Expect the cost of insurance to rise, or taxes to go up. Or both! An excerpt:
Earlier this month, JPMorgan estimated the fires around Los Angeles had inflicted $50 billion in losses, of which only $20 billion were insured.
One reason for the gap: State regulators have prevented insurers from charging premiums commensurate with rising property values, construction costs and wildfire risk exacerbated by a warming climate. Many thus stopped renewing policies.
Hundreds of thousands of homeowners shifted to California’s state-run backstop, the Fair Plan, whose exposure has tripled since 2020 to $458 billion. It has only $2.5 billion in reinsurance and $200 million in cash.
If the Fair Plan runs out of money, it can impose an assessment on private insurers to be partly passed on to all policyholders. In other words, the costs of the disaster will be socialized.
California is a microcosm of what happens when insurance breaks down: Either households face potential ruin or the public is handed a financial time bomb.
“What we are seeing is a real disconnect,” said Carolyn Kousky, an economist specializing in risk and founder of the nonprofit Insurance For Good. “There are opposing views on insurance: Is it a private market good, or is it social protection, to make sure everyone has the resources to recover from disaster?”
A central feature of insurance is risk pooling: The combined contributions of the community cover the losses incurred by members of the community in a given year.
Another feature of private insurance is actuarial rate-making, that is, calibrating premiums to the customer’s risk. That’s to prevent “adverse selection,” in which only the riskiest people buy insurance, and moral hazard—the tendency to encourage risk by undercharging for it.
But some activities or individuals are so risky they could never obtain, or afford, private insurance. That’s when risk gets socialized. The federal government’s expansion since the 1930s has largely been through the provision of insurance: Social Security, unemployment insurance, health insurance for the elderly and poor, deposit, mortgage, and flood insurance and, after Sept. 11, 2001, terrorism insurance. Not for nothing is the federal government often called an insurance company with an army.
A great WSJ article on private firefighting:
Stop them from burning
