A further upshot of this: as a result of this disaster, more insurance companies will pull out of California, as you point out. Most (or all?) home mortgages require the mortgagee to carry insurance. FAIR insurance costs more, for less coverage, than current commercial insurance policies. How many people won't be able to afford the increase, and will either default on their mortgages or be forced to sell their homes? If enough have to sell at once, how much will that depress home values, and how many sellers will be underwater when they do sell as a result? There could be one hell of a mortgage/property value crisis coming to California as a result of an insurance crisis.
The idea that insurers would provide better coverage if only they could raise premiums is ludicrous. Whether it's the Orwellian promise of "all risks" coverage at the time a policy is sold or "deny and delay" when a policyholder files a claim, most of the country endures a regime in which premiums have risen for policies that provide less and less coverage. So long as a for-profit industry controls access to the funds necessary to repair property, policies will cost more and coverage will shrink. If you live in a State that has to approve a premium hike, one of the things an insurer has to provide is the profit built into the proposed rate hike. Any owner of a small business would be shocked to see profits as high as 25% in those applications.
- 1. Health insurance is NOT like property & casualty insurance. They are regulated differently and have distinct financial models (even if the concept of insurance is the same).
- 2. The P&C market is complex and intertwined. You did a nice job of explaining the reinsurance issue that far too many do not understand. But the basic concept is to spread the risk of loss across as many responsible parties as possible. In short, from each what they owe, to each what they need (sound familiar).
All is insurance has been tampered with so that market forces are not allowed to work to create a more efficient insurance system. It often takes too long with the claims payout process. But your basic point of view is”socialized” loss is 110% correct. I fear, however, that top many people blame the insurance companies as the problem, when they are often only reacting to the market regulations in which they operate.
FYI, I work in commercial P&C insurance and feel they must do more to help. it is in their long-term interest to do so.
JVL, with your sophistication about insurance and interest in medicine, could you write a piece on the financing healthcare? An insurance model has never made sense to me given that almost everyone has an inelastic demand for life, that sickness and death are inevitable, and that annual resets for deductibles and such make no sense . Thanks.
Never give to the American Red Cross. Your gift will not go to the LA fire disaster. It will be banked for future disasters, and the very highly paid C suite. Give to something with local impact.
As someone who has spent their career in the insurance industry, I can’t begin to describe how hard I geeked out over this one. Well written JVL.
Historically speaking, the government is already involved in insuring catastrophic risks. A good example is the national flood insurance program but a more recent one is the Terrorism Risk Insurance Act (TRIA). After 9/11, the insurance/reinsurance industry recognized that it couldn’t withstand another 9/11 style attack with the related level of losses. The federal government stepped in and agreed to reinsure terrorism losses if companies opt in to TRIA coverage when they buy their commercial insurance. It’s a great example of the private sector and the government working together. Yes, it socializes the losses but there are some risks too large for the insurance market to handle on its own. Fires in California and hurricanes in Florida are likely at this level and may require a TRIA style arrangement. The quickest way to get communities back on their feet is to provide certainty. There is definitely a private/public role here.
The week prior to the fires my daughter was assigned Didion's essay on the Santa Ana's for school. I saw her reading it and hopped up -- 'Joan Didion! She's one of my favorites!'. I reread it too. A week later, probably bc the essay was still bouncing around in my mind, I noted the Santa Ana warning (from NYC), and hoped it wouldn't result in disaster. We know what happened then.
Which leads me to ask -- is my daughter's AP Language teacher a prophet, and if so, hopefully the next assignment won't be reading "The Road".
Many people I know who live in LA refer to the Santa Ana winds as the Didion winds. I miss her too.
Also, one other worthy place to donate is the Pasadena Humane society. They have relocated hundreds of wild and domesticated animals and could use some help.
How “states rights” will bring the downfall of property/casualty insurance starting in CA
McCarran-Ferguson Act of 1945 explicitly states that the business of insurance shall be regulated by the states and exempts it from most federal commerce laws, including antitrust laws. The consequences are that in the case of the CA fires bottom-line profit oriented Insurance companies must price homeowner rates to state business. However, differences in regulation can lead to significant variation in coverage, pricing and consumer rights from one state to another.
texas will literally and metaphorically go dark when the grids fail. Hurricanes 5 will devastate the entire southern states, especially florida. This monk can see new categories for wind speeds. It is all about physics. 🙂
Interesting that repubs, from places such as Ohio, want to withhold federal money from California, for fire fighting, due to CA “mismanagement”. The reality is it the “red states” that tend to be on welfare, taking in more federal money than paying in federal taxes.
The “big blue” states, productive and positive federal revenue, CA and NY, should just secede, As it is, both florida and texas, with all this immigrants hatred, will collapse into chaos with global warming. tbh, not even this monk can help those with such hatred.
Serious question JVL - As an ex-Californian and ex-pat, but one that still pays federal and state tax I am confounded as to why the Federal Gov't (Trump/Musk) can threaten to withhold federal aid, while the California Gov't can't do the same? Forget paying federal tax until the majority of our money is returned to California to help pay for this tragedy. Let's stop supporting the Red states that drain our monies and start supporting our own.
I've wondered the same. I'm all for it, but I suspect the weight of the federal government's response would make it ... very difficult. But on the surface a trade of CA tech and defense industries for Walmart and Stuckey's seems fair to me.
Factoid re marine insurance and its origins... it depends how far back you want to go. By 1255 A.D. merchants of the Venetian Empire could document their cargo and insure it against loss.
Against the Gods, by Peter Bernstein, is a really entertaining and informative read about the evolution of the understanding of risk, and the integration of risk pricing into commerce. https://www.browsersolympia.com/item/1bpbfuS7sdw6Jw82r-LdGw
A further upshot of this: as a result of this disaster, more insurance companies will pull out of California, as you point out. Most (or all?) home mortgages require the mortgagee to carry insurance. FAIR insurance costs more, for less coverage, than current commercial insurance policies. How many people won't be able to afford the increase, and will either default on their mortgages or be forced to sell their homes? If enough have to sell at once, how much will that depress home values, and how many sellers will be underwater when they do sell as a result? There could be one hell of a mortgage/property value crisis coming to California as a result of an insurance crisis.
The idea that insurers would provide better coverage if only they could raise premiums is ludicrous. Whether it's the Orwellian promise of "all risks" coverage at the time a policy is sold or "deny and delay" when a policyholder files a claim, most of the country endures a regime in which premiums have risen for policies that provide less and less coverage. So long as a for-profit industry controls access to the funds necessary to repair property, policies will cost more and coverage will shrink. If you live in a State that has to approve a premium hike, one of the things an insurer has to provide is the profit built into the proposed rate hike. Any owner of a small business would be shocked to see profits as high as 25% in those applications.
JVL,
Two key items to note:
- 1. Health insurance is NOT like property & casualty insurance. They are regulated differently and have distinct financial models (even if the concept of insurance is the same).
- 2. The P&C market is complex and intertwined. You did a nice job of explaining the reinsurance issue that far too many do not understand. But the basic concept is to spread the risk of loss across as many responsible parties as possible. In short, from each what they owe, to each what they need (sound familiar).
All is insurance has been tampered with so that market forces are not allowed to work to create a more efficient insurance system. It often takes too long with the claims payout process. But your basic point of view is”socialized” loss is 110% correct. I fear, however, that top many people blame the insurance companies as the problem, when they are often only reacting to the market regulations in which they operate.
FYI, I work in commercial P&C insurance and feel they must do more to help. it is in their long-term interest to do so.
Great article, though.
JVL, with your sophistication about insurance and interest in medicine, could you write a piece on the financing healthcare? An insurance model has never made sense to me given that almost everyone has an inelastic demand for life, that sickness and death are inevitable, and that annual resets for deductibles and such make no sense . Thanks.
Never give to the American Red Cross. Your gift will not go to the LA fire disaster. It will be banked for future disasters, and the very highly paid C suite. Give to something with local impact.
As someone who has spent their career in the insurance industry, I can’t begin to describe how hard I geeked out over this one. Well written JVL.
Historically speaking, the government is already involved in insuring catastrophic risks. A good example is the national flood insurance program but a more recent one is the Terrorism Risk Insurance Act (TRIA). After 9/11, the insurance/reinsurance industry recognized that it couldn’t withstand another 9/11 style attack with the related level of losses. The federal government stepped in and agreed to reinsure terrorism losses if companies opt in to TRIA coverage when they buy their commercial insurance. It’s a great example of the private sector and the government working together. Yes, it socializes the losses but there are some risks too large for the insurance market to handle on its own. Fires in California and hurricanes in Florida are likely at this level and may require a TRIA style arrangement. The quickest way to get communities back on their feet is to provide certainty. There is definitely a private/public role here.
The week prior to the fires my daughter was assigned Didion's essay on the Santa Ana's for school. I saw her reading it and hopped up -- 'Joan Didion! She's one of my favorites!'. I reread it too. A week later, probably bc the essay was still bouncing around in my mind, I noted the Santa Ana warning (from NYC), and hoped it wouldn't result in disaster. We know what happened then.
Which leads me to ask -- is my daughter's AP Language teacher a prophet, and if so, hopefully the next assignment won't be reading "The Road".
Many people I know who live in LA refer to the Santa Ana winds as the Didion winds. I miss her too.
Also, one other worthy place to donate is the Pasadena Humane society. They have relocated hundreds of wild and domesticated animals and could use some help.
How “states rights” will bring the downfall of property/casualty insurance starting in CA
McCarran-Ferguson Act of 1945 explicitly states that the business of insurance shall be regulated by the states and exempts it from most federal commerce laws, including antitrust laws. The consequences are that in the case of the CA fires bottom-line profit oriented Insurance companies must price homeowner rates to state business. However, differences in regulation can lead to significant variation in coverage, pricing and consumer rights from one state to another.
Me too. Remember reading Slouching Towards Bethlehem as a college Freshman.
texas will literally and metaphorically go dark when the grids fail. Hurricanes 5 will devastate the entire southern states, especially florida. This monk can see new categories for wind speeds. It is all about physics. 🙂
Interesting perspective. 🙏
Interesting that repubs, from places such as Ohio, want to withhold federal money from California, for fire fighting, due to CA “mismanagement”. The reality is it the “red states” that tend to be on welfare, taking in more federal money than paying in federal taxes.
The “big blue” states, productive and positive federal revenue, CA and NY, should just secede, As it is, both florida and texas, with all this immigrants hatred, will collapse into chaos with global warming. tbh, not even this monk can help those with such hatred.
Serious question JVL - As an ex-Californian and ex-pat, but one that still pays federal and state tax I am confounded as to why the Federal Gov't (Trump/Musk) can threaten to withhold federal aid, while the California Gov't can't do the same? Forget paying federal tax until the majority of our money is returned to California to help pay for this tragedy. Let's stop supporting the Red states that drain our monies and start supporting our own.
I've wondered the same. I'm all for it, but I suspect the weight of the federal government's response would make it ... very difficult. But on the surface a trade of CA tech and defense industries for Walmart and Stuckey's seems fair to me.
Factoid re marine insurance and its origins... it depends how far back you want to go. By 1255 A.D. merchants of the Venetian Empire could document their cargo and insure it against loss.
I knew about the reinsurance from Katrina and the mess it left but this explanation really helped clarify. Great Triad.
Against the Gods, by Peter Bernstein, is a really entertaining and informative read about the evolution of the understanding of risk, and the integration of risk pricing into commerce. https://www.browsersolympia.com/item/1bpbfuS7sdw6Jw82r-LdGw
Yes, I'll second that. Brilliant book, and anything but boring, even for non-actuaries :-)>