Comment by Sabinus
1 day ago
If the market is allowed to price insurance correctly then we can motivate building designs to be more disaster resist. If the McMansion can't get insurance but disaster resistant, modest homes do, then people will adapt.
"Correctly" is doing a lot of work here. Some readers might miss that this is double edged. Insurance is a mandated product. You don't have a choice if you want a mortgage, or want to run a business. So while it is true that the sustainable price for insurance in many areas is higher than what current regulations allow, let's not forget what happens in an unregulated insurance market; price gouging.
If the regulators have defined 'price gouging' as a price substantially below the break even mark, literally any profitable insurance product is implicitly believed by them to be price gouging. The US does a weird thing where "insurance" no longer means pooling risk but some sort of transfer payment welfare system. If they're going to define "price gouging" as profitable activity it is hard to see how the economy is going to function.
Allowing insurers to make a profit and run a business without interference is going to be cheaper - and in most instances better - than whatever the politicians are trying to build here. If you get rid of all the mandatory-this and price-gouging-thats then to stay in business insurers have sell products that people want to buy at a competitive yet sustainable price. It works for food, it'd work here too.
The math of insurance suggests that, if it needs to be widely carried (either due to things like mortgage requirements, or the simple realization most people don't have enough resources to absorb a major catastrophe themselves), the most economical way to go is to have a single risk pool that's as broad and diverse as possible, so it can swallow a large clustered crisis more easily. Yes, this is a bit of robbing Peter to pay Paul.
I always found it funny when insurance marketing talks about "personalized rates", when the goal is to DE-PERSONALIZE the risk. If you have 10,000 customers in Los Angeles, and 5 million elsewhere, you can either isolate the LA customers and charge them the "real" price of the risk, which will be unviable as a business and probably politically touchy too, or you can include them in the broad pool, and the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work.
The concept probably works better if you have some concept of social cohesion to lean on-- you might not get the best possible outcome personally, but the system itself is more robust for everyone.
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This sounds like a very US-centric view and id strongly disagree that only the profit motive keeps economies and people going.
You almost said it yourself, "The US does a weird thing where insurance no longer means pooling risk". Why? Is it the profit motive or gov. regulation?
My answer: The selective approach of insurance companies mirrors the profit seeking lack of solidarity, which is ultimately incompatible with the risk pooling purpose, insurance companies are justified with.
Free markets have down sides and failure conditions too and only principled gov. regulation can fix it.
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> unregulated insurance market; price gouging.
with sufficient competition, it is impossible to price gouge.
So if there is supposed price gouging, then there must be insufficient competition. Therefore, the source of the lack of competition would need to be removed (ostensibly, by gov't - such as increasing business loans so that new insurance companies can be started).
Or, you need to be pragmatic, realize that you're not gods and won't create a perfect system that can't be exploited, and instead tackle the issue from multiple angles while revising your approach as the exploiters attack.
Don't let the perfect be the enemy of good enough.
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I mean, there's sometimes simply not enough capital available to support the creation of further competition in a sector. And government subsidies in the form of cheap business loans are sort of robbing Peter to pay Paul. You're simply allocating capital from one sector (the one being taxed) to another
For what it’s worth, you can get a house with no insurance or mortgage. They tend to be cheap. I had an uninsured thatched cottage for a while, it was 68k
You can have a mortgage with no insurance (after purchase day) here in New Zealand. The bank won’t like it, but also won’t know.
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What did you do for liability insurance?
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Price gouging isn't actually what we're seeing in the most disaster prone areas. Insurance companies aren't charging open ended prices, they're simply exiting the market. Florida for example.
I believe Florida market exits had more to do with litigation-friendliness than premium caps or disaster risks. E.g.,
> In 2020, 79 percent of homeowners insurance lawsuits nationwide were in Florida—even as the state accounted for only 9 percent of the U.S. homeowners insurance claims, according to the Florida Office of Insurance Regulation.
There were some recent reforms in response (HB 837, 2023; SB 2-A, 2022).
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They're exiting the market because the states have limits on how premiums can increase y/y. The risk modeling (which is turning out to be right) says premiums are fractional of what they should be. So unable to raise premiums, the companies just leave.
Rock, meet hard place.
The big risk that we need regulation for is not that insurance charges too much, but too little. There will always be the temptation to charge less than the other guy, get lots of customers and hope nothing really bad happens.
This is a great callout, although I suspect the two main things insurers need but can't get today, due to regulations:
1 can accommodate for 2, but then its basically insurer charging the actual price of the home, year one. Maybe they can work out a deal though, like you get the money back if it doesn't burn down. (Mostly parroting things I've heard that seems to make sense).
P&C insurance is a pretty competitive industry, and there are plenty of mutual insurance companies in the P&C business that don't have a price gouging incentive. Most of the regulations that are about reducing counterparty risk for the insured are probably necessary, but price controls are not, and generally, they only distort the market.
Can you define “price gouging”?
Insurance (at least the kind we are talking about) is only mandatory if you have loans, and even then it is not 100% mandated. We do need insurance regulations, but price caps limit what things actually make sense to cover. To put it another way, you are free to buy land in a risky area if you want, but nobody has to insure it or loan you money for it. If you find someone who will loan you the money if you can get insurance, then you can't get insurance, that sucks for you but nobody owes it to you to hand over money on a losing investment. These requirements can be abused, but there really isn't much evidence of insurers, lenders, and investors colluding to rip people off.
Resistant homes will pay nearly the same prices as everyone else. So the cinder block home owner is subsidizing the sticks houses.
Same happens in autos. Monitored safe driving nets at most 10-20% discounts. Biggest factor is age, and even then, difference between 20yo and 35yo driver is 38%.
There are no tricks or deals to insurance.
> Resistant homes will pay nearly the same prices as everyone else.
but this means the insurance company is mispricing (or is being forced to misprice) the risk of resistant homes.
In theory, when correct pricing happens, these resistant homes should face less claims, and thus the premiums paid on them is high profit margin; ala, the customer is a good one, and the insurer should persue this customer more than another. This ought to results in a discount for said customer's premium, as more insurers vie for this customer over another.
This does happen, it's just done at neighborhood level. That makes some sense, the biggest fire risk factor for your house is probably your neighbor's house burning down.
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This is more a matter of market rules than an inherent property of insurance; currently we do not let insurers get sufficiently granular due to some assumptions about wider social benefits of a less individualised system.
This might be reworked to allow for fire resistant designs to be a factor.
> Biggest factor is age, and even then, difference between 20yo and 35yo driver is 38%.
That's because age is both observable and strongly predictive of risk.
Try and extend this logic to other highly correlative, immutable individual factors.
It was only a week or so ago that I learned that a major failure mode of most houses in Florida during Hurricane season used to be the roofs ripping off. The tie plates and straps that were invented to solve that problem created the McMansion as a side effect.[1]
[1] https://www.youtube.com/watch?v=3oIeLGkSCMA
Interesting video, didn't know about truss plates
Let's just consider Los Angeles for a second. For decades working class immigrants were pushed to the foothills in Altadena by redlining policies which placed them at risk for wildfires. Today their risk is exponentially greater due to the effects of unchecked climate change, and many cannot afford insurance even now.
How exactly do you expect these people to adapt? Many live in multigenerational households and could never afford to rebuild their house or move without uprooting their communities to another state.
Why are the victims made to adapt to the atrocious actions of the wealthy and powerful? Maybe our policy discussions should start from a place of compassion and work towards solutions from there.
One of my daughters was born with moderate to severe autism. There's no obvious cause. I'm told that from what we know it's at least 10 different factors that go into it, one of which is environmental pollution. So maybe corporations are partially at fault.
If I could cure it (yes, I'm using that term. It's a debilitating condition and she'd be better off without it) by selling my house and moving hundreds of miles away from family I'd do that in a heartbeat without complaint. All we can do is make the best of things.
People don't understand the exponential change. As you correctly stated, the effects of climate change are exponential. Why? Because if you take a normal distribution and shift it linearly, the area on the edges grows exponentially. This is why even a linear shift in temperature can lead to an exponential rise in disasters.
Math is hard for people, even on HN.