Bad news for our insurance premiums

 

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