4 ms·

California needs to get rid of its price controls on insurance, so that people building in high risk areas are exposed to the true costs of the risks they are t

California needs to get rid of its price controls on insurance, so that people building in high risk areas are exposed to the true costs of the risks they are taking, and have appropriate incentives to build to the conditions.

dullcrisp 2y ago
How can there be price controls on insurance? The state subsidizes insurance in these areas?
- throwup238 2y ago
  The California Department of Insurance regulates the insurance rates, down to how much they can raise them each year. Over the last decade the real risk of these fires has become better known to insurance companies and they've been screaming to be allowed to raise rates faster. Some have even exited the state completely (to new sign ups). CalFAIR is the state insurer of last resort but last I checked it's not subsidized. There were talks of needing a possible bailout last year, and it's going to intensify now, but it hasn't happened yet.
  - silotis 2y ago
    CalFAIR is subsidized in the sense that insurance companies are forced to pay into it. Insurers of course pass this cost on to their customers. Combined with price controls on insurance this is just taxation with extra steps.
    - scoofy 2y ago
      The California FAIR Plan will almost certainly be bankrupted by this event, and then will almost certainly be bailed out by the state... which will be a direct subsidy.
Neonlicht 2y ago
I live in the Netherlands. My insurance already doesn't cover a flood (it also doesn't cover war or a nuclear reactor blowing up). It is the government that picks up the bill in real disasters I suggest everyone reads the fine print on their contracts.
- nosefurhairdo 2y ago
  Government doesn't pick up bills, taxpayers do. And it introduces moral hazard when the people engaging in risky behaviors (buying homes in high fire-risk areas) don't bear the costs of those risks. This creates larger, systemic risks and is simply unfair. Someone in Montana should not have to pay to rebuild homes in California.
  - bad_haircut72 2y ago
    No doubt the people in Montana expect help when their own houses burn down though
    - Panzer04 2y ago
      It's the difference between paying a few hundred dollars a year on your own insurance because it's incredibly unlikely your house burns down, and many thousands a year because your suburb burns down once or twice a decade. We shouldn't be back stopping the insurance costs for anyone. If they can't pay it, maybe that tells them something about the place they are choosing to live in.
  - dataflow 2y ago
    > Government doesn't pick up bills, taxpayers do. [...] Someone in Montana should not have to pay to rebuild homes in California. Are Montana residents' taxes currently paying for rebuilding homes in California? How does that work - I actually don't know but I thought FEMA doesn't rebuilt homes?
    - scoofy 2y ago
      I significant amount of the homes destroyed were "uninsurable" which they called an "insurance crisis" and they created an insurer-of-last-resort called the California FAIR Plan, which was socialized fire insurance: https://en.wikipedia.org/wiki/California_FAIR_Plan https://en.wikipedia.org/wiki/California_FAIR_Plan However if you look at the "Key Statistics" fact sheet, you'll see that, guess what: >The FAIR Plan’s Highest Wildfire Exposures >This map shows the five areas with the highest wildfire exposure concentrations each in Northern and Southern California. Each quarter circle represents a 7-mile radius where risk is concentrated. https://www.cfpnet.com/key-statistics-data/ https://www.cfpnet.com/key-statistics-data/ Pacific Palisades is one of many cities where a wildfire would bankrupt the entire system, because the plan didn't actually charge people what the actual cost of replacement value of the homes is. The system apparently has about $700M in assets, and it is predicted to have over $7B in exposure right now. I think it's pretty clear that they're going to have California tax payers bailout the system so that people living in the best real estate all of CA rebuild their homes in a place where people probably shouldn't be building in the first place, and continue to have their insurance subsidized by normal folks who could never afford to live in places that valuable.
merrywhether 2y ago
Yeah, the solution isn’t divorcing risk (as communicated by cost) from reality. If the concern is usurious insurance rates, that’s where things like profit caps and other regulations come in. Society should want people to have fair insurance rates but not necessarily cheap rates.
- Analemma_ 2y ago
  Profit caps are a bad idea in general, but they are an especially terrible fit for companies insuring against tail risks, because you need to eke out a small profit for years or decades to hedge against the black swans with massive costs. The 2017 and 2018 wildfires wiped out _25 years_ of insurance company profits, for example: if you had said in 2013, "hey, these guys have made 20 straight years of profits, we need caps to control costs", you'd have left them insolvent against the fires. This is all a moot point though: you cannot force companies to offer insurance. If regulations prevent them from offering policies at a profit, they just leave. Which is exactly what is happening in California (and Florida): every company is bailing out and refusing to renew policies.
  - daveguy 2y ago
    Profit caps are not the same as disallowing profit. They make sure insurance payouts are fair given the insurance premiums. Distributing "profits" back to shareholders to the point that the insurance company cannot honor policies is a disingenuous use of funds for an insurance company. You seem to think profit cap = no profit, which is not the case. It means the profit ROI cannot take precedence over the insured ROI.
    - scarab92 2y ago
      Profit caps in general are a bad idea, and should only be considered in a near complete absence of competition. In insurance the problem is even worse, because you can’t compute what a reasonable profit cap is. Because of tail risks, you often see insurance companies making a profit of $1b each year for 30 years, then suffering a loss of $40b. Looked at during the typical year you might conclude the profits are excessive, but over a long term it might become apparent that the average profit is actually zero or even negative. As is often the case, more competition and better competition policy is the solution.
__loam 2y ago
Really hard to make the argument for this politically when the state is also facing a housing crisis. Unfortunately, a lot of undeveloped land is also prone to wildfire. The solution is zoning relaxation and building dense but there's also a lot of resistance to that.
- Analemma_ 2y ago
  Newsom is proposing waiving CEQA for rebuilding destroyed homes in the wildfire zone, but only for low-density structures, which makes me want to scream until my throat bleeds. California infallibly manages to zero in on the worst possible solution; waive CEQA either entirely or not at all, and let the Palisades homeowners wait for their decade of environmental review like the rest of us have to.
  - bcrosby95 2y ago
    I think CEQA only applies if you aren't building a similarly sized/footprinted structure, which seems reasonable enough. So I don't see why it would need to be explicitly waived, except to give people with the means to to rebuild bigger/etc.
seanp2k2 2y ago
Let’s start with 1978 Prop 13 and end their property tax subsidies though. Go look up how much the owners of these eight-figure properties paid in taxes over the past five decades. https://www.taxfairnessproject.org/map https://www.taxfairnessproject.org/map only has it for the Bay Area, but Zillow and the county tax assessor websites can show for any address — it’s public record.
- dano 2y ago
  Here is a screenshot of Pacific Palisades property taxes https://imgur.com/a/1G6pLap https://imgur.com/a/1G6pLap More exploration can be done here https://www.officialdata.org/ca-property-tax/#34.04626347956261,-118.54426413774493,18 https://www.officialdata.org/ca-property-tax/#34.04626347956...
  - cudgy 2y ago
    Pretty cheap considering average house costs $6-7 million.

dullcrisp 2y ago

How can there be price controls on insurance? The state subsidizes insurance in these areas?

throwup238 2y ago
The California Department of Insurance regulates the insurance rates, down to how much they can raise them each year. Over the last decade the real risk of these fires has become better known to insurance companies and they've been screaming to be allowed to raise rates faster. Some have even exited the state completely (to new sign ups). CalFAIR is the state insurer of last resort but last I checked it's not subsidized. There were talks of needing a possible bailout last year, and it's going to intensify now, but it hasn't happened yet.
- silotis 2y ago
  CalFAIR is subsidized in the sense that insurance companies are forced to pay into it. Insurers of course pass this cost on to their customers. Combined with price controls on insurance this is just taxation with extra steps.
  - scoofy 2y ago
    The California FAIR Plan will almost certainly be bankrupted by this event, and then will almost certainly be bailed out by the state... which will be a direct subsidy.

Neonlicht 2y ago

I live in the Netherlands. My insurance already doesn't cover a flood (it also doesn't cover war or a nuclear reactor blowing up). It is the government that picks up the bill in real disasters I suggest everyone reads the fine print on their contracts.

nosefurhairdo 2y ago
Government doesn't pick up bills, taxpayers do. And it introduces moral hazard when the people engaging in risky behaviors (buying homes in high fire-risk areas) don't bear the costs of those risks. This creates larger, systemic risks and is simply unfair. Someone in Montana should not have to pay to rebuild homes in California.
- bad_haircut72 2y ago
  No doubt the people in Montana expect help when their own houses burn down though
  - Panzer04 2y ago
    It's the difference between paying a few hundred dollars a year on your own insurance because it's incredibly unlikely your house burns down, and many thousands a year because your suburb burns down once or twice a decade. We shouldn't be back stopping the insurance costs for anyone. If they can't pay it, maybe that tells them something about the place they are choosing to live in.
- dataflow 2y ago
  > Government doesn't pick up bills, taxpayers do. [...] Someone in Montana should not have to pay to rebuild homes in California. Are Montana residents' taxes currently paying for rebuilding homes in California? How does that work - I actually don't know but I thought FEMA doesn't rebuilt homes?
  - scoofy 2y ago
    I significant amount of the homes destroyed were "uninsurable" which they called an "insurance crisis" and they created an insurer-of-last-resort called the California FAIR Plan, which was socialized fire insurance: https://en.wikipedia.org/wiki/California_FAIR_Plan https://en.wikipedia.org/wiki/California_FAIR_Plan However if you look at the "Key Statistics" fact sheet, you'll see that, guess what: >The FAIR Plan’s Highest Wildfire Exposures >This map shows the five areas with the highest wildfire exposure concentrations each in Northern and Southern California. Each quarter circle represents a 7-mile radius where risk is concentrated. https://www.cfpnet.com/key-statistics-data/ https://www.cfpnet.com/key-statistics-data/ Pacific Palisades is one of many cities where a wildfire would bankrupt the entire system, because the plan didn't actually charge people what the actual cost of replacement value of the homes is. The system apparently has about $700M in assets, and it is predicted to have over $7B in exposure right now. I think it's pretty clear that they're going to have California tax payers bailout the system so that people living in the best real estate all of CA rebuild their homes in a place where people probably shouldn't be building in the first place, and continue to have their insurance subsidized by normal folks who could never afford to live in places that valuable.

merrywhether 2y ago

Yeah, the solution isn’t divorcing risk (as communicated by cost) from reality. If the concern is usurious insurance rates, that’s where things like profit caps and other regulations come in. Society should want people to have fair insurance rates but not necessarily cheap rates.

Analemma_ 2y ago
Profit caps are a bad idea in general, but they are an especially terrible fit for companies insuring against tail risks, because you need to eke out a small profit for years or decades to hedge against the black swans with massive costs. The 2017 and 2018 wildfires wiped out _25 years_ of insurance company profits, for example: if you had said in 2013, "hey, these guys have made 20 straight years of profits, we need caps to control costs", you'd have left them insolvent against the fires. This is all a moot point though: you cannot force companies to offer insurance. If regulations prevent them from offering policies at a profit, they just leave. Which is exactly what is happening in California (and Florida): every company is bailing out and refusing to renew policies.
- daveguy 2y ago
  Profit caps are not the same as disallowing profit. They make sure insurance payouts are fair given the insurance premiums. Distributing "profits" back to shareholders to the point that the insurance company cannot honor policies is a disingenuous use of funds for an insurance company. You seem to think profit cap = no profit, which is not the case. It means the profit ROI cannot take precedence over the insured ROI.
  - scarab92 2y ago
    Profit caps in general are a bad idea, and should only be considered in a near complete absence of competition. In insurance the problem is even worse, because you can’t compute what a reasonable profit cap is. Because of tail risks, you often see insurance companies making a profit of $1b each year for 30 years, then suffering a loss of $40b. Looked at during the typical year you might conclude the profits are excessive, but over a long term it might become apparent that the average profit is actually zero or even negative. As is often the case, more competition and better competition policy is the solution.

__loam 2y ago

Really hard to make the argument for this politically when the state is also facing a housing crisis. Unfortunately, a lot of undeveloped land is also prone to wildfire. The solution is zoning relaxation and building dense but there's also a lot of resistance to that.

Analemma_ 2y ago
Newsom is proposing waiving CEQA for rebuilding destroyed homes in the wildfire zone, but only for low-density structures, which makes me want to scream until my throat bleeds. California infallibly manages to zero in on the worst possible solution; waive CEQA either entirely or not at all, and let the Palisades homeowners wait for their decade of environmental review like the rest of us have to.
- bcrosby95 2y ago
  I think CEQA only applies if you aren't building a similarly sized/footprinted structure, which seems reasonable enough. So I don't see why it would need to be explicitly waived, except to give people with the means to to rebuild bigger/etc.

seanp2k2 2y ago

Let’s start with 1978 Prop 13 and end their property tax subsidies though. Go look up how much the owners of these eight-figure properties paid in taxes over the past five decades. https://www.taxfairnessproject.org/map https://www.taxfairnessproject.org/map only has it for the Bay Area, but Zillow and the county tax assessor websites can show for any address — it’s public record.

dano 2y ago
Here is a screenshot of Pacific Palisades property taxes https://imgur.com/a/1G6pLap https://imgur.com/a/1G6pLap More exploration can be done here https://www.officialdata.org/ca-property-tax/#34.04626347956261,-118.54426413774493,18 https://www.officialdata.org/ca-property-tax/#34.04626347956...
- cudgy 2y ago
  Pretty cheap considering average house costs $6-7 million.