6 ms·

I'm not familiar with the price restrictions. I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event hap

by jfoutz 3y ago

I'm not familiar with the price restrictions. I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down. I don't know the math off the top of my head to calculate how likely a lightning strike, or bad wiring or whatever might cause a house to burn down, but I'm sure such tables exist. So I bet every month that no more than one house will burn down. If no houses burn down, I'm in great shape and put that money in the stock market or whatever and get a better return. Maybe I get unlucky and have to rebuild 2 houses. The sort of sense I get is, the insurance companies can't calculate the probability of catastrophic weather. So there's no way to pick how much to charge for premiums. I get that it's a continuous curve. But if the cost of the premium is half the cost of rebuilding the house, why buy insurance? If I can squeak by one year without having to rebuild, I should just keep the money and rebuild out of pocket. Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother? if it's annually a big chunk of the total value of the asset, is there any point? Why put a $100 lock on a $50 bicycle?

badlucklottery 3y ago
> If it's not cheap, why bother? The mortgage lender can require it. They don't want to have a burnt down house on the books for any amount of time.
- digitalsushi 3y ago
  Mortgage lenders can just start to require yet another insurance, like PMI, but for natural disasters. I have faith in them that they will find a way to bill us.
  - lotsofpulp 3y ago
    In the US, the lender for a home mortgage is usually the federal government (Fannie Mae, Freddie Mac, Ginnie Mae). https://www.investopedia.com/terms/c/conformingloan.asp https://www.investopedia.com/terms/c/conformingloan.asp
- evilduck 3y ago
  If you can afford 50% of your housing replacement cost in premiums every year you probably don’t need a mortgage.
- photochemsyn 3y ago
  I can see mortgage lenders moving towards a high-resistance model, e.g. only financing homes with tile-only roofs and defensive sprinkler systems in wildfire-risk zones, elevated foundations (or how about tethered houseboats?) in flood-risk zones, etc. The issue is that if adaptation and resistance strategies end up being required due to climate-related risks, climate denialism ends and there'll be a lot more pressure to replace fossil fuels with renewables.
gruez 3y ago
>I get that it's a continuous curve. But if the cost of the premium is half the cost of rebuilding the house, why buy insurance? If I can squeak by one year without having to rebuild, I should just keep the money and rebuild out of pocket. >Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother? In that specific case it probably wouldn't make sense, but that doesn't mean it happens in real life or it's representative of the typical insurance buyer.
JumpCrisscross 3y ago
> insurance companies can't calculate the probability of catastrophic weather They can. They can also sell the risk through cat bonds and to reïnsurers. There is concentration risk, in that if you have one hurricane claim you probably have many others. But that isn’t the problem. The problem is the price is too high, but the folks in the disaster zones can’t afford to rebuild on their own.
- soramimo 3y ago
  A bit of a tangent, but do you happen to know if it's possible to purchase cat bonds as a small investor? I had looked into this a few years ago but never quite got to the bottom of it.
- PawgerZ 3y ago
  I would like to add: many owners in the disaster zones can't afford to rebuild even with insurance's help. Due to actual cash value policies with non-recoverable depreciation, homeowners with older homes get much less money back. Add insurance companies intentionally writing poor estimates, code upgrades that aren't covered, and the market inflating due to the large number of projects -- many homeowners can't make it.
nostrademons 3y ago
There's always a price where it makes sense to offer insurance. It's possible that nobody wants to pay that price, though. Like in your example, if the annual premium is half the cost of rebuilding the house, it implies that the insurance company expects the house to get destroyed every 2 years (maybe a bit less because profit & overhead). The rational thing to do there isn't really to bank the premium into your rebuilding fund (unless you're really wealthy and really want to live there), it's to move. Continuing to stay in a house that gets destroyed every 2 years is what we consider an exercise in futility. And that's the situation that climate change puts us in: some areas that were previously populated are economically uninhabitable, because the cost of rebuilding so frequently becomes greater than the benefit of continuing to live there. The issue with price restrictions is that in some places, the response to "it's becoming more expensive to keep rebuilding and insuring these places" has been "well, there should be a law to limit how much those greedy insurance companies can charge." And the predictable response to that is "if it costs me more in insurance payouts than we can charge in premiums, we are just going to stop doing business in this state." And so even homeowners that would've been willing to pay the higher premiums simply can't get insurance.
- izzydata 3y ago
  I wonder what it take to convince people some of the coast of Florida, much of California and other disaster areas are uninhabitable. I definitely wouldn't want to live in a home that is not insured or have insurance that is exceedingly expensive. Also places in the middle of the desert that are going to literally run out of water.
  - mschuster91 3y ago
    The problem is that a lot of wealth is tied up in the real estate markets of these areas. If the government were to declare them uninhabitable, it would have to pay out at least some compensation to the owners, and that would be a huge amount of money, politically completely unviable.
    - nostrademons 3y ago
JackFr 3y ago
Natural disasters are especially problematic, because while burglaries and house fires are nicely distributed across time, when the earthquake or hurricane comes, every policy holder in a region makes a claim at the same time.
kelnos 3y ago
Governments restrict how much insurance companies can increase premiums each year. If they want to increase prices beyond some percent, they need to make a special request, which -- at least in California -- is being denied. > I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down. Correct. The problem is that instead of one house burning down, a significant percentage of the insured houses are burning down. And the insurance companies are claiming that when that happens, that wipes out all the premiums that have been collected (including from customers whose houses did not burn down) and then some, so it's not financially possible for them to insure all these houses in high-risk areas without eventually having to file for bankruptcy. So they want to raise prices, but the government won't let them.

by jfoutz 3y ago

badlucklottery 3y ago

> If it's not cheap, why bother? The mortgage lender can require it. They don't want to have a burnt down house on the books for any amount of time.

digitalsushi 3y ago
Mortgage lenders can just start to require yet another insurance, like PMI, but for natural disasters. I have faith in them that they will find a way to bill us.
- lotsofpulp 3y ago
  In the US, the lender for a home mortgage is usually the federal government (Fannie Mae, Freddie Mac, Ginnie Mae). https://www.investopedia.com/terms/c/conformingloan.asp https://www.investopedia.com/terms/c/conformingloan.asp
evilduck 3y ago
If you can afford 50% of your housing replacement cost in premiums every year you probably don’t need a mortgage.
photochemsyn 3y ago
I can see mortgage lenders moving towards a high-resistance model, e.g. only financing homes with tile-only roofs and defensive sprinkler systems in wildfire-risk zones, elevated foundations (or how about tethered houseboats?) in flood-risk zones, etc. The issue is that if adaptation and resistance strategies end up being required due to climate-related risks, climate denialism ends and there'll be a lot more pressure to replace fossil fuels with renewables.

gruez 3y ago

>I get that it's a continuous curve. But if the cost of the premium is half the cost of rebuilding the house, why buy insurance? If I can squeak by one year without having to rebuild, I should just keep the money and rebuild out of pocket. >Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother? In that specific case it probably wouldn't make sense, but that doesn't mean it happens in real life or it's representative of the typical insurance buyer.

JumpCrisscross 3y ago

> insurance companies can't calculate the probability of catastrophic weather They can. They can also sell the risk through cat bonds and to reïnsurers. There is concentration risk, in that if you have one hurricane claim you probably have many others. But that isn’t the problem. The problem is the price is too high, but the folks in the disaster zones can’t afford to rebuild on their own.

soramimo 3y ago
A bit of a tangent, but do you happen to know if it's possible to purchase cat bonds as a small investor? I had looked into this a few years ago but never quite got to the bottom of it.
PawgerZ 3y ago
I would like to add: many owners in the disaster zones can't afford to rebuild even with insurance's help. Due to actual cash value policies with non-recoverable depreciation, homeowners with older homes get much less money back. Add insurance companies intentionally writing poor estimates, code upgrades that aren't covered, and the market inflating due to the large number of projects -- many homeowners can't make it.

nostrademons 3y ago

There's always a price where it makes sense to offer insurance. It's possible that nobody wants to pay that price, though. Like in your example, if the annual premium is half the cost of rebuilding the house, it implies that the insurance company expects the house to get destroyed every 2 years (maybe a bit less because profit & overhead). The rational thing to do there isn't really to bank the premium into your rebuilding fund (unless you're really wealthy and really want to live there), it's to move. Continuing to stay in a house that gets destroyed every 2 years is what we consider an exercise in futility. And that's the situation that climate change puts us in: some areas that were previously populated are economically uninhabitable, because the cost of rebuilding so frequently becomes greater than the benefit of continuing to live there. The issue with price restrictions is that in some places, the response to "it's becoming more expensive to keep rebuilding and insuring these places" has been "well, there should be a law to limit how much those greedy insurance companies can charge." And the predictable response to that is "if it costs me more in insurance payouts than we can charge in premiums, we are just going to stop doing business in this state." And so even homeowners that would've been willing to pay the higher premiums simply can't get insurance.

izzydata 3y ago
I wonder what it take to convince people some of the coast of Florida, much of California and other disaster areas are uninhabitable. I definitely wouldn't want to live in a home that is not insured or have insurance that is exceedingly expensive. Also places in the middle of the desert that are going to literally run out of water.
- mschuster91 3y ago
  The problem is that a lot of wealth is tied up in the real estate markets of these areas. If the government were to declare them uninhabitable, it would have to pay out at least some compensation to the owners, and that would be a huge amount of money, politically completely unviable.
  - nostrademons 3y ago

JackFr 3y ago

Natural disasters are especially problematic, because while burglaries and house fires are nicely distributed across time, when the earthquake or hurricane comes, every policy holder in a region makes a claim at the same time.

kelnos 3y ago

Governments restrict how much insurance companies can increase premiums each year. If they want to increase prices beyond some percent, they need to make a special request, which -- at least in California -- is being denied. > I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down. Correct. The problem is that instead of one house burning down, a significant percentage of the insured houses are burning down. And the insurance companies are claiming that when that happens, that wipes out all the premiums that have been collected (including from customers whose houses did not burn down) and then some, so it's not financially possible for them to insure all these houses in high-risk areas without eventually having to file for bankruptcy. So they want to raise prices, but the government won't let them.