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The coming failure of the entire insurance industry

NWRatCon

NWRatCon

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The wildfires in California and hurricanes in Florida have brought to the fore the failure of the insurance system to adapt to climate change. As a result, the entire system is collapsing. There are, essentially three components to insurance: risk, exposure, and coverage(reserves). These terms can be confused, so a short primer: "risk" refers to the potential for harm or negative consequences from a specific situation; "exposure" describes the degree to which something or someone is subject to that potential harm; and "coverage" refers to the ability of those "exposed" to meet actual losses.

To put this in real world terms: if you own a house, your risk from, say fire, is quantifiable (x# houses burn per year, expressed as a percentage); your exposure is the replacement value of your house and its contents; and your coverage is how much insurance you have to cover those losses. Your premium is based upon the insurer's evaluation of those factors.

Insurance providers (public and private) themselves have to address those same issues - risk of payouts happening, how many "insureds" have policies (and the amounts), and how losses are expected to be covered. Coverage, for insurance companies, is primarily reserves (assets on hand), often mandated by law, + "re-insurance" (yes, insurance companies have insurance) from entities like "Lloyd's of London", and even governments. The basic premise of insurance is spreading exposure over as many people as possible to ensure coverage is available.

The problem is, the entire system is failing to cover, because the risk has not been properly evaluated, largely for failing to adequately evaluate the impact of climate change. There are many factors involved in this failure, and YOU have likely benefited yourself, because you've been paying lower premiums than necessary to cover the actual risk of the entire community. The piper has come to be paid.

When you see insurance providers "withdrawing" from markets, like Florida and California, it's because they recognize that they're overextended/overexposed. They won't make money. I want to make clear that this is not just a screed against insurance companies, but an explanation of all of our failures.

More to follow, but I want to get the party started.
 
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When you see insurance providers "withdrawing" from markets, like Florida and California, it's because they recognize that they're overextended/overexposed. They won't make money.

I don't know about Florida, but in California, insurers are leaving because they CAN'T make money because of anti-insurance laws that passed there which they thought would protect insureds, but made it stupid for companies to offer coverage. The Legislature thinks insurance companies should be forced to lose money when there are catastrophic losses, so the insurance companies tell them, 'Goodbye Charlie'!

They'd be stupid to continue to cover there.
 
verrip1 said:
When you see insurance providers "withdrawing" from markets, like Florida and California, it's because they recognize that they're overextended/overexposed. They won't make money.

I don't know about Florida, but in California, insurers are leaving because they CAN'T make money because of anti-insurance laws that passed there which they thought would protect insureds, but made it stupid for companies to offer coverage. The Legislature thinks insurance companies should be forced to lose money when there are catastrophic losses, so the insurance companies tell them, 'Goodbye Charlie'!

They'd be stupid to continue to cover there.
Click to expand...
Thanks for exposing your bias and ignorance. Now we all know how seriously to take your "contributions". Be well, wherever you choose to wander.
 
NWRatCon said:
The problem is, the entire system is failing to cover, because the risk has not been properly evaluated, largely for failing to adequately evaluate the impact of climate change.
Click to expand...
Other than this nonsense, it's a good post.
 
Many States, including, recently, California, have instituted "FAIR" plans, either legislatively, or when allowed by existing law, by executive or agency action. In sum,

FAIR Plan insurance explained​

A FAIR Plan, which stands for Fair Access to Insurance Requirements, is a program that allows high-risk homeowners to purchase a home insurance policy. People who get insurance through a FAIR Plan are typically not eligible for coverage through the standard home insurance market because their home is located in a high-risk area or they have other red flags that deter insurers.

FAIR Plans are state-run programs that are financially supported by private insurance companies. A FAIR Plan is slightly different from a typical home insurance company because it is a shared market plan. Rather than getting coverage from a single insurance company, technically, several insurance companies cover your property in a FAIR Plan, limiting the amount of risk that one company assumes. If you have to file a claim, every participating company pays for a portion of your loss.

When it comes to the actual coverage, homeowners insurance through a FAIR Plan is pretty limited. Many plans may only include dwelling and personal property coverage on a named-perils basis. You most likely cannot get liability, medical payments or loss of use coverage through a FAIR Plan. Further, most states’ FAIR Plans only insure homes at actual cash value, as opposed to replacement cost value.

FAIR Plan home insurance is intended to be a last-resort option. You cannot apply for home insurance through your state’s FAIR Plan as your first option because you will have to prove that you have been denied home insurance by several private companies. (Via Bankrate, no link provided.)
__________
34 States currently have FAIR plans.

www.investopedia.com

What Is FAIR Plan Insurance?

FAIR plan insurance is a last-resort alternative for homeowners unable to buy traditional home insurance, but coverage is usually more expensive and limited.
www.investopedia.com www.investopedia.com

The thing about FAIR plans is to understand that it is still being covered by insurance companies, but as a group, not individually.
 
From Axios: "Anything above $12.5 billion would pass 2018's Camp Fire to become the biggest insured wildfire loss ever [estimates are now $135 - 150 Bn, and growing], per data from insurance brokers Aon. Economic losses will be substantially higher, perhaps tens of billions of dollars more.
  • Stunning stat: At the high end of the range, the L.A. fires would be near the list of the 10 costliest natural disasters in global history by inflation-adjusted insured loss, per data from the Insurance Information Institute.
The big picture: The loss number in and of itself is staggering, but only tells a small portion of the story.
  • Thousands upon thousands of homes and businesses have been lost, and tough decisions about if and how to rebuild will take years, even as climate change makes this sort of disaster more likely.
  • California's insurance market was already struggling as carriers fled the state's many risks. As a result the state insurer of last resort, FAIR Plan, has ballooned to an unsustainable size.
  • Systematic reforms designed to expand coverage and let insurers re-price risk are just now coming online, but may be too little, too late, given the scope of losses at play.
What they're saying: "A $20 billion to $30 billion, insured loss event is now on the table," says Jon Schneyer, research director at analytics firm CoreLogic.
  • Risk assessment firm Verisk said late Thursday the insured property at risk in just the Palisades area is at least $15 billion — not a loss estimate, but a clear sense of what's at stake.
Zoom in: "It's going to be a challenge to the affordability and availability of insurance," says Sridhar Manyem, senior director of industry research at insurance ratings agency A.M. Best.
  • Ironically, homeowners' insurance premiums in big California cities are much lower than the rest of the country on a cost-per-$1,000-of-coverage basis, per an Oct. 2024 ICE Mortgage Monitor report.
  • But if the houses are more expensive, the premium ends up being higher anyway — and in the Pacific Palisades, the median house is worth $3.5 million.
  • "That is a demographically well-off area. When their only alternative is to get the FAIR Plan, you have to wonder what happens to people who don't have the same resources," says Michelle Meyers, an insurance litigator with Singleton Schreiber in Sacramento.
What's next: The immediate question will be what happens to FAIR Plan, which is not built to handle billions of dollars of simultaneous losses."

 
NWRatCon said:
From Axios: "Anything above $12.5 billion would pass 2018's Camp Fire to become the biggest insured wildfire loss ever [estimates are now $135 - 150 Bn, and growing], per data from insurance brokers Aon. Economic losses will be substantially higher, perhaps tens of billions of dollars more.
  • Stunning stat: At the high end of the range, the L.A. fires would be near the list of the 10 costliest natural disasters in global history by inflation-adjusted insured loss, per data from the Insurance Information Institute.
The big picture: The loss number in and of itself is staggering, but only tells a small portion of the story.
  • Thousands upon thousands of homes and businesses have been lost, and tough decisions about if and how to rebuild will take years, even as climate change makes this sort of disaster more likely.
  • California's insurance market was already struggling as carriers fled the state's many risks. As a result the state insurer of last resort, FAIR Plan, has ballooned to an unsustainable size.
  • Systematic reforms designed to expand coverage and let insurers re-price risk are just now coming online, but may be too little, too late, given the scope of losses at play.
What they're saying: "A $20 billion to $30 billion, insured loss event is now on the table," says Jon Schneyer, research director at analytics firm CoreLogic.
  • Risk assessment firm Verisk said late Thursday the insured property at risk in just the Palisades area is at least $15 billion — not a loss estimate, but a clear sense of what's at stake.
Zoom in: "It's going to be a challenge to the affordability and availability of insurance," says Sridhar Manyem, senior director of industry research at insurance ratings agency A.M. Best.
  • Ironically, homeowners' insurance premiums in big California cities are much lower than the rest of the country on a cost-per-$1,000-of-coverage basis, per an Oct. 2024 ICE Mortgage Monitor report.
  • But if the houses are more expensive, the premium ends up being higher anyway — and in the Pacific Palisades, the median house is worth $3.5 million.
  • "That is a demographically well-off area. When their only alternative is to get the FAIR Plan, you have to wonder what happens to people who don't have the same resources," says Michelle Meyers, an insurance litigator with Singleton Schreiber in Sacramento.
What's next: The immediate question will be what happens to FAIR Plan, which is not built to handle billions of dollars of simultaneous losses."

Click to expand...
How about not building or living in high risk areas? And if you absolutely want to do so, you get to deal with the risk.
 
NWRatCon said:
The wildfires in California and hurricanes in Florida have brought to the fore the failure of the insurance system to adapt to climate change. As a result, the entire system is collapsing. There are, essentially three components to insurance: risk, exposure, and coverage(reserves). These terms can be confused, so a short primer: "risk" refers to the potential for harm or negative consequences from a specific situation; "exposure" describes the degree to which something or someone is subject to that potential harm; and "coverage" refers to the ability of those "exposed" to meet actual losses.

To put this in real world terms: if you own a house, your risk from, say fire, is quantifiable (x# houses burn per year, expressed as a percentage); your exposure is the replacement value of your house and its contents; and your coverage is how much insurance you have to cover those losses. Your premium is based upon the insurer's evaluation of those factors.

Insurance providers (public and private) themselves have to address those same issues - risk of payouts happening, how many "insureds" have policies (and the amounts), and how losses are expected to be covered. Coverage, for insurance companies, is primarily reserves (assets on hand), often mandated by law, + "re-insurance" (yes, insurance companies have insurance) from entities like "Lloyd's of London", and even governments. The basic premise of insurance is spreading exposure over as many people as possible to ensure coverage is available.

The problem is, the entire system is failing to cover, because the risk has not been properly evaluated, largely for failing to adequately evaluate the impact of climate change. There are many factors involved in this failure, and YOU have likely benefited yourself, because you've been paying lower premiums than necessary to cover the actual risk of the entire community. The piper has come to be paid.

When you see insurance providers "withdrawing" from markets, like Florida and California, it's because they recognize that they're overextended/overexposed. They won't make money. I want to make clear that this is not just a screed against insurance companies, but an explanation of all of our failures.

More to follow, but I want to get the party started.
Click to expand...
Insurance companies ARE recognizing climate change.....by pulling out.
 
verrip1 said:
When you see insurance providers "withdrawing" from markets, like Florida and California, it's because they recognize that they're overextended/overexposed. They won't make money.

I don't know about Florida, but in California, insurers are leaving because they CAN'T make money because of anti-insurance laws that passed there which they thought would protect insureds, but made it stupid for companies to offer coverage. The Legislature thinks insurance companies should be forced to lose money when there are catastrophic losses, so the insurance companies tell them, 'Goodbye Charlie'!

They'd be stupid to continue to cover there.
Click to expand...
You don't understand the law, or the insurance business.

AI Overview

According to recent reports, the insurance sector, particularly the property and casualty (P&C) segment, experienced record profits in 2023, with the industry earning around $88 billion in profits, marking its most profitable year ever, even as companies raised premiums for policyholders; this high profit was attributed to increased investment income due to rising interest rates.

Key points about 2023 insurance profits:
  • Record high profits:
    The P&C insurance industry reported a record $88 billion in profits in 2023.

  • Increased premiums:
    Companies raised premiums to offset rising claims costs, contributing to higher profits.

  • Investment income boost:
    Higher interest rates significantly boosted investment income for insurers.

 
Cosmo said:
How about not building or living in high risk areas? And if you absolutely want to do so, you get to deal with the risk.
Click to expand...
What high risk areas? Why are there MORE high risk areas today than in the past?
 
Florida home insurance is incredibly high so much so there is a taxpayer subsidized government option. Yes the government has gotten into the insurance business and Republicans love it.....go figure. Home insurance is one of the reasons we are selling.
 
I started this thread to be educational. Some people refuse to be educated. I was the legal advisor to a State Insurance Commissioner (many years ago), so I have some knowledge of the industry, and more importantly, its regulation, that most other posters may not have. I welcome contributions from others who have knowledge of the industry.

To help understand some of the tensions in the industry, and risks, here's an explanation (as I said, this is not a screed against insurers, but an explanation of the entire system's failure to adjust):

First, what is insurance? "Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursement against losses from an insurer (usually a company). The insurer pools clients’ risks to make payments (premiums) more affordable for the insured." Insurance has been around since the Code of Hammurabi. It's that "Risk Pool" that is the fault point in the system, because premiums are insufficient to cover the exposure. And here's why:

Premiums - everyone wants premiums to be as low as possible - policyholders, to keep costs down; insurers to be competitive in the market (15 minutes can save you 15%!!!); Insurance regulators, to "protect the public from gouging"; elected officials, to stay in office. The problem is, premiums have to cover exposure, or else the system doesn't work. Insurance regulators of the various States (almost all insurance regulation is at the State level) require insurers to have reserves to cover losses. Those reserves are then invested (which is why insurance companies are often also investment agencies), mostly in the market. To cover losses in excess of those reserves, insurers also get reinsurance from even bigger companies. Some of these are also covered/guaranteed by government systems (e.g., FAIR systems, catastrophic coverage programs, The National Flood Insurance Program).

The pressure to keep premiums low has meant that exposure to known risks is not adequately covered by existing risk pools and other coverage programs. Most of the time, it is an invisible problem, because day-to-day coverage is adequate to keep the system running, but when major disasters occur, it exposes the problem, like storms washing away the sand on the beach. The reality is that the frequency of major disasters has increased tenfold since 1960. Let me repeat that - TEN FOLD. Some of that is inflation, but most of that is frequency. Nine out of the 10 years with the highest number of natural disasters occurred in the last decade. Homeowners insurance costs are growing fast but coverage is shrinking (Minn FED). So, even though premiums are going up rapidly, they are not keeping up with exposure:

"Insurance experts say the main reason premiums are going up is that insurers are under financial stress. For several years, premiums in many states have not kept up with the payouts for damaged property. Catastrophes are a key driver. In Florida, it’s hurricanes. In California, Montana, and many Western states, it’s wildfires. In the Upper Midwest, it’s wind and hailstorms. All of which are exacerbated by the inflation of construction costs.

The financial stress has spread to homeowners as well. Besides protecting an important investment, homeowners insurance is also often required for those with mortgages.

Shannon Martin, an insurance agent and analyst with Bankrate, said the affordability of homeownership is a concern as catastrophes become more common. “What’s happening to the people who already have homes and they’re 15 years into a 30-year mortgage, and now their insurance is completely unaffordable?”
....
The National Association of Insurance Commissioners (NAIC), which compiles statistics for regulators, calls this “underwriting profit and loss.” The group’s data shows insurers throughout the U.S. experiencing losses in four of the five years from 2018 to 2022. That was the case in Minnesota and South Dakota, too. In Montana, it was three of the five years. The few years of profit means insurers have been unable to make up for losses from other years (Figure 2)."
 
NWRatCon said:
The wildfires in California and hurricanes in Florida have brought to the fore the failure of the insurance system to adapt to climate change. As a result, the entire system is collapsing. There are, essentially three components to insurance: risk, exposure, and coverage(reserves). These terms can be confused, so a short primer: "risk" refers to the potential for harm or negative consequences from a specific situation; "exposure" describes the degree to which something or someone is subject to that potential harm; and "coverage" refers to the ability of those "exposed" to meet actual losses.

To put this in real world terms: if you own a house, your risk from, say fire, is quantifiable (x# houses burn per year, expressed as a percentage); your exposure is the replacement value of your house and its contents; and your coverage is how much insurance you have to cover those losses. Your premium is based upon the insurer's evaluation of those factors.

Insurance providers (public and private) themselves have to address those same issues - risk of payouts happening, how many "insureds" have policies (and the amounts), and how losses are expected to be covered. Coverage, for insurance companies, is primarily reserves (assets on hand), often mandated by law, + "re-insurance" (yes, insurance companies have insurance) from entities like "Lloyd's of London", and even governments. The basic premise of insurance is spreading exposure over as many people as possible to ensure coverage is available.

The problem is, the entire system is failing to cover, because the risk has not been properly evaluated, largely for failing to adequately evaluate the impact of climate change. There are many factors involved in this failure, and YOU have likely benefited yourself, because you've been paying lower premiums than necessary to cover the actual risk of the entire community. The piper has come to be paid.

When you see insurance providers "withdrawing" from markets, like Florida and California, it's because they recognize that they're overextended/overexposed. They won't make money. I want to make clear that this is not just a screed against insurance companies, but an explanation of all of our failures.

More to follow, but I want to get the party started.
Click to expand...
Its bigger than that. Health insurance has not done any better with the enhanced risks of climate change and we as an extension will be seeing those risks assessed.
 
Callen said:
Florida home insurance is incredibly high so much so there is a taxpayer subsidized government option. Yes the government has gotten into the insurance business and Republicans love it.....go figure. Home insurance is one of the reasons we are selling.
Click to expand...
Thanks. What those taxpayer subsidies really are is "State reinsurance", spreading the risk pool to every taxpayer. This is an important concept to understand in the overall scheme of the system, and why it is so at risk.
 
NWRatCon said:
The wildfires in California and hurricanes in Florida have brought to the fore the failure of the insurance system to adapt to climate change. As a result, the entire system is collapsing. There are, essentially three components to insurance: risk, exposure, and coverage(reserves). These terms can be confused, so a short primer: "risk" refers to the potential for harm or negative consequences from a specific situation; "exposure" describes the degree to which something or someone is subject to that potential harm; and "coverage" refers to the ability of those "exposed" to meet actual losses.

To put this in real world terms: if you own a house, your risk from, say fire, is quantifiable (x# houses burn per year, expressed as a percentage); your exposure is the replacement value of your house and its contents; and your coverage is how much insurance you have to cover those losses. Your premium is based upon the insurer's evaluation of those factors.

Insurance providers (public and private) themselves have to address those same issues - risk of payouts happening, how many "insureds" have policies (and the amounts), and how losses are expected to be covered. Coverage, for insurance companies, is primarily reserves (assets on hand), often mandated by law, + "re-insurance" (yes, insurance companies have insurance) from entities like "Lloyd's of London", and even governments. The basic premise of insurance is spreading exposure over as many people as possible to ensure coverage is available.

The problem is, the entire system is failing to cover, because the risk has not been properly evaluated, largely for failing to adequately evaluate the impact of climate change. There are many factors involved in this failure, and YOU have likely benefited yourself, because you've been paying lower premiums than necessary to cover the actual risk of the entire community. The piper has come to be paid.

When you see insurance providers "withdrawing" from markets, like Florida and California, it's because they recognize that they're overextended/overexposed. They won't make money. I want to make clear that this is not just a screed against insurance companies, but an explanation of all of our failures.

More to follow, but I want to get the party started.
Click to expand...
Good post. You've recapped the essence and the significance of Capitalism. The insurance industry is not a philanthropic institution. It exists to make a profit. I would never run a home insurance company in California. I would never own a home in the hills of California or close to the beaches in Florida. That is dumb.
Yes, there is the existence of climate change which has existed for tens of thousands of years. And now tens of thousands of homes are residing in areas that are dry and have strong winds periodically.
There are at risk for destruction by wild fires.
California has never been good at cleaning the forests of flammable debris on the ground. They have never been good at building more reservoirs to capture rain water and have it ready in the event wild fires start- for whatever reason.
Should there be insurance companies willing to share that risk?
 
What are we suggesting here? If anything.
 
I don't see how the for profit insurance industry can keep making as much money for its executives in the time of rapid climate change. It will probably withdraw from coastal and fire prone areas and jack up rates for those in tornado alley. The public sector will have to step in, but that's going to be problematic while Republicans control everything.
 
jaypatriot said:
Good post. You've recapped the essence and the significance of Capitalism. The insurance industry is not a philanthropic institution. It exists to make a profit. I would never run a home insurance company in California. I would never own a home in the hills of California or close to the beaches in Florida. That is dumb.
Yes, there is the existence of climate change which has existed for tens of thousands of years. And now tens of thousands of homes are residing in areas that are dry and have strong winds periodically.
There are at risk for destruction by wild fires.
California has never been good at cleaning the forests of flammable debris on the ground. They have never been good at building more reservoirs to capture rain water and have it ready in the event wild fires start- for whatever reason.
Should there be insurance companies willing to share that risk?
Click to expand...
You realize that most "forests" in California are federal owned like the Angeles National Forest above Pasadena and Altadena?
You realize that California has reservoirs all over but they are low or almost non-existant right now because of the drought and high population?
 
Callen said:
Florida home insurance is incredibly high so much so there is a taxpayer subsidized government option. Yes the government has gotten into the insurance business and Republicans love it.....go figure. Home insurance is one of the reasons we are selling.
Click to expand...

NWRatCon said:
Thanks. What those taxpayer subsidies really are is "State reinsurance", spreading the risk pool to every taxpayer. This is an important concept to understand in the overall scheme of the system, and why it is so at risk.
Click to expand...

Wouldn't some people call that socialism?

WW
 
I don't want to be flip in my responses (sometimes I just can't help myself). I think this is a deep, complicated and present issue that we, as a society, are not dealing with. Insurance is one aspect of the larger picture, but an important one.

I am thinking of the incalculable loss that has occurred to tens of thousands of people around the country and its implications for all of us.
 
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