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In the company's own words: > State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapi

by shoo 3y ago

In the company's own words: > State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market. If you understand the insurance & re-insurance business - can you explain these three factors in a bit more depth? Naive guesses: insurer offers a policy that agrees to rebuild a destroyed home -- so they're exposed to construction costs, if those costs rise above their projections. Unanticipated increases in construction costs increase the liability and reduce the expected profitability of each insurance policy. Increased risk of catastrophe might also increase liability of each insurance policy for homes exposed to those catastrophic risks, and also increase the risk to the whole portfolio of a catastrophe destroying many homes at once, causing many policies to come due at at the same time. A catastrophe might also do interesting things to market rates for construction costs.

khuey 3y ago
Premiums also are regulated so if liability is rising faster than premiums are allowed to rise you're in a bad place.
to11mtm 3y ago
I'll admit I don't understand insurance in CA specifically... But I have a decent general knowledge of a lot of insurance concepts from a past partner. Your naive guesses look to me to be on point. Another thing to consider, at least in the case of 'Replacement Cost' (What it would cost to build a house with similar features) versus 'Actual Cash Value' (What the house was worth on the market.) In the case of 'Replacement Cost' there is the issue that any changes to code must be factored in (i.e. a house built in 1980, may have wiring/plumbing/etc that had been grandfathered in but could not be approved as a new build today.) Increased risk of catastrophe is also a result of the root causes of massive losses from wildfires not being addressed at a government level.

by shoo 3y ago

khuey 3y ago

Premiums also are regulated so if liability is rising faster than premiums are allowed to rise you're in a bad place.

to11mtm 3y ago

I'll admit I don't understand insurance in CA specifically... But I have a decent general knowledge of a lot of insurance concepts from a past partner. Your naive guesses look to me to be on point. Another thing to consider, at least in the case of 'Replacement Cost' (What it would cost to build a house with similar features) versus 'Actual Cash Value' (What the house was worth on the market.) In the case of 'Replacement Cost' there is the issue that any changes to code must be factored in (i.e. a house built in 1980, may have wiring/plumbing/etc that had been grandfathered in but could not be approved as a new build today.) Increased risk of catastrophe is also a result of the root causes of massive losses from wildfires not being addressed at a government level.