Comment by w10-1

This is a great opportunity for developers to rebuild with greater density.

It's not clear how extraordinary the losses are - by how much home insurance losses actually outpace home-price inflation (not CPI).

For the moment let's set aside legitimate concerns of climate change or land-use policy inducing unanticipated risk.

Insurance is systemic in the sense of pervasive, but the question is whether the crisis is a controllable excursion from stability, or itself amplifies the problem.

The key factor in the 2008 crisis was how foreclosures reduced prices causing more foreclosures and higher borrowing costs - a vicious cycle.

With insurance, homes are already affected. What other specific markets? Does insurance company diversification spread the impact from real estate costs to other industries?

The destabilizing mechanism is insurer exit after over-exposure. Over-exposure comes not from extra assets, but from mis-pricing.

US Insurance is a private market facility, so pricing is competitive. If a competitor prices insurance below your risk-assessed value, your incentive is to meet their price and try to make it up in other markets or through better investments. This tendency would get worse in times of strong investment growth.

Thus the investment-dependent insurance industry loses when investments fail, and also tends to lose after investments have been winning. Insurance profitability in the last two decades may reflect a sweet spot of stock market performance more than improvements in risk-assessment.

Assuming over-exposure, then what? Both low prices and availability depend on diverse and competitive suppliers. After an insurer has suffered major losses in a market, particularly to the point of viability, they lose the confidence of both investors and customers -- and insurance depends entirely on that belief of reliability. So their best response is to simply leave that market, to maintain their reputation in other markets. Then as more insurers leave a market, prices go up, consuming all available price elasticity - which is very, very significant for homes as fixed assets that are key to other value streams like jobs, schools, etc.

Still, that seems limited to housing unless it takes down cross-subsidizing insurance companies.

But it does end housing in these markets. Individuals won't be able to buy homes because of the cost of mortgages and insurance. But if insurance is unavailable large companies could own apartments (or even subdivisions where they lease homes) and self-insure or enjoy more tailored insurance.

With entire neighborhoods destroyed by fire, developers could rebuild newer, denser housing. And insurers could stay in business by settling with policy holders using money combined with a stake in the new neighborhood corporation.

That's the ideal solution, but it won't happen at neighborhood scale because it would involve too many coordination costs. The state (California) would have to effectively take all the property to avoid hold-outs, and then arrange with various insurance companies and developers.

So the economic solution is for developers to buy up plots of burned-down neighborhoods. A single small developer could use California's SB-9 to build 4 units where there was one. And larger developers could buy a 4 adjacent plots and build a 30-unit apartment. Both could self-insure, or be well-served by insurance company that focuses on protectable, high-density housing.

Doing that at middling scale - lots of complex transactions - would make a good business, albeit not the typical YC. You'd combine a small tech firm with a boutique law firm, add a government relations team. You'd have to be up and running quickly to use the crisis to get the policies you need and start coordinating developers who are sure to be in demand.