California is burning. The tragedy of the destruction is unfathomable.
On top of that, many homes don’t have insurance. Why?
This is because of price controls. But CA's Prop 103 system goes way beyond normal insurance price controls into total dysfunction 🧵
On top of that, many homes don’t have insurance. Why?
This is because of price controls. But CA's Prop 103 system goes way beyond normal insurance price controls into total dysfunction 🧵
Let's first talk rate suppression.
If an insurer shows they need a 40% increase to cover expected costs and get a fair return, but regulators only approve 15%, that's a 25% rate suppression.
If an insurer shows they need a 40% increase to cover expected costs and get a fair return, but regulators only approve 15%, that's a 25% rate suppression.
CA ranks 50th in rate suppression - approving rates 29% below what actuaries show is needed for homeowners insurance.
In plain English: regulators force insurers to sell WAY WAY below cost.
In plain English: regulators force insurers to sell WAY WAY below cost.
Other states with price controls still let insurers charge closer to actual risk.
A price control near the market price doesn't create much dead weight loss and can accomplish other goals (say favoring buyers)
CA forces the biggest gap between rates and risk in the nation.
A price control near the market price doesn't create much dead weight loss and can accomplish other goals (say favoring buyers)
CA forces the biggest gap between rates and risk in the nation.
The system is also uniquely rigid. CA won't let insurers:
- Use catastrophe models to project future fire risk
- Consider reinsurance costs
A state leading on climate change won't let insurers use climate science to price risk.
Make it make sense.
- Use catastrophe models to project future fire risk
- Consider reinsurance costs
A state leading on climate change won't let insurers use climate science to price risk.
Make it make sense.
If it was just the ridiculous under priced price controls, that'd be one thing.
But it's slow slowest system to change as well.
But it's slow slowest system to change as well.
How bad is CA's system?
Over the last 5 years, CA ranks 50th in speed of rate approvals. The avg delay is 236 days for homeowners and 226 days for auto insurance.
That's not a typo.
Over the last 5 years, CA ranks 50th in speed of rate approvals. The avg delay is 236 days for homeowners and 226 days for auto insurance.
That's not a typo.
Why do delays matter?
Insurance is about matching price to risk. When a market can't adjust prices quickly to changing risks (like increasing fires), it breaks down.
Insurers pull back rather than sell at outdated prices.
Insurance is about matching price to risk. When a market can't adjust prices quickly to changing risks (like increasing fires), it breaks down.
Insurers pull back rather than sell at outdated prices.
And it's getting worse.
The avg delay from 2013-2019 was 157 days. More recently? 293 days. When insurers can't adjust rates to risk quickly, they pull back coverage.
The avg delay from 2013-2019 was 157 days. More recently? 293 days. When insurers can't adjust rates to risk quickly, they pull back coverage.
The results? State Farm, Allstate, Farmers all pulling back. These homes didn't have insurance canceled on them. The policy wasn't renewed because it was bleeding money.
The state-run FAIR plan growing 90% since 2015.
And now, devastating fires with many uninsured homes.
The state-run FAIR plan growing 90% since 2015.
And now, devastating fires with many uninsured homes.
It's an extremely tragic story but one we've known about for years.
For more info, check out the excellent white paper my @LawEconCenter colleagues @raylehmannand @IAtheTeapot put out last with Lawrence Powell
laweconcenter.org/wp-content/upl…
For more info, check out the excellent white paper my @LawEconCenter colleagues @raylehmannand @IAtheTeapot put out last with Lawrence Powell
laweconcenter.org/wp-content/upl…
The catastrophe in California combined with the policy failures is simply a tragedy. There's no other word.
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