In mid-January I noted that California had implemented insurance "reforms" that would allow insurers to recoup losses in one part of the state (e.g. the Pacific Palisades fire) from all the insured in that state, by raising everyone's premiums, no matter where they live.
It now appears that something similar is happening across America, even if we live thousands of miles away from the disaster area.
Regulators in many states are allowing insurance companies to raise rates to cover the cost of events that insurers have had to pay elsewhere, as well as increasing the money for things like the rising cost of reinsurance, which insurance firms purchase to limit their risks of major catastrophic events.
“In a world where we have persistently large shocks, you’re getting big cross-subsidies across the country,” said Ishita Sen, a professor at Harvard Business School who was part of a team that conducted a 2022 study on the effects of costly disasters on homeowners insurance rates nationwide. “The past suggests that after big wildfires, other states have ended up paying for it.”
The Insurance Information Institute, an insurance industry trade group, disputes the study’s findings. It says that increases in rates come because insurers are judging the greater risks and costs across most of the country, not because homeowners’ premiums in one area are being used to pay for disasters in other regions.
. . .
Schneyer said some shifting of costs and risks is inevitable for large, national insurers, which benefit from customers facing different perils in different geographies. Asked about what he would say to someone in the Midwest paying more for hurricane risks along the Gulf and East Coasts, and fire risks in the West, he said that “they should hope if they need a new home because their home is destroyed by a tornado, or need a new roof that is damaged by large hail, their insurer would pay for that.”
“That’s risk-sharing. That’s how risk works in the insurance industry,” he added.
There's more at the link.
In the past, our insurance "markets" were apparently centered around the risks each area faced. States with a hurricane problem, or a tornado problem, or a wildfire problem, were typically grouped with other states facing the same dangers. The cost of a major natural disaster of that type were estimated and/or averaged, and that led to insurance rates matching the risks and costs involved. Now, however, it appears that all risks everywhere in the country are going to be costed and averaged in that way, so that my insurance premium in Texas is going to have to contribute something to the cost of rebuilding the Pacific Palisades suburb in Los Angeles, or pay for hurricane damage in Florida, or whatever.
In one sense, this is logical, because insurance companies operate on a national basis and need to cover themselves against national risks. However, it flies directly in the face of traditional insurance practices, which had states setting limits on how much premiums may be increased in the light of the risks that their in-state policyholders face. Can that state-by-state legislative/regulatory system continue if insurance companies are going to demand that customers in a low-risk state nevertheless pay premiums as if they were in a higher-risk area, to cover those who actually do live in such areas?
I don't pretend to know the answer to this. All I know is, I'm paying a lot more for property insurance than I used to, and I don't like it. It may become unaffordable, or add so much to mortgage costs that some properties become impossible to sell - because nobody can afford to pay both the mortgage and the insurance premiums each month.
Oy.
Peter
24 comments:
The insurance companies may price themselves out of the market. Group together in cooperatives to cover potential loses... Oh wait, thats how the insurance companies started....LOL.
Some insurance company will opt not to participate in the high risk areas and therefor charge lower fees everywhere else
They will grow very rapidly.
I live in an area of the country that is mostly benign as far as "acts of nature" (or arson) and this pisses me off
"In one sense, this is logical, because insurance companies operate on a national basis and need to cover themselves against national risks."
Nope, sorry...not logical.
Basically, they're rewarding risky behavior by spreading the risks out to people who eschewed those risks.
If I'm inclined to be prudent and would normally build my house in an area of low risk, but am going to have to pay the same premiums as people with houses in high risk locations, what's the incentive to stick with the low risk alternative? Why give up those beautiful oceanfront sun rises or the riverside boat dock or the mountainside vista if I'm going to be paying for them anyway? If I'm going to have to pay for it, I may as well indulge right?
Basically what's happening here, is that the rest of the nation is being tasked with subsidizing California's idiocy. The reason rates in California are artificially low and/or policies have been canceled, is because the California government has control over the insurance rates in that state and prevent the insurance companies from instituting rates commensurate with the risks.
So, instead of fixing that problem, they're just going to make the rest of us pay. Great idea for Californians...for the rest of the country, not so much.
And the result is going to be even higher insurance losses after people figure "why not build in a high risk area...everyone else is going to be paying for the increased insurance costs..."
Oh...and a sidenote: Who is it that can afford to build houses on riverbanks, and the oceanfront, and mountainsides? Not poor people. Which means by distributing the increased insurance rates across the spectrum, you're not only enabling risky behavior, but you're redistributing the costs of that risky behavior from the rich, to the poor.
Great plan.
I live in southern California. We had a wildfire in our area several years ago. Physically, we were near the fire, combustibly though, we were MILES apart. The people who were affected by the fire lived in the hills, which were heavily peopled with dry brush That hadn't burned for a decade. My neighbors and I live in an area surrounded by plant nurseries and citrus groves. That fire would've had a HELL of a time reaching us across that well-watered land. Still, two of my neighbors lost their homeowners' insurance due to them living in a "high risk" area. My policy, however, renewed. When I looked at the risk assessment page it showed "Wildfire risk: MINIMAL." So this assessment seems to be nothing more than an arbitrary observation the insurance companies make.
I find it odd to hear all the bellyaching about rates going up nationally because of fires in California. Our area may see an occasional wildfire, and will most likely only affect those whose houses are in the brush-covered hills; a FRACTION of the houses in our area. Once an area has seen a burn, there won't be another for YEARS because it takes that long for the brush to grow back. On the other hand, the East Coast and South can be handed one or more hurricanes PER YEAR, which cause WAY more damage than the wildfires do here. You can BET the insurance companies pad the rates of the rest of the country's policyholders to cover those losses. Add tornadoes, flooding, blizzards, ice storms that hit most of the country annually, and you can see it's a fair bet that the West Coast pays more than its fair share of the cost of the rest of the country's claims.
It isn't about risk sharing but how can an insurance company charge more so that their profits are higher and the executives can be paid more.
Dude. Rates vary by region. You're not paying for CA, you're paying for risks in your local area.
Hmm. so this means that when my kids' kids turn 16 and begin to drive, my kids won't be paying the greatly increased premiums for teenaged drivers. All insurance is pooled, right?
In the era of trying to have insurance companies crossing state-lines, the old solution of NOT allowing state-line crossovers may indeed be the answer
Sailorcurt has the right of it.
If the premiums are not based upon the risk of individual loss, but rather the risk of loss average, then there is no incentive to NOT build in a higher risk area.
Being forced to pay higher premiums in Indiana or Ohio because the insurance risks in Califronica or the gulf states are higher simply shows that those areas of high risk were not being charged appropriate premiums all along.
I knew that this was going to happen. I am now paying tens of thousands of dollars for personal and business liability and property insurance on my various properties. Makes one want to get out of the business rental market as my tenant are tapped out and cannot pay any more rent.
There is good reason most states have their own regulatory mechanism to handle insurance corporations, to prevent this. Unfortunately, since many insurers mitigate risk by reinsuring with specialized corporations, and virtually every one uses them, those reinsurers are also increasing their prices to everyone, impacting everyone regardless of what state the original policies were written in.
Insurance is like living in an apartment building. You can be the safest person in the world, but you're only as safe as the guy who's cooking meth in apartment 2B. I'm a VERY safe driver, but my insurance rates are based on where my car is GARAGED. In other words, my rates are based on the stupidity of the whole... That's just how they do it...
As far as it being "a great day for Californians," think again. Yeah, we've had some fire damage out here, but that PALES in comparison to the damages caused by the recent HURRICANE activity back East and in the South! You can BET us folks out West are "helping" to backfill that! And that doesn't even count the blizzards, ice storms, tornadoes, and lowland river flooding that you get and that we don't. And earthquakes aren't even figured in. We have to buy a separate earthquake "rider" to cover earthquake damage, so you folks aren't even on the radar for that.
...Damn... Why is it ALWAYS California's fault?...
One of my nephews thought he'd buy himself a house in the woods here in Montana. He changed his mind when he could not find anyone to insure the house. The Montana forests are an hour drive away from me. My insurance is up but not insane and the past increases were because of hail, not fire.
So what happens when your mortgage company REQUIRES insurance, and you can't get it? Then what???
Haven't had a mortgage in 30 years. Haven't had homeowners insurance in 30 years. Pay $280/yr for minimum coverage allowed by law on two trucks.
Califrutopia is attempting to let insurers do exactly that, by letting insurers pass along a one-time (until the next time) "surcharge" for their liability stupidity, but they're also about 0.2 seconds from getting sued if they do that, because it violates state insurance regulations.
Unfortunately for the rest of y'all, CA regulations prohibiting insurance companies operating here from passing on their poor decisions to you are not protected by similar regulations.
Yes, but no.
CA is forcing insurance companies to eat their own losses, just as it allows them to recoup their own profits in fat times with few disasters, as they do with gusto.
Prevented from soaking the entire state here for their own stupid decisions in offering sub-par premiums for idiots building stupid homes in firetrap canyons that burn every three years, they're doing what Willie Sutton did when he robbed banks: going where the money is. That'd be your pockets.
Kick your own state's elected idiots for failing to act so prudently to protect you, rather than palming CA's foresight in this as the root of the problem.
Insurance companies exist to make a profit.
"Greed is good" has consequences.
If this is news to you, may I suggest some prophylactic perusal of Adam Smith?
Yes, we are.
For property worth 2-5X what the rest of the country (outside of NYFC) will ever pay.
So do you figure that makes our rates higher, or lower?
Many people hereabouts pay more in monthly homeowner's insurance than what most of the country pays for their monthly mortgage.
If nobody told you that national insurance companies share all risk with all policyholders nationwide, let me be the first to clue you in.
You want solely regional rates, find an insurance company that isn't national. (Which company, dollars to donuts, re-insures with those same national carriers for re-insurance.)
Catch-22.
You'll own nothing, and like it.
:)
Not everyone understands insurance.
Best understood as a cost/risk-spreading among a selected group of risks, administered by what we end up calling "the insurance company."
When we fail to exclude undue risks (aka the California Tinder Box waiting for the first first spark) we've accepted an uneconomic level of cost/risk.
When we allow political types to abuse our risk pools by dictating inclusion of bad risks or setting prices, we also have allow a disservice to be done to the risk containment group.
Unfortunately the manipulators control of our cost/risk pools have both disassociated cost-from-risk but also sharply limited our options of pools.
Silly us.
Might be coming up on the time for a repeat of the CEO reduction program.
What happened with California and fire insurance is purely a result of who got elected to their Executive and Legislative branches ... those people prevented insurers from setting effective pricing for the policies they underwrote. The result ... those companies canceled policies and in some cases withdrew from the California market.
This is what happens when government tries to regulate the real world with imaginary regulations. Unintended consequences will make the real world reassert itself.
We had this in southern Oregon already. After 2020 (Antifa) fires, and a huge (400,000) "lightning smolder" fire in 2021, rates went up 40% in 2023. Individual efforts to reduce risk were ignored. We paid...
For 2024, the shiny "improved coverage" letter had a buried section saying that most manufactured houses lost coverage beyond the equivalent of renters insurance. Burnt to the ground? Too bad for the house.
We rewarded the FAFO efforts by pulling house insurance to someone less crazed, and the automotive coverage. Don't trust them any more.
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