k_denninger

Another Perfect Storm Brewing: Government Underwritten Contingent Liabilities

The problem with property insurers is that they don't actually <b>underwrite<... their policies - they just say "yes" or "no" without regard to the actual risk they're taking!

For example, no homeowner policy covers flood. You want flood, you buy it through the FEMA-administered program, even though a regular company handles the transaction.

During Andrew most structures that failed did not meet code. Many were built after codes were toughened <b>but the builders did not actually meet the new codes anyway.</b> The insurers didn't know this because they didn't bother to come out and look!

They also take no notice of loss history in a given storm profile.

For example, my home (on the coast) has been through two major hurricanes - Opal and Ivan. It took zero structural damage from either. These were solid Cat 3 hits. Yet I am offered no different rates than someone who lost their roof during either of these storms due to THAT house not being built as well.

When I buy auto insurance my actual crash history is taken into account in setting rates. How come the loss history of my <b>specific</... home, when it has weathered similar events in the past without damage, isn't taken into account when I am offered homeowners?

This sort of "zero-underwriting effort" problem is a big part of the mess and why it can't be fixed easily. To solve this you have to actually do the work, and nobody wants to.

Insurance is inherently about spreading the risk of <b>unlikely</... events across large populations so as to make everyone's premium affordable. If an event is likely, then insurance will cost almost as much as what you're insuring!

The practice of creating "pup companies" that are state (or even area!) specific so as to allow them to be cut off if they take a loss violates this precept and leads to states assuming the burden. While not all areas have hurricanes, they do have other hazards - we get few if any tornadoes here that do significant damage, as the tornadoes that form around here tend to be very weak (F0) and at worst rip up some trees and tear off shingles. Go inland a bit and you find F3-F5 tornadoes that level entire villages.

We don't have earthquakes - but California does, and the New Madrid fault (near St. Louis) historically HAS. The next one there is going to be ruinous.

In short, national companies should be forced to write nationally or not at all. Is it fair to spread the risk of a hurricane among those who are inland? Absolutely, just like it is fair to spread the risk of a TORNADO or EARTHQUAKE among those who do not live in areas particularly prone to those hazards.

To those who say "oh they'll just leave", are you now trying to tell me that Allstate and State Farm will just go out of business? This needs to be a <b>national</... thing, not a state thing. These firms are inherently engaged in Interstate Commerce - regulation ought to come from the federal side - and while we're at it, let's get rid of their anti-trust exemption too.

That assumes anyone is actually interested in seeing the problem fixed.