California’s Insurance Crisis;
A long-term change in the frequency or intensity of extreme weather events would indeed alter the risk of loss. But insurance is about the management of risk. Without risk, insurance could not exist. As Cuthbert Heath, an early innovator in catastrophe insurance, explained more than a century ago: “Any risk is insurable at the right price.”
Changing risk does not lead to uninsurability. However, changing risk while restricting the ability to price appropriately in response, could lead to uninsurability. It is pricing, not risk, that underlies California’s insurance crisis. Let’s take a closer look.
Back in 1998, soon after Chris Landsea and I published our first paper estimating what damage past hurricanes would do under contemporary levels of population and wealth, we were contacted by someone in Florida’s government involved with insurance regulation. We were asked if we could apply our normalization just to hurricanes that affected Florida. We performed the requested analysis and shared our findings with Florida officials — Normalized hurricane losses for Florida under our methods implied much greater risk of loss than other contemporary methods of loss estimation, and thus implied a need for higher insurance rates for Florida homeowners. We did not hear back.
Rate suppression is a great way of putting your risk on others. Legislate to keep the rates so low that the insurance companies flee the state. Form a state-run insurance company that pretends to offer insurance but that is so under-funded it could never realistically cover a major disaster. Wait for a disaster to occur, have the state-run insurer go bankrupt, run to the state to cover the balance, and have the state run to the federal government to provide most of the funding using money from taxpayers from other states who have a properly operating insurance industry. You really don’t need to insure, you just need to participate to the point that you can throw in the towel. It’s the son in the basement who doesn’t live at home scenario.
Steve
Excellent post.
I’ll add this. The state-run insurance company execs will all collect healthy bonuses.
Banks do much the same thing. How many banks have taken big risks, collected healthy exec bonuses, and then rely on tax payers for bail outs when their risks fail, due to yet another ten sigma event?
Any form of government price suppression has predictable consequences. Witness ‘rent controls’.
Planes are insured that fly behind enemy lines. Everything is insurable for a price.
In Canada there are provincial insurance schemes. British Columbia – ICBC, Manitoba – MPIC and Saskatchewan – SGI. Losses are backstopped by the taxpayers. Even the ones who don’t drive. These Provinces drove the private sector out and set up a monopoly. They don’t have the discipline of the market to contend with. They’re run by bureaucrats…
I live in CA, but NOT in any MAPPED high fire zone area. The exterior of my home is effectively fireproof, and as virtually everyone in CA … I have NO earthquake insurance as it is an unaffordable add-on to my homeowners insurance.
So, I don’t expect my insurance to be priced as though I live in tornado alley, or on the leading hurricane edge of the Gulf of America. My home is about as low risk as it gets.
I pay a lower insurance rate for my auto insurance because I am a good driver who makes no claims, gets no tickets (in recent years) and has NEVER been in an at-fault accident. And I live in a safe community where cars are not burglarized as in Oakland and San Francisco. As a result I pay a much lower auto rate than those living in Oakland.
Hence, I do NOT expect to pay HIGH RISK rates for my homeowners insurance … but I do. My insurance is not priced based on the mathematical actuarial calculations. My homeowners insurance is priced on what the Insurance industry can get away with.
Yes, the State has CAUSED this mess … and the STATE has enabled Insurance companies to abuse my low risk by making me pay for the high risk. So take your actuarial tables and shove em. And take the Newsom Admin. and shove him … off a precipice on Mt. McKinley
When I hear someone say “actuary” I assume he’s a supercilious Chinaman.