by a week or so based on my current saving rate -- but I do care a lot about protecting our family assets from a catastrophic financial meltdown.
The unfortunate happenings in Louisiana does let me wonder one thing: will we ever have enough coverage for our house?
Take a look at my homeowner's insurance policy: I have a coverage of $240,000 on my 4-bedroom house, $120,000 for personal properties, and up to 12 months' coverage of loss of use, all "replacement value" (vs. inferior "cash value" policies). $240,000 should be sufficient to rebuild my house based on my agent. Do I have enough coverage?
My house is probably worth a bit over $400,000 now, and I understand a big chunk of the value is actually the value of the land, which, presumably, will not diminish if my house itself is burnt down. And I can totally understand the rationale that insurance companies will not insure the value of land -- it is hard to value and more or less driven by market sentiments. Plus, in front of a disaster that destory the house in its entirety, the homeowner still owns the land, and the value of the land should not change, supposedly.
Only supposedly. But is it true for those in New Orleans? I cannot help but imagine that some beachfront mansions were demolished, and the complete community becomes uninhabitable. If someone was willing to pay $1 million for a good lot by the sea before the hurricane, will he still be willing to pay the same amount for the same lot with mud and human or animal remains, which is so polluted that is no longer inhabitable for human beings?
My point is: even without a housing market meltdown, the land value of individual communities can still be send to a tailspin by natural disasters. In light of this, how can a rational investor in Florida or the gulf area get enough protection?
I don't have an answer, and I doubt a type of insurance can be developed commerically when we are dealing with the subjective value of land instead of objective value of rebuilding cost. Fortunately enough, I don't see a big issue for me. After all, my house is on a plateau, and unless Seattle is completely submerged, my house and community should stay relatively unharmed.
On a separate and only loosely related topic, Steven E. Landsburg argued "Why we shouldn't aid Katrina's victims too much" at Slate. His economic analysis-based argument is: if people in the gulf area choose to take the natural disaster risk and live in the area for the "Big Easy" lifestyle, other risk-averse society members should not be penalized at the expense of New Orleans citizens' risk-taking decisions. (Federal aid reduced the government's ability to support other regions' development and thus harm the welfare of other states.)
Don't get me wrong. I'm not taking an absolute position on this. Now that the disaster happened, I believe we ought to show some love, even it means tens or hundreds of billion dollars, but if people in New Orleans choose to rebuild the city again in these flood-prone below-the-sea-level areas when they have safer alternatives, I will question whether they deserve another multi-billion-dollar bailout when the next major hurricane visits the region in the next few years or decades.