When insurance companies are legally forced to choose between providing insurance at a loss and not providing it at all, they'll predictably choose the latter. I have to wonder: who on earth thought those price-restriction laws were a good idea?
I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down. I don't know the math off the top of my head to calculate how likely a lightning strike, or bad wiring or whatever might cause a house to burn down, but I'm sure such tables exist. So I bet every month that no more than one house will burn down. If no houses burn down, I'm in great shape and put that money in the stock market or whatever and get a better return. Maybe I get unlucky and have to rebuild 2 houses.
The sort of sense I get is, the insurance companies can't calculate the probability of catastrophic weather. So there's no way to pick how much to charge for premiums.
I get that it's a continuous curve. But if the cost of the premium is half the cost of rebuilding the house, why buy insurance? If I can squeak by one year without having to rebuild, I should just keep the money and rebuild out of pocket.
Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother? if it's annually a big chunk of the total value of the asset, is there any point? Why put a $100 lock on a $50 bicycle?
The mortgage lender can require it. They don't want to have a burnt down house on the books for any amount of time.
The issue is that if adaptation and resistance strategies end up being required due to climate-related risks, climate denialism ends and there'll be a lot more pressure to replace fossil fuels with renewables.
>Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother?
In that specific case it probably wouldn't make sense, but that doesn't mean it happens in real life or it's representative of the typical insurance buyer.
They can. They can also sell the risk through cat bonds and to reïnsurers.
There is concentration risk, in that if you have one hurricane claim you probably have many others. But that isn’t the problem. The problem is the price is too high, but the folks in the disaster zones can’t afford to rebuild on their own.
Like in your example, if the annual premium is half the cost of rebuilding the house, it implies that the insurance company expects the house to get destroyed every 2 years (maybe a bit less because profit & overhead). The rational thing to do there isn't really to bank the premium into your rebuilding fund (unless you're really wealthy and really want to live there), it's to move. Continuing to stay in a house that gets destroyed every 2 years is what we consider an exercise in futility. And that's the situation that climate change puts us in: some areas that were previously populated are economically uninhabitable, because the cost of rebuilding so frequently becomes greater than the benefit of continuing to live there.
The issue with price restrictions is that in some places, the response to "it's becoming more expensive to keep rebuilding and insuring these places" has been "well, there should be a law to limit how much those greedy insurance companies can charge." And the predictable response to that is "if it costs me more in insurance payouts than we can charge in premiums, we are just going to stop doing business in this state." And so even homeowners that would've been willing to pay the higher premiums simply can't get insurance.
(Also, I'm not convinced that the vast majority of houses in California and Florida are economically uninsurable. There's a wide variety in actual climate risk: houses in the middle of an urban area don't realistically have much more risk from wildfires than they do from an ordinary house fire, while houses in Central Florida are, as another commenter mentioned, much less vulnerable to hurricanes than houses on the coast. As I mentioned to another commenter, the rational response to everyone leaving an area, if it's not actually economically unviable, is to start your own insurance company and fill the void they left. There may be a business opportunity for startup insurers with better risk models than the insurers that are leaving the area.)
https://www.fema.gov/press-release/20230502/fact-sheet-acqui...
https://theconversation.com/when-homes-flood-who-retreats-an...
So they either need to be allowed to let prices float or declare areas smaller than a state as “unisurable”.
Insurance is one of the most regulated areas in business, and for good reasons - too many cases of shady or undercapitalized companies going belly-up and leaving the customers stranded, or being outright scams. Besides, even the largest insurance companies don't shoulder all the risk themselves - no company can survive getting hit by a few "century events" in too short order, so they purchase reinsurance, and even if your risk model may be "better", your reinsurance rates will still be based on the classic risk model.
In any case I seriously doubt it that any startup could be a threat to the established giants of the insurance world with hundreds of years of experience in drawing up risk tables - Lloyd’s of London dates back to the 17th century [1] for a reason.
> I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down.
Correct. The problem is that instead of one house burning down, a significant percentage of the insured houses are burning down. And the insurance companies are claiming that when that happens, that wipes out all the premiums that have been collected (including from customers whose houses did not burn down) and then some, so it's not financially possible for them to insure all these houses in high-risk areas without eventually having to file for bankruptcy. So they want to raise prices, but the government won't let them.
Your mistake is assuming the intention of the people who passed the law was to actually create cheaper insurance.
The laws WERE a good idea for the people who got them passed, for their actual purpose; getting the representatives re-elected.
the home insurance industry in California changed dramatically with the 2017 summer fire season. The numbers are about "billion" in claims. (edit) substantial destruction of buildings of a major city Santa Rosa. At the same time, price escalation of homes was in full swing. Some houses experience a paper-value growth of more than ten percent a year, on top of high prices. The combination is fatal to the stable insurance industry.
No party is innocent on this.. all players are aggressively padding their positions adversarially, including local government. Less than half the burned homes were rebuilt, four years later IIR.
ps- a recent study claims that about fifteen percent of residential homes are under extreme fire risk in California now, out of maybe 1.5 million structures... roughly, depending on definitions.
Some of your other statements are exaggerated. You say a third of Santa Rosa burned in 2017 but it was more like 3% of the dwellings in that city. The Census states that Santa Rosa has gained net dwellings in the last 5 and 10 years, so Santa Rosa is not another Paradise.
ps- I recommend this site.. https://ccst.us/reports/the-costs-of-wildfire-in-california/
If you believe that insurance is still profitable at the rates where other insurers leave the market, the rational response is to start your own insurance company. Run the numbers and prepare a presentation to investors; if your numbers are rational and convincing, you can capture the market for yourself and reap the profits.
For the consumer insurer its more like looking at a commission and guessing whether it will go up again as other market participants decide what to do.
See page 63 of: https://www.energy.ca.gov/sites/default/files/2019-12/Forest...
"In terms of financial performance, admitted insurers in the Homeowners Multiple Peril line broke even in terms of combined underwriting profit between 2001 and 2017. Results for the Fire line were better, with the combined ratio well below 100 percent over the same period. The industry was profitable when investment returns were considered; however, insurers’ experience between 2001 and 2017 illustrates how a particularly bad wildfire season can wipe out many years of underwriting profits."
This is also an easy way to get people out of wildfire areas without being the bad guy. Can blame Allstate that someone needs to move.
It could also be that it is better politically to have cheap insurance for 80% than more expensive insurance for 100%.
Or frankly, just an easy way to get some votes without really getting blamed later.
Historically, the rate one paid was related to the risk one was insuring. The alternative is to have those with low risk pay for those with high risk. I would prefer we don’t build I. Places that need to be rebuilt every few years, which you and I are paying for.
And that's still the case today. The rate of change regarding extreme weather events is significantly accelerating due to climate change and unintentional geoengineering [1], humans are ever more and more encroaching on nature, and a lot of infrastructure like power lines is frankly rotting, so it's only a matter of maths that insurers introduce serious rate hikes.
Another part is that insurers try to anticipate future risk increases as well so they can build up reserves for when disaster (inevitably) strikes... and politicians all over the world aren't exactly prioritizing tackling climate change, quite a few openly deny it. So of course insurances have to price in the additional risk coming from the expectation of many more years of inaction making climate change and its impact even worse.
[1] https://www.science.org/content/article/changing-clouds-unfo...
“Free-market, pro-freedom” conservatives in places like Florida and South Carolina.
https://www.palmbeachpost.com/story/news/state/2023/07/18/hu...
https://www.miamiherald.com/news/state/florida/article129837...