Incendiary Insurance

New at Reason: Matt Welch throws cold water on "Fair Access to Insurance Requirements."

Comments

[JSM]

At the very least, shouldn't they be required to build fire retardent homes as a prereq to getting FAIR insurance? I say, minimize the liability if you are going to force it on the market.

[Anonymous]

Matt: Good piece, but can you clarify one point?

Does the government subsidize any aspect of the plan, or does it simply set the rates and force the participating insurers to subsidize it?

I suppose it's a minor distinction, in that either way those costs are no doubt pushed along to consumers.

But I'd be interested to know whether it is taxpayers who are footing the bill (via a state subsidy), or insurance ratepayers (via higher premiums necessary to spread the pain).

[Matt Welch]

Sorry I didn't spell this out -- in California at least, there is no government subsidy, just a directive requiring insurance companies to participate, and some Insurance Commission approval of rates & policy changes. In practice, when a FAIR plan has to cough up millions (such as the $143 million from the 1993 Malibu-Topanga fires), it will either A) make FAIR plans more expensive, B) raise rates statewide, including non-fire regions, and (most likely) C) both. So, those who live in safe zones end up paying, inappropriately, for some of that high risk.

Another potential indirect cost comes in the form of insurance companies deciding either A) FAIR imposes too costly a burden, and/or B) FAIR policies dominate what might otherwise have been a lucrative market, so C) we're outta this state. The fewer insurance companies compete, the higher rates generally go, and this in fact was already reaching an acute level *before* the recent fire, and we haven't really had any costly disasters for several years.

To JSM's point, one thing California FAIR finally did in 1998 or so (I'm away from my notes right now; will clarify/confirm more tomorrow) was to impose steep surcharges (I believe 57%) on fire-hazard homes that didn't comply with several safety provisions, such as clearing brush within a 100-foot radius, and I think some building-material stuff. Homeowners squawked, of course.... This would lead you to conclude that maybe, hey, here's regulation that's working! But then you'd have to ask -- if there were no FAIR for brush-fire zones, don't you think private companies would have come up with similar carrot-stick enticements to build safely? And wouldn't they do that some time before 30 years?

Related point -- if I'm not mistaken, the homes that were rebuilt out of the ashes of the 1993 Laguna Hills fires did *not* have their premiums jacked, in part because they instituted all kinds of fire-safety upgrades.

Finally (and apologies for the scatter-brainedness here), what we'll likely see in the coming months, if the Northridge Quake is any guide, is a significant spike in FAIR issuances, while firms like All-State announce policy freezes and refuse renewals (the latter has already happened). It doesn't take a lot of imagination to see how a negative cycle can be started up.

[mark]

Thanks for the additional detail. I'm still wrestling with where I stand here.

On the one hand, I support the essential rationale behind FAIR -- to make up for the market failure of insurers walking out on high-risk areas -- and the requirement that insurance companies subsidize it in proportion to their policy writing in the state, thereby preventing cherry picking and redlining.

But I'm uncomfortable with the one-size-fits-all equivalence of what constitutes "risk" -- fire vs. riot vs. earthquake vs. other disasters.

And I surely agree that a necessary approach would be to require homewoners to take tangible steps to mitigate the risk -- whether that's fireproofing measures, or putting an automotatic shutoff valve on your gas main in an earthquake area, etc.

In any event, thanks for the info...

[Brad S]

Matt - the same thing is happening here in Texas with homeowners insurance due to the "black mold" epidemic. The state mandates that insurance cover black mold, and given that claims for black mold damage have sky-rocketed in recent years, most insurance companies are deciding that they don't really need to sell homeowners insurance in Texas. The result is fewer competitors and higher rates. Of course, politicians from both the Left and the Right have a hard time grasping this.

[Floyd McWilliams]

What Mark calls "market failure" and "cherry picking" and "redlining" is also known as "rational business practices."

Is it "cherry picking" when Hasbro arranges for shelf space at Toys R Us, rather than at Home Depot? Is it "redlining" when United Airlines does not build a hub in Nome, Alaska? Is is "market failure" when people in low-income ghettos do not receive circulars advertising million-dollar real estate?

[Tom Hynes]

If we knew how many of the FAIR homes burned down, we can figure out what rates should have been. Maybe insurance rates of $10,000 per year will discourage rebuilding. When the same houses burn down every 20 years, rates should be that high.

[Bill O'Reilly]

Shut up!!!

[Douglas Fletcher]

I saw bring the insurance industry back to its roots and let the bookies insure things. Put it up on the board in the Las Vegas.

[Brendan Perez]

Douglas, how about pari-muetual wagering on natural disasters?

Let sports books take action on what month the next fire will happen, perhaps an over/under for acreage consumed or homes burned. Usng the same model for guessing contenders in championships, action could be taken on which city or cities will be the first to burn.

This post was not be meant to be a sarcastic jibe at anyone, I very much would like to see another board at casinos: Baseball, Football, Horse Racing, California Disasters, Hockey...

[Rob]

There's already a market for weather futures. Maybe they could offer a future contract for forest fires?

Oh, wait a minute. That wouldn't work.

1. Go way long the Cuckoo County California forest fire future.
2. Set forest fire.
3. Profit!

[Brad S]

Brendan - at its very core, insurance is nothing more than a peri-mutual wager.

[Amy Alkon]

If we're going to be forced to be protectionist, how come there's no "FAIR"ness rule that says insurers can't turn down journalists for renters insurance. I was turned down twice by AAA (which would have given me a 7%) discount on my car insurance policy if I had renters insurance through them because they don't insure journalists, screenwriters, or others they think could be sued. It doesn't matter that I personally carry a libel-slander policy, and that my syndicator has another one as well. They refused me, and many others. Read about this recently on Romanesko, I believe. Have others experienced this?

By the way, regarding the topic, I'm totally against subsidizing this idiocy. It's one thing if you're beset by an unexpected disaster and insurance picks up the cost of picking up the pieces. If you live in the flood or fire plain, pay the price of being stupid all by yourself.