And like a good neighbor...

State Farm has decided not to issue any more policies in Mississippi, due to the litigation it faced re: Katrina. The reason for the litigation was that State Farm didn't pay on the policies of its customers, yet continued to take their money. The thing about insurers is, they're trying to manage risk. But "managing" risk really means making decisions as to profitability.

One could argue that based on risk alone, a place like California is simply uninsurable, given its four seasons of: mudslides, earthquakes, fire and, I don't know, pestilence. The insurance costs for living there are very high, particularly on the coast. One could argue that FEMA should stop ministering to California altogether. That if you want to live there, you can. But it's inherently unsafe and so no one is going to help you when some natural deadly phenomenon occurs. The same could be said of coastal Florida, or any number of other non-coastal areas, like Colorado, where people want to live next to nature and thus run a risk.

And yet, we don't make that argument to them. We insure them. We may make them pay more, but we insure them. The Mississippi issue is different. Here, State Farm is saying, "While it was our business to know that levees were incompetent and that a massive flood was likely, we nevertheless took your money and then refused to pay up. Then when you rightfully sued us every which way, we were forced to pay up and now we refuse to insure you further." The actual quote from State Farm's VP of public affairs was "We're just not in a position to accept any additional risk in this homeowners' market."

So the question here is: at what point does it become unprofitable to insure an unsafe place? Is it the point at which you know it's dangerous but keep taking money (while charging high prices)? I don't think so. Or is it at the point where your money-grubbing tendency comes back to bite you in the ass? It makes me wonder how State Farm defines risk. Is it insuring people who live in a flood plain? Or is it getting busted trying to keep from having to pay out?

If State Farm isn't in a position to accept any additional risk b/c of crappy management decisions that involved ripping off thousands of policy-holders at arguably the worst time in their lives, it's probably better for the citizens of Mississippi to no longer have to deal with it. I would love to know what the Mississippi Insurance Department is doing about it.

Sources:
http://www.usatoday.com/money/industries/insurance/2007-02-14-state-farm-katrina_x.htm?csp=24