[chuankl]

Summary:

Real estate properties in Florida are increasingly at risk due to climate change.

Established insurers ran their numbers and noped out of Florida quickly.

New low-quality insurers came in and filled the vacuum.

Established rating agencies looked at the new low-quality insurers and came to the conclusion that they are trash.

New low-quality rating agencies came in and declared those new low-quality insurers to be a-ok.

Lenders, fearful of being left holding the bag (from climate losses that are likely to bring down the low-quality insurers), sold mortgages in Florida to Freddie Mac and Fannie May (i.e., the GSEs, which are financial institutions that purchase mortgages en masse and implicitly backed by the US Government).

Freddie Mac and Fannie May bought those mortgages because the properties are insured by (low-quality) insurers declared a-ok by (low-quality) rating agencies.

As is usually the case, the government will be left holding the bag.

[ok_dad]

> As is usually the case, the government will be left holding the bag.

The taxpayers, really. We’re going to pay for stupid decisions by politicians voted in by Florida people.

[droopyEyelids]

Its malicious not stupid. The florida politicians and businessmen are all getting what they want while externalizing all the risk

[throwup238]

The alternative is the NFIP [1], isn't it? The federal government was always going to be left holding the bag.

Meanwhile, responsibly run solvent programs like the California FAIR Plan for fire insurance have to fund it all from premiums and can survive major fires no problem.

[1] https://en.wikipedia.org/wiki/National_Flood_Insurance_Progr...

[jimmygrapes]

NFIP is really strict about what is covered and takes ages to settle. It's specifically designed to NOT cover dumb decisions by home builders/buyers.

[IG_Semmelweiss]

Which is why many homeowners are losing coverage in CA.

At this point its probably cheaper for an acreage owner to build natural barriers to fire vs getting fire insurance.

[sidewndr46]

Wouldn't that only cover flood damage? I grew up on the Gulf Coast and what counts as flood damage from my experience is very little

[SoftTalker]

Similar in a way to non-dischargable student loans. When lenders are not exposed to the real risk of their loans, someone always ends up holding the bag.

Mortgage loan rates in Florida probably ought to be in double-digits.

[johnchristopher]

> Similar in a way to non-dischargable student loans. When lenders are not exposed to the real risk of their loans, someone always ends up holding the bag.

Students (people) are more likely to suffer from climate change and will have to fight it during their lifetime than those new low-quality insurers will have ever to, regardless of who hold the bags.

Let the fuckers hold the bag and give a fighting chance to the people rather than building our economy on the back of debt ridden slaves.

[ejstronge]

> Lenders, fearful of being left holding the bag

This is where the logic breaks down - lenders are selling these mortgages irrespective of any other conditions.

The only loans that aren’t sold are unsaleable investor and boutique loans. These wouldn’t be offered to normal borrowers in the first instance (since the loans of a normal borrower would be targeted for resale)

[0cf8612b2e1e]

What I am missing is how do you profit from this. Many of these new entries have to know that the big insurance companies left for a good reason. That the smaller entries cannot absorb the risk they will be facing.

So, what’s the play? I have to assume there is some smart money who has identified a way of discharging the liabilities while still collecting pay, but how does it work?

[roenxi]

I have no idea about these circumstances, but speaking generally...

It is really easy to make money from an irresponsible insurance company if customers have confidence in you. You take in a large amount of money from people insuring their stuff, invest it, make lots of money in the stock market, distribute the money back to the company owners as profit. Good times.

Then the highly predictable crisis that "nobody" predicted happens, the insurance company goes bankrupt, the customers get no payouts and the company owners don't really lose anything because they got their profits out years ago. Sucks to be a customer.

Under modern theory there is a Phase 3 where the government steps in to pay the insurance company extra money and keep them ticking over. It is an optional step and depends on political connections.

The basic idea is that insurance companies are paid to assume risk. But if, when the risk materialises, it turns out that the risk was actually held by the customers or government then it is a bit like the insurance company was making free money in the intervening period.

[nothercastle]

The goal is to underprice risk to drive out competition then grow to a point where you are too big to fail. All the while you collect bonuses as the leader of this scammy enterprise. You bank on events that happen every 50 or 100 years not happening before you grow so big you get bailed out when they do.

[IG_Semmelweiss]

There are some gaps in this argument.

First, insurance boards by each state set the rules of the game, and one of the rules is to have an asset coverage ratio for the risk. Its effectively a sort of liquidity measure. Another one is minimum capital etc. Both are traditionally paid by the original owners.

So, in effect, if the insurer goes belly up owners do lose some of the capital, and owners cannot loot the assets, either. But I agree that overall it is the customer who is most short changed because although they will get a partial payout in a crisis, it wont match their expectation - most of the missing funds will be gone as you have explained.

[sidewndr46]

This should be the abstract for a paper on "Modern Insurance Theory"

[0cf8612b2e1e]

Thanks for this. I was anticipating some grand conspiracy, but nothing need be so complex. Just swoop in offering a product for a market who is required to buy. Pay yourself above market rates, and if you get lucky, you can maintain the system for years before ruin.

[donavanm]

A mismatch in risk and term duration. In the worst case its short term cashflow, converted to profit ona regular basis. the huge tail risk is of a longer (likely) term. On a normal year reinsurance pays out expected losses, the primary insurer keeps their couple of percent margin, business continues. Eventually their optimistic/naive/malign actuarial numbers are shown up, reinsurance doesnt cover it, huge losses, bankruptcy, the profits are long gone and paid out, remaining share and debt holders are wiped out. Their insured customers are covered by the state after much bad pr, or just not covered.

[0cf8612b2e1e]

Duh, I suppose this is obvious. Just take inflated pay as long as the good times last. I was trying to envision some grand huge payout, but methodical grind until apocalypse is fine too.

[Dalewyn]

The Great Recession 3.11 For Workgroups?

(v2 was covid.)

[User23]

> As is usually the case, the government will be left holding the bag.

To be fair last-resort bag-holder is one of government’s primary jobs right behind monopolizing violence.

[schmidtleonard]

Then what the hell are we paying insurance companies for?

[Dalewyn]

There are two reasons, one virtuous and one sinful:

* People hate saving money, money in our hand now must be spent now. Buying High and Selling Low is in our DNA, quite literally. Nobody wants to save a buck a day for a potential externality when they can spend that buck on something right here right now. Mandatory insurance forces people to save a buck (the monthly premium) for the potential externality, forcing people to Buy Low and Sell High.

* People want wealth, some moreso than others. The secret sauce? Being the middleman has the biggest revenue compared to effort. You are literally moving money from Person A to Person C, and you as Person B can take some of it. This is textbook rent seeking.

If you just want a TL;DR, here: People are shit.

[schmidtleonard]

The government can do #1 just fine.

[Dalewyn]

You greatly underestimate the sheer effort undertaken by most people to not pay Social Security tax.