[merrywhether]

Yeah, the solution isn’t divorcing risk (as communicated by cost) from reality. If the concern is usurious insurance rates, that’s where things like profit caps and other regulations come in. Society should want people to have fair insurance rates but not necessarily cheap rates.

[Analemma_]

Profit caps are a bad idea in general, but they are an especially terrible fit for companies insuring against tail risks, because you need to eke out a small profit for years or decades to hedge against the black swans with massive costs. The 2017 and 2018 wildfires wiped out _25 years_ of insurance company profits, for example: if you had said in 2013, "hey, these guys have made 20 straight years of profits, we need caps to control costs", you'd have left them insolvent against the fires.

This is all a moot point though: you cannot force companies to offer insurance. If regulations prevent them from offering policies at a profit, they just leave. Which is exactly what is happening in California (and Florida): every company is bailing out and refusing to renew policies.

[merrywhether]

It’s all in the nuance. Currently the insurance companies have too much moral hazard, as they are able to extract profits during the “good” years (like AllState’s recent $3B stock buyback) and then deny or default during disasters. An extractive profit cap could allow companies to take in more than they spent and save it to prepare for major catastrophes. They wouldn’t have to simply disperse these funds back to policy holders or something. I’m sure that idea would need more refinement, but my overall point was that our regulations should directly target the incentives we actually care about. And we have to rely more on regulation in these situations because the market can’t properly price the risk of companies disappearing during major payout events.

I’d really argue that for-profit insurance companies are a bad idea in general, but that’s a higher-level debate. There’s an interesting idea where governments handle all disaster-related insurance handling but are then also able to have a more comprehensive approach to management (though that’d be hard to trust in the current US political climate).

[cyberax]

> The 2017 and 2018 wildfires wiped out _25 years_ of insurance company profits

Money spent to repay loans or to make reserves are not profits.

[daveguy]

Profit caps are not the same as disallowing profit. They make sure insurance payouts are fair given the insurance premiums. Distributing "profits" back to shareholders to the point that the insurance company cannot honor policies is a disingenuous use of funds for an insurance company. You seem to think profit cap = no profit, which is not the case. It means the profit ROI cannot take precedence over the insured ROI.

[scarab92]

Profit caps in general are a bad idea, and should only be considered in a near complete absence of competition.

In insurance the problem is even worse, because you can’t compute what a reasonable profit cap is. Because of tail risks, you often see insurance companies making a profit of $1b each year for 30 years, then suffering a loss of $40b. Looked at during the typical year you might conclude the profits are excessive, but over a long term it might become apparent that the average profit is actually zero or even negative.

As is often the case, more competition and better competition policy is the solution.

[throwup238]

Except they end up paying most of that out in stock buybacks and dividends each year, then the state has to bale them out for tens of billion after 40 years anyway, either directly by taking on the liabilities or by bailing out the homeowners after the insurance company goes bankrupt.

Insurance is an industry with great cashflow. They should be able to keep any profits they make off of investing the premiums, but not the premiums themselves. The incentives just do not line up, they siphon off the money and scream about over regulation before they need to get bailed out.

[refurb]

Do you have an example of the government bailing out an insurance company that couldn’t pay claims?

Or an insurance company that went bankrupt?

Insurance companies are already highly regulated (especially in CA). There are regulations around how much money has to be held in reserves to pay claims. There are regulations around what investments can hold reserves in.

Hell in CA, there are regulations around how premiums can actually increase and a mechanism for returning “excess premiums” back to policy holders.

In fact those regulations are one of the reasons insurers are leaving CA. They can’t increase premiums sufficiently to cover risk.

You can read all about them: https://www.insurance.ca.gov/01-consumers/130-laws-regs-hear...

[daveguy]

> Or an insurance company that went bankrupt?

Yes. There were 6 insurance companies that went bankrupt in Florida in 2022. I am surprised you didn't know insurance companies go bankrupt all the time due to mismanagement.

https://news.climate.columbia.edu/2022/11/03/with-climate-im...

Insurance should not be used as a profit source. It is antithetical to the purpose of insurance.

[Ekaros]

Shouldn't competition take care of usurious rates in relatively free and working market? That is people will move to cheaper offerings which likely are close to real price.

[brewdad]

In a market with high uncertainty, more companies are likely to abandon it than hope that their actuaries get the numbers exactly right.