Crazy for Living Next to a Volcano? No, Just Insured

Keli'i Akina of the Grassroot Institute, a Hawaii think-tank, says that Hawaii insurance laws encourage building homes next to active volcanos: [bold added]

Lava nears a Pahoa house (Reuters/Japan Times)

The destruction caused in the early 1990s cost private insurers millions of dollars, prompting them to stop insuring property in the most vulnerable areas, called Lava Flow Hazard Zones 1 and 2....

the Hawaii state government stepped in. In 1991 the legislature created the nonprofit Hawaii Property Insurance Association, which provides policies to people who can’t buy them on the market. But private insurers are forced to join the HPIA as a condition of doing business in the state....In essence, Hawaii law requires all private insurers to pool their resources to subsidize policies in Lava Zones 1 and 2.

Ordinarily, people would be hesitant to build homes in a place that’s too hazardous to insure, but here the Legislature’s actions created incentives. The result was a housing boom on the edge of an active volcano. By 2008 there were more than 2,400 HPIA policies in the area, providing more than $700 million of insurance to the highest-risk lava zones in Hawaii.

This case is one example of moral hazard, in which an arrangement (insurance) meant to reduce risk encourages behaviors that increase risk. The writer, Mr. Akina, recommends that "Hawaii’s leaders should wind down the HPIA." On Hawaii it's been tough to breathe lately, but we're not holding our breath for that one.