Fires in California = Insurance Cost Increases

This article here talks about how they are predicting that the Southern California fires going on right now are 'on track to become one of the most expensive fire events in U.S. history.' Insured damages are estimated to be at least $500 million. The report goes on to catalog all of the fires that California has had in the past, including 8 of the most expensive fires in the country.

My favorite part of the article states 'this is California. We are not strangers to these kinds of tragedies.' That means that Californians are used to environmental conditions that are dangerous, not only to their physical self but to their pocketbooks.

Insurance companies in California will continue to raise the price of policies issued in that state, especially the areas that have been locally effected since it seems to keep happening in the same place (not if but when).

But there is no way that individual policy holders in these affected areas can compensate the insurance companies monetarily for the insurance claims that are pouring in. Luckily, my insurance company is not listed as having policies with claims in that area. If they did, I would expect an increase in rates for my personal policy to offset the difference, even though I live nowhere near the affected area, nor do I plan to.

My point is this. Why does the collective have to pay for the poor mistakes of the few? If you decide to move to California, and it is a matter of when you will have an insurable claim, why not charge these people out the nose for living in such a hazardous environment? Is it because a private insurance program instituted locally would go bankrupt after the first major incident? This would discourage insurance companies from offering policies in that area and homeowners would go uninsured. Is it important enough to our society that we have people live in known hazard zones that we are all willing to fit part of the bill? Is that economically efficient?

I see that the government has stepped in and declared disaster zones, offered manpower and other aid for this event, which I believe they should. That is what we have a governmental body for, to deal with issues that the private sector cannot, or would not if left alone. In this manner, however, we are again all pitching in toward the cause with our taxes going to provide relief.


Caden said...

This is a bad situation that will probably affect our overall economy in lots of ways besides just higher insurance costs. I have read or heard on the radio that many of those of houses were not insured because the insurance companies thought it was to risky to insure them because of past fires. I also read that Governor Schwartznagger was looking to see if there was any legal to way to force the insurance companies to offer policies on these homes. I expect to see insurance policies on any home that is in anyway at risk for a natural disaster to have a major price increases.

Timothy said...

Perhaps there is a silver lining in this terrible catastrophe afterall. You see, there has been an incredible amount of inventory of homes on the market in California for quite some time. The fires have removed lots of inventory or supply from the market at the same time creating demand for those homes that did not burn by adding those whose homes did burn to the list of potential buyers in a slow market. This may help slightly with the housing problem in Southern California and perhaps some of those people will move up I-15 to settle in little old St. George. I do agree that insurance costs will most likely go up significantly because of the immense costs to the insurance companies from the fires and I think this may be something that makes people move from Southern California to a market with less risk to the insurance companies like Southern Utah.

Wyatt said...

It's going to be hard to get any insurance company to insure houses in the affected areas in the future. It is similar to the hurricane areas insurance companies stay out of. The government will have to set up a type of fire insurance guarantee that the taxpayers will foot the bill on. This seems to be the only solution to natural disasters these days.

Dr. Tufte said...

-1 on Logan for a spelling error.

One digression: this dollar figure puts the loss from these wildfires in the range of 1/100th to 1/500th of the losses in New Orleans from Katrina. Next time someone complains about the situation there, keep that scale in mind.

There are two points here. First, Logan is right that you couldn't have an insurer who covered just a wildfire prone area: the whole point is to diversify your risk. Second, this all but implies that rates away from the disaster area will have to change in response to this disaster.

A broader issue is that the insurance companies would have no trouble figuring out how much to charge in these areas. The problem is that when they do, homeowners hijack the political process to force them to charge less. Then we wonder why we get overbuilding.

What we really have is a situation where many people, and the state, have decided to self-insure, and now that they have had a problem they want to get someone else to foot the bill.

Jordan said...

Dr. Tufte said:

"Logan is right that you couldn't have an insurer who covered just a wildfire prone area: the whole point is to diversify your risk. Second, this all but implies that rates away from the disaster area will have to change in response to this disaster."

This is right. Most people who have homeowner's insurance end up never having to use their policies, but they pay for the slight risk that they might have to use it. It's the collected premiums from a diverse base of homeowners that allow the insurance company to foot the bill for tragedies and make a profit. Undoubtedly, rates will go up across the nation. I agree, though, that what should happen is that insurance companies should be allowed to charge what they assess is the right price for the risk.

Gavin said...

Extra Credit - Dr. Tufte
Dr. Tufte suggested that homeowners are able to influence insurance premiums politically. Are you suggesting that this in someway side-steps the rules of economics? It seems that savings from low interst rates, insurance premiums, and lending standards are all being priced into these million dollar homes anyway. Where's the real savings?

Dr. Tufte said...

Killer comment, Gavin.

Bottom line - I don't know, but I think you might be right that this is already priced. Point conceded.