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PaperclipPerfector  8mo ago (text post)   3778 thread views

Small-Scale Question Sunday for August 27, 2023

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I'm seeing articles about insurance companies withdrawing from Florida and California because of wild fires. Why are they exiting the market entirely instead of just raising prices to account for the higher risk?

I know that California at least has a state fund that serves as an insurer of last resort, I don't know much about it but I suspect that either there are regulations related to it that prohibit raising prices that much, or that everyone would use it instead of if prices were raised that much.

Also note that there's a lot of overhead involved in calculating what the rates should be and advertising them and offering them, if you expect that no one can afford the rates you would have to charge and you will get very little business, it may save money to shut down rather than pay the overhead to keep offering them.

It’s better PR to leave the market entirely and let the next hurricane ruin people’s lives instead of raising premiums and having an entire class of people who had to sell their family house because Farmers hiked their insurance rates 300%.

In a broader sense than what the commenters below added, there are various scenarios where market failures exist because of information asymmetries. I.e., person A knows about x and person B does not, so they can't come to terms they both find agreeable. In this case there has to be some kind of intervention by the government or another third party for things to work; classic examples for this would be used cars and health insurance.

Insurance companies have a much more sophisticated understanding of wildfire risks than the average person. Throw in some other cognitive biases (humans generally don't organize their finances in 50 year windows), and there are going to be places where insurance companies essentially feel obligated to raise rates to the point where humans will not pay them. Hell, auto insurance is something comparatively much simpler for both issuer and seller and governments generally still have to force drivers to buy it.

The government stops them from raising prices.

Insurance companies are just like us: They buy insurance! When insurance companies buy it, it’s called “reinsurance.”

The cost of reinsurance has risen dramatically, and State Farm cited “a challenging reinsurance market” as one of the reasons it decided to stop selling new home insurance policies in California.

When insurance companies explain their costs to the insurance department as part of the process for justifying their prices, they aren’t allowed to include the cost of reinsurance. The department hasn’t historically permitted it, Soller said, because it doesn’t regulate reinsurance.

“What are insurers supposed to do when, on the one hand, the Department of Insurance is telling them ‘maintain your solvency’ and then, on the other hand, when their costs go up, you can’t charge for it?” said Frazier.

I didn't know that, sounds like a classic case of price controls causing an artificial shortage.

Well just like any business there's a break-even point where their costs will outstrip what people are willing to pay for insurance. With the dramatic rise of housing prices pretty much everywhere in the US especially over the past ~5 years, it makes perfect sense to me.

I figured insurance would be different because most people have mortgages so they are contractually obligated to carry insurance. My understanding is that if I let mine lapse my mortgage company would purchase it and send me the bill. Are people just letting their houses go uninsured because it's too expensive?

Yes. Lots of people do it. They can get in trouble with their mortgage company but not everyone gets caught.

Then they get to learn about the not so wonderful world of force placed insurance. It's, as you can imagine, atrociously expensive and the borrower has to pay for it.

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