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by tlogan
549 days ago
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The issue here has less to do with climate change itself and more to do with a combination of regulatory and economic factors. While left-leaning outlets might point to climate change as the primary cause, the reality is more nuanced—similar issues are visible in other sectors, such as health insurance. Here are a few key points to consider: - Insurance Company Consolidation: As the industry consolidates, large insurers gain the ability to strategically drop unprofitable market segments. This allows them to improve profitability, but it often leaves consumers in those markets with fewer or no options. - Regulations: Some states, like California, have introduced stringent requirements that compel insurers to continue providing coverage, even in high-risk areas. In response, many insurers have opted to exit these markets entirely. Consolidation has made this easier for them to implement at scale. - Lack of Investment in Disaster Prevention: Across both Democrat- and Republican-led states, we’ve seen a decline in state and federal spending on preventive measures for natural disasters. This shortfall exacerbates the risks insurers face, further disincentivizing them from operating in high-risk areas. |
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The issue is not that the insurance regulations have tightened or changed. The issue is that the climate risks have heightened and the regulations have NOT changed to match the heightened climate risks.
Small increases in average temperature of the air leads to large decreases in average moisture content of brush and vegetation, making fires more common and more likely to impact more homes. The insurers have the data, that's why they are acting the way they are. Fires are more common and fires are larger. Not politics. Actuarial data compiled by insurance companies. If you've spent any time with insurance CEOs, you'll know they are not bleeding heart liberals. They tend to be very conservative and very data driven. And they have the data and it impacts their business.
The regulatory issue is that, to prevent historical forms of bad behavior on the part of insurers, state regulators require that insurers can only set pricing for fire insurance (for example) on the basis of historical data, not on the basis of forward-looking projections. That's the right thing for regulators to do in normal circumstances, when the risk environment isn't changing, but if the risk environment is changing it means you as an insurer will need to pay out money in the future at a higher rate than you did in the past, but you can only collect money based on lower historical payout rates. You are, in practice, required by the regulators to now offer your product at a loss not because the regulations changed but because the average daily temperature is increasing ever so slightly but just enough to significantly increase your cost. You don't want to offer a product at a loss, so you leave the market.
As to why insurance is a regulated industry, in large part that's because insurance is one of the few products the government requires you to purchase, distorting the market, and also in large part because there are massive asymmetries of information between consumer and provider - insurance companies have much more information about risks than insurance customers do, which prior to regulation led to abusive practices on the part of the insurers, in ways that led voters to say "this is a problem that needs to be fixed."
All big problems are hard, and insurance regulation is a big hard problem. If you just say "the environment is changing, so insurers should be able to set prices based on forward-looking projections" you help with the climate pricing increases but are likely to get other unrelated bad behavior at the same time (forward-looking projections are notoriously easy to fudge or fake in ways that are massively favorable to the person making the projections). If you don't allow for forward-looking projections, you lose insurers, if you do allow for it, you get abuses. "Just do it the right way" is much easier to demand in a blog post or comment thread than it is to deliver in legislation.