State insurance regulators do have a legitimate purpose -- to prevent totally free-market (read, "lawless") behavior by insurance sales companies which happens when people can promise something in the future, take money for it now, but not deliver (ala the golden age of past American business hucksterism). Insurance as a product (or snake oil) is highly prone to this malfeasance when unregulated. Just like lotteries.
But on the other hand, because state regulators are slow to react or adapt to changing circumstances, they essentially freeze the market and the parameters allowed for sales of insurance in the past, for circumstances that may no longer exist.
So, new risks and willingness to insure are not accounted for, and companies no longer find it profitable to do business with rules of the past, in the present.
California has "fire season," not a season I ever wanted in my life. I wonder how much this is actually kind of an issue of global warming without being called that. My understanding is fires are getting worse on the west coast thanks to climate change.
As far as i can tell, california forest management essentially ended up suppressing "good fires", and didn't do enough of controlled burns, which ended up accumulating a lot of fuel to cause large fires.
Santa Cruz had huge wildfires when I was a kid in the 80s (it snowed ash even). The fire experts were pretty explicite that if the same policies were kept in place (preventing burn off) we would have those same fires 40 years later. It's 40 years later I wonder how that turned out.
>> My understanding is fires are getting worse on the west coast thanks to climate change
So, without taking a position on whether fires are getting worse, how would that matter for the insurance markets?
There's a price that would make it work. Risks are higher, price of an insurance policy would be higher.
Insurance companies, left to their own devices, wouldn't leave markets due to that, insurance companies would price risks accordingly, which is the thing that insurance companies do. That's the positive externality of insurance companies, they give you information about risk.
Insurance companies leave markets when they aren't allowed to accurately price risk, which the state of California will not allow them to do.
So, without taking a position on whether fires are getting worse, how would that matter for the insurance markets?
I'm not arguing with you nor rebutting your claim. I haven't studied the situation in California and have no opinion about what is going on there.
But I did work in insurance for a few years and insurance began as a form of betting or gambling. If the possibility of X happening is too high, it's no longer a gamble.
So as the odds of being required to payout approaches 100 percent, they stop covering it because that's not what they do.
This is why flood insurance in the US is provided by the federal government, not private insurers: Because most land with residential development floods. It's not a question of if but when, how often and how badly.
Hurricane Andrew also significantly impacted the homeowners insurance industry. I don't recall the details at the moment, but this is not without precedent.
I don't think your example is completely logical and is pretty biased sounding opinion from "someone who did work in insurance".
"Because most land with residential development floods" - no i don't think its exactly that. Most land with residential development floods is not true. Now what is true is that most land in a flood zone does indeed have a high chance of flooding. Flood zones are a fairly known and accurate data set that anyone can look at. Heck most of the online realtor sites will show you a flood map with the property. This is the same problem for individuals that live in CA in known fire zones. These type of properties are impossible to underwrite because everyone in pool is high risk. You either need to build a home that is fireproof or accept the risk and potential for total loss. The fed's flood insurance and the state levels fire program are just allowing people to continue to live in unsustainable areas or with properties that have not taken the precautions to prevent loss.
It tends to be something the market won't bear though. If people can't afford it, pricing it as high as you want tends to cause the market to collapse anyway, just from a different mechanism.
Some things simply don't work well when handled as a business model.
Fire departments that only show up for people paying their fire dues don't work at all. In practice, places that require you to pay for fire department help have the fire department show up anyway and they watch your house burn down while standing around to be on hand just in case it threatens to spread beyond the uncovered property.
Places where there is no police department and rich people all hire private security are also pretty dysfunctional socially.
Some things get provided as a public good by sane societies because other formats for addressing it simply don't work.
Some things simply don't work as a government model either. The logic in this entire thread is flawed. Just because someone decided to buy a home in a known flood zone or in a known high-risk fire zone, does not mean other individuals should have to compensate them for taking on that risk. Lets not dilute this with public services such a police or fire. This is about insuring homes that individuals bought, often/majority of the time with known data that it is at some risk. We cannot just eliminate risk for risk-takers.
I spent some years trying to find someplace on earth I could theoretically move that had no natural disasters. It doesn't exist.
It's a case of pick your poison: Which kind of natural disaster are you more comfortable with? Tornados? Fires? Hurricanes? Landslides?
Flooding is the most common natural disaster humans face. We tend to build our biggest cities at natural port sites.
We need water to drink, for hygiene and for crop production and we use waterways as cheap transit for goods. So we tend to build in flood zones.
We could probably do a better job of favoring architecture that played nice with that, such as having carports at ground level under the house and residential development above that. But the reality is humans can't escape our inconvenient need for water.
Housing is a public good. One criticism cited frequently on HN of the US housing situation is that it has created problems socially to treat homes as investment vehicles. It gets cited as a root cause of the national housing crisis.
I don't know how to have a meaningful discussion of any of this by following the arbitrary rules you list. It makes no sense to me.
What arbitrary rules? I am simply saying that it is impossible to underwrite for anyone, including the government, buildings that are built in known high risk zones.
Just because a city is near a port does not mean that exact spot of land is a flood zone. Just because you live in a fire prone region does not mean your house cannot be covered. There are a lot of ways to retrofit homes for fire prone areas including landscaping changes.
You’re entirely correct that there are threats to buildings everywhere. My point is that most state/government programs treat areas that are impossible to underwrite. I am suggesting that in those cases perhaps it’s more cost effective to not underwrite the risk. You could shape it different ways, from not underwriting it at all to underwriting the risk but on a loss, paying for the relocation not rebuild.
This has nothing to do with being a public good and more that zones that are known complete loss high risk zones should be mitigated. Yes nature exists everywhere but you can generally underwrite things when your entire pool is not experiencing a total loss.
Is suggesting a home built in a flood zone should not be rebuilt arbitrary? Is suggesting homeowners in high risk fire zones take the steps to alter their landscaping to reduce risk arbitrary? You are sharing all these feel good sentiments and I am simply saying it’s not feasible to underwrite these activities.
Woah, I don't have any idea why you are characterizing my remarks as "sharing all these feel good sentiments."
Society is supposed to help individuals thrive so society thrives. That's how a sane culture works.
Figuring out where to draw the line between benefits to individuals that help society thrive versus benefits to individuals that undermine society is what gets argued over if you want a functional world.
Dog-eat-dog, screw you, up yours, not my problem attitudes fundamentally end up coming back to bite people.
If that's where you are at currently: Sorry you got burned or whatever. But it's not a mental framing that fosters good business.
I still don’t follow the logic but I would love to. If you have some specific ideas it would be great. Are you suggesting the government underwrites all risk no matter what? Are you suggesting to get rid of commercial insurance companies?
Perhaps the feel good statement comes off inflammatory but everything you said are nice ideas but lack how it actually get implemented. I am only suggesting that I am not sure having the government underwrite risk is a good idea, these funds are often underfunded and not underwriting the actual cost of loss correctly. It is funny because I don’t like the current constructs of health insurance in America but I think other forms of insurance work. On that side I think a form of a single payer system would work better, probably what you envision but not shared is like.
Again my point is simply that I think it can make sense for the government to underwrite if it requires moving those individuals out and not providing coverage to new homes that are in a flood zone. But I don’t think economically it works out going forward to just cover everything and anything.
Then share your idea like I have with mine. You made multiple examples towards a fire departments and police forces. How else can anyone infer what you mean then? If you don’t want to share then just don’t but it is silly to respond by picking apart my statements alone.
Most insurance companies have made pretty public statements about states not giving them the ability to properly account for global changes in climate. I don't think it has anything to do with what you are saying. There is no conspiracy that "fire season" is a code word for "climate change". Fire season is a complicated problem with many inputs but I am sure the lack of proper fire management of these lands did not help it.
For the record, I never suggested that fire season was a code word for climate change. Just that fires are getting worse, fire hazard is being cited as a factor in this decision and I can't help but wonder if the thing not being explicitly spelled out is that this longstanding risk of post-earthquake fires is looming larger in the minds of insurance company decision makers because of this changing context.
It doesn't require any conspiracy theories or intentional deceit for people to start going "Oh. X thing. That's too much risk." without them thinking to explicitly state "...because the context has changed since my dad or grandad founded the company, so the risk he felt ok with now feels like too much risk to me."
People often don't spell everything out when talking about an issue. Humans are routinely kind of blind to their own implicit assumptions and the need to communicate them.
It's not just the home insurance either. Last week, I bought a car and 3 of the big insurance companies refused to insure it without a 15 days waiting/underwriting period (Geico which I've had for many years, State Farm and Progressive). It was pretty surprising, it seems like they are trying to stop offering insurance without explicitly getting out of the state or something. Thankfully, AAA gave immediate coverage.
"When setting their rates, insurance companies [in California] cannot consider current or future risks to a property. They can only use historical data.
...
Insurance companies say that because they can’t consider climate change in their rates, it makes it difficult to truly price the risk for properties."
The FAIR plans are NOT fair. The insurance companies in the FAIR association have zero incentive to reduce rates, or even assist with mitigation recommendations. AB38 was supposed to fix this and force the insurance companies to recognize mitigation, but it is so overly broad, and watered down, that it means nothing.
I live in CA. We have a separate optional earthquake insurance that is maintained by some CA authority that is pretty expensive to buy into. Wonder why that can't be done with fires that originate from a forest if it's such a high risk?
California law has established the FAIR plan [1] which is insurance of last resort for people who can't otherwise get fire insurance coverage for their home. It's a mandatory association of insurers who are operating in California.
It's my understanding that FAIR plans are very expensive compared to market-provided homeowners insurance. I presume this is because of adverse selection--if you buy FAIR insurance you're in the same risk pool as people who live in very high fire risk areas and have no other insurance options.
Because state run insurance is kind of a crock. These are programs put together for constituents to be pleased enough to vote in the next election cycle but will do little to help in an actual disaster. Its been years but the state run insurance had pretty limiting caps on both contents and the cost to rebuild. Seemed kind of pointless from a total loss perspective.
Edit: I would guarantee that the state run plan is both underfunded and not charging appropriate premiums for the given risk.
Good question. Not about the claims process but about state programs being generally underfunded and not underwriting the risk properly. If multiple insurance companies cannot underwrite the risk properly, how can a state government do it any better and at a sometimes affordable price. Maybe everyone is baking in the idea that the state will just get a bailout from the federal government.
I also believe that it creates a perverse incentive for people to continue living in unmaintainable habitats. We also hear talk about how can these cities with no water continue to survive, its not maintainable etc. Well neither is living in a hurricane prone area or high fire risk area.
The options for these funds are often fairly limited too and not covering even 50% of the loss. YMMV.
This is what happens when government officials are too severely ignorant of economics, and try to make things cheaper by decreeing prices. They decree a price for something that is below what it costs to provide, and all the sellers stop selling.
the basic elephant in the room is that in the years 2017, 2018 and 2020.. there were unprecedented losses due to fire.
The right way to look at this negotiation.. a power-play between goliaths.. is that losses occurred on a scale and severity that no one predicted.. now, years later the markets are trying to find a way to do business in insurance
No, the elephant in the room is that in many states, including CA, insurance companies are severely limited at how much they can change their rates and what factors they can to determine risk/premiums.
Edit: I think there has been a number of comments from the big underwriters that they are unable to underwrite risk properly. This is not just a CA problem either, Florida is also a huge issue.
> is that losses occurred on a scale and severity that no one predicted
The house made some bad bets, the players “won” a few hands, and now the house is backing those players off while they figure out how to rig the game again.
California has been considering enforcing Prop 103 recently, which has begun spooking insurance providers into leaving.
The Insurance Commissioner is also an elected position now, so there is an incentive for them to succumb to populist pressures to climb up the poltical ladder (eg. Govenor, Senator, Congressmember)
Edit: listen to CharlesW. I'm incorrect on the fact that it wasn't enforced until recently
> California has been considering enforcing Prop 103 recently…
Nope, it's been enforced since the start. Right after it passed, insurance companies refunding over $1.2 billion to consumers based on CDI enforcement.
insurance is a scam anyways. the only reason it works is because nothing is supposed to happen. howevever, shit has been happening (thanks to weak enforcement of laws) and their easy profit margins are being lost because asset values have balooned
The major reason insurers are leaving is because California has been considering enforcing Prop 103 recently, which has begun spooking insurance providers into leaving.
The Insurance Commissioner is also an elected position now, so there is an incentive for them to succumb to populist pressures to climb up the poltical ladder (eg. Governer, Senator, Congressmember)
Edit: listen to CharlesW. I'm incorrect on the fact that it wasn't enforced until recently
Incorrect, it's been enforced since it passed. Soon after it passed, insurance companies refunded over $1.2 billion to consumers based on California Department of Insurance (CDI) mandates. You can find many more examples.
Lara could make radical changes if he wanted to, but ever since the court sided with him twice against the FAIR association, the insurance companies have sort of gone to war against him.
The article also mentions that one of the proposed fixes is to allow forward pricing of the insurance market, and more flexible rate change regulations.
Right now, California does not allow pricing of insurance policies except on a few non-standard factors. These factors do not include "proximity to wildfire risk areas", which means that insurers lost a lot of money in the big wildfires of 2017-2018. The state refuses to change, so the insurers are pulling out of the market.
Framing this as "because of wildfires" is technically true, but misses the point. The problem is that insurers in CA can't accurately price for wildfire risk.
This explains a lot. Most of CA's population does not live in wildfire prone zones. But most of the rural parts do. This will price them out of their homes. Parts of the central valley, the mountains, and really north California.
They also tend to be the more anti-government types. One family in an unincorporated part of the mountains refused to pay the voluntary firefighter service fee. When their home caught on fire the firefights just watched it and put out the parts that threatened a neighbor's house who did pay the fee.
More than just rural areas are at risk now - but it may not be correctly accounted for. Much of Southern California has canyons that can bring fires much closer to urban areas than expected - as far back as 2007.
But on the other hand, because state regulators are slow to react or adapt to changing circumstances, they essentially freeze the market and the parameters allowed for sales of insurance in the past, for circumstances that may no longer exist.
So, new risks and willingness to insure are not accounted for, and companies no longer find it profitable to do business with rules of the past, in the present.