9/28/2004

Homeowner's Insurance

Regarding our class discussion from "The Armchair Economist" about insurance prices going up and pushing people out of the market, I found an article that talks about that very thing. Insurance companies are paying out $1.18 for every premium dollar they earn. They are have to raise their rates and stop writing new claims and stop renewing clients. They cannot afford to keep people insured so they are raising their rates. Those people at the very bottom cannot afford to pay for insurance so they deal without and drop out of the market.

When dealing with homeowners insurance there is a problem with prices rising for building a home and the upkeep costs. There was one story of a lady who had her house flood and the insurance company covered her claim but then refused to reissue insurance because there were other risks within her home. She now cannot afford insurance and has to find somewhere else to get coverage. It is interesting to me how you can find everyday items from Steven Landsburg's book.

5 comments:

Rufio said...

I really liked the article you found. Just like you said it seems that insurance premiums are on the rise and this can pose some problems. People most definetely won't be willing to pay and will then drop out of the market. Hopefully this will give insurers a wake up call to start lowering their premiums so that they can get back customers that they have lost.

The hurricanes in Florida aren't going to help matters either. I am sure that with the number of claims being filed that a lot of coverage plans will be cancelled. Once again insurance premiums will continue to go up. Soon everyone will be out of the insurance market, and then where will we be?

John West said...

This article and post by Lisa made me think about Florida and all of their recent tropical storm's. I don't understand how insurance companies can even make a profit in states like this. Hundreds of millions of dollars in claims doesn't even seem feasible. I suppose that the rest of the country just pays for it in the end.

Dr. Tufte said...

-1 Two grammatical errors in the post.

Spelling error in Rufio's comment.

Paying out more than they take in is an occupational hazard for insurers. But, they are a little like casinos - they make their money by making sure that this doesn't happen as often as its opposite. So, I wouldn't worry too much about news like this.

But ... refusal to renew policies is a problem. This is an indicator that the insurer either thinks they cannot charge enough to cover the policy, or that they cannot gather enough information to nail down what the risk actually is. My guess is that it is a bit of both.

First, refusing to insure is a signal that the firm doesn't feel free to state the price at which it would be willing to ensure. Note that this doesn't mean that this price does not exist. So, if the price exists but the firm won't say what it is, this probably means that they fear either regulators or bad press. I'm not sure of the reasons, but I think it's safe to say that insurance companies don't rate very highly with either of those groups.

Second, refusal to insure can mean that the insurer cannot gather enough information to fairly evaluate the risk of the policy. Insurance companies are not helped in this by the evolution towards greater privacy in insurance issues. So, many times they are refusing to renew groups of policies from the same area.

Personally, I find this sort of criticism of insurers really annoying: none of the critics (regulators, the press, or people making claims) are providing an alternative to the service that insurers provide.

Jordan said...

Dr. Tufte said:

"First, refusing to insure is a signal that the firm doesn't feel free to state the price at which it would be willing to ensure. Note that this doesn't mean that this price does not exist. So, if the price exists but the firm won't say what it is, this probably means that they fear either regulators or bad press."

If insurance would be left as a competitive market, then people would be able to get insurance while compensating for the amount of risk involved. When people expect to get insurance for their home for the same low price of someone else's low-risk home, they are displaying an "entitlement" attitude that is extremely irritating.

Dr. Tufte said...

Some parents have ways of dealing with "entitlement" attitudes. Perhaps our government needs to act analogously.