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Subject: interesting article on insurance and climate change
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09/08/2021 5:40 AM  
Some of you may have commented on the post that discussed increased insurance costs for wind damage in condos. In that post, I noted that climate change was going to have a huge impact on homeowners insurance (and association insurance for the common areas) - you may want to read this article on how wildfire and hurricane damage eventually results in higher costs for everyone:

If this link doesn't work, try Googling Harvard Business School Working knowledge and you should be able to find the article that way.


09/08/2021 6:46 AM  
The link works fine. Excerpts that got my attention:

When losses occur in California, insurance companies end up raising prices in New Mexico and Massachusetts more often than in California,” says Sen. “That's potentially because California happens to be a very restrictive state, so it's not so easy to change prices in California.

Companies that insure homes must file detailed applications in states where they want to increase rates. Sen, Tenekedjieva, and Oh compared the insurers’ target price increases with the prices that state regulators ultimately allowed, resulting in a measure of price “friction” in each state. The states with the most restrictive regulators also experienced the highest property damage per capita from natural disasters and other climate-related events in recent years.

The researchers found that insurers end up charging higher prices in “low-friction states,” those with the most lenient rules. When there’s a large jump in losses in high-friction states, insurers file more and larger rate-change requests to increase prices in low-friction states, even though those states are themselves less exposed to climate risk, according to Sen and Tenekedjieva’s working paper, Pricing of Climate Risk Insurance: Regulatory Frictions and Cross-Subsidies.

Over time, this makes society less and not more prepared to tackle climate-change-related challenges.

I don't know to what extent [regulators in low-friction states] are even aware that this goes on,” Sen says, “because you would think that if you’re more exposed to climate losses, you should be paying more. But in reality, insurance rates have risen more quickly in states like New Mexico than in California” over the past decade.



09/08/2021 8:09 AM  
Makes you wonder when regulators in the more relaxed states will wake up and strengthen their own regulations. I'm not holding my breath...

One unintended consequence of spreading the cost around is that it dis-incentivizes people living in high risk areas from relocating elsewhere. A common gripe after hurricanes and whatnot is that we're basically subsidizing housing in these areas, which is not cost effective. And it annoys the heck out of people who live in the lower risk areas, which tend to be the colder ones with lousy winters - the higher risk areas tend to be warmer and/or coastal.
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