Why don’t clients buy enough insurance?

​One of the great challenges in the aftermath of Hurricane Harvey will be the number of uninsured victims. According to an Associated Press report, Houston’s Harris County actually had 25,000 fewer active flood insurance policies when Harvey slammed into the city than it did five years before.

So why, in a flood plain, were there so many uninsured homeowners?

According to one expert, it’s because our brains simply aren’t wired to buy enough insurance.

“It turns out that lots of types of insurance are like flood insurance,” Bloomberg economics editor Peter Coy wrote in an editorial for Bloomberg Businessweek. “People don’t buy enough coverage unless they’re required to.”

Coy pointed out that the government requires private citizens to carry many kinds of insurance: auto insurance is legally required in nearly every state, and flood insurance is federally mandated for properties located in areas with a high risk of flooding.

“The government has a right – in fact, a duty to taxpayers – to insist that people take care of themselves by carrying adequate insurance, rather than throwing themselves on the mercy of the government when something goes wrong,” Coy wrote.

Coy wrote that since people generally wouldn’t buy enough insurance on their own, the government should mandate more coverage.

“Coming back to flood insurance, the problem is not that there’s a mandate but that the mandate isn’t broad enough,” Coy wrote. “Plus, premiums are too low, which is why the National Flood Insurance Program keeps losing money, as the Congressional Budget Office stated again on September 01. Higher premiums and a broader mandate wouldn’t just benefit taxpayers. They would send a signal to homeowners: If you want to live here, go ahead, but you could save yourself a lot of money by moving to higher ground.”

by Ryan Smith