State Farm's prescient market call

Investment Analysis Clubs Macro Economic Trends and Risks
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{{ Tucked into the fire-prone hillsides on the city’s Westside, the neighborhood was one of a growing number in California deemed too risky to insure, State Farm President Denise Hardin wrote in a letter to regulators. The carrier did not renew nearly 70 percent of policies in the Palisades Zip code, leaving residents increasingly reliant on a state-backed “insurer of last resort” known as the FAIR plan. Pacific Palisades had become one of the most fire-exposed areas the plan covered, with nearly $5.9 billion in assets at risk of going up in flames. }}

https://www.washingtonpost.com/climate-environment/2025/01/09/california-wildfire-palisades-homeowners-insurance/

Insurers will be the tax collectors for climate change denial.

intercst

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Home Equity plays an abnormally big role in USAian macroeconomics, as it has been a reliable source(?) of capital creation for investment.

A whole bunch of capital just went up in smoke, and with more coming.

Kaboom.

Both of the homes above Malibu where I lived long ago are now cinders.

d fb

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So, my question is, over the next few years will insurance rates rise faster in Florida or California?

DB2

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My predication is Florida.

Only portions of CA are exposed to a high risk of fires. The entire state of Florida is at risk of hurricanes/floods. You have some ability to mitigate risk with fire but not so much with hurricanes.

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I also vote Florida, and for the same reasons.

I think the crux, when it comes, will involve state subsidies of whatever sort propping up housing as long as possible. The construction and Real Estate industries control Florida, but not so much in California.

Apres moi, le deluge. And that creates horrible frenzies both before (party time!) and after (guillotines).

d fb

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Probably Florida, but that’s mainly because ALL Florida hazards are being included, while some of California hazards are not being included. If you figure everything all in, it might be a wash.

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What makes anyone think the insurance business is going to allocate based on, you know, risk?

You may live hundreds or thousands of miles away, but the [wildfires tearing across Los Angeles] and other natural disasters stand to raise your home-insurance bill. The wildfires are estimated to have caused insured losses of as much as [$20 billion or more]. Hurricanes Milton and Helene inflicted [insured losses approaching $50 billion]
Insurers have tended to raise rates on homeowners in regions where disasters strike. But researchers say the scale of losses leads companies to tap faraway customers to recoup their money.
A [Harvard Business School study] found that expensive disasters in some parts of the country affect insurance rates in others, as insurers bump up premiums for homeowners in other areas to help cover big losses.

“It’s spread all over the country, and it spreads in a disproportionate way, where some people are bearing an overwhelmingly higher cost,” said Ishita Sen, a co-author of the study and a Harvard finance professor.

https://www.wsj.com/personal-finance/wildfires-and-other-disasters-push-up-home-insurance-rates-thousands-of-miles-away-f0a20085

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Note that the states with “light” insurance regulation are the ones where this happens (i.e., the states where the insurance industry has bought the most politicians in the legislature.)

A heavily-regulated state would makes sure that premiums only included state-specific risks and that the collateral damage from elsewhere was excluded.

There’s a price for “freedom”, ignorance and innumeracy. {{ LOL }}

intercst

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Are you saying that no state should rely on other states to spread the risk for insurance pricing? That is tantamount to also saying that the federal government shouldn’t provide any major assistance for big disasters!

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If I live in an area with few fires why should I have to pay for an area with high fire risk? That is what insurance is all about. My car insurance is low because I live in an area with less population and fewer accidents. Should I have to pay more for people who live in congested areas and more accidents?

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Not at all. Homeowner’s insurance is regulated by the states. Flood insurance is a Federal program. If you want a Federal wildfire insurance program, or a Federal Hurricane wind damage program, contact your Congressman and lobby for it.

As a practical matter, a Federal Hurricane wind insurance program would only be collecting premiums from states prone to hurricanes. You’re probably not going to find anyone in Montana willing to buy a policy and pay a monthly premium. But Florida and Texas customers might see some benefit to spreading the risk to other Atlantic coast states that get hurricanes.

One of the reasons I moved out of Texas was because I was unwilling to pay a premium for poor insurance regulation. Poor insurance regulation tends to enrich the insurers rather than provide any additional benefit to the homeowner or health insurance customer.

intercst

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I grew up in a congested urban environment. My late father used to complain that auto insurance rates in Hartford were high because of all the suburban workers coming into the city for their fancy office jobs, or in the evenings to buy drugs.

There was a family of Jamaicans down the street that regularly had a line of late model German sedans passing by their front door to pick up product. It was so obvious, you had to wonder who they’d paid off.

intercst

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Or it could be because they had an Insurance company named after them. :joy:

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Because that’s how insurance works. The people with low risk pay less, the people with high risk pay more, but everyone pays. It’s also important to understand the role of reinsurance in the insurance business. Almost all insurance companies buy reinsurance to help cover very large damages. And reinsurance is generally priced based on risk profile of the insurance company, but it still is INSURANCE, so everyone pays into it so it can cover the big losses when they happen, and those big losses almost always happen in the higher risk areas. So, in the end, regardless of state insurance regulation, the insurers in Montana are indeed paying into funds that eventually are destined to cover a large CA firestorm, or a large FL hurricane, or a series of large OK tornadoes, etc.

Well, there is already an ad hoc Federal “insurance” program for at least some of the costs.

President Biden announced Thursday that for the next six months, the federal government will pay for 100% of the disaster response costs from the wildfires destroying neighborhoods across the greater Los Angeles area. The president also said he’ll be asking Congress for more funding to help.

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Did they do that for North Carolina damages from Hurricane Helene?

DB2

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It’s possible to mitigate the risk with hurricanes, but it’s expensive.

I was walking around my mother’s Boynton Beach, FL neighborhood (in 2000) and saw a house being constructed. I took a few minutes to ask the contractor about it. The house was designed to be hurricane-resistant. The foundation included steel pilings sunk 16 feet deep. The framing was steel, not wood. The outside sheathing was concrete slab panels. The roof was steel. It was fire-resistant as well as wind-resistant.

Expensive.
Wendy

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Biden didn’t promise to pay damages, just some of the response costs.

Speaking from the White House during a briefing on the fires, the president said federal funding will cover things like removing debris, setting up temporary shelters, and paying first responders.

—Peter

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Different disaster, different response. With a hurricane it’s there and then it’s gone. The Federal Government (Biden/Harris) gave out hundreds of millions to individuals and local and state governments to help with rebuilding and temporary displacement of people.

In California the catastrophe is ongoing, and putting it out is the only way to stop it from growing exponentially larger, so the “early help” is to assure fire teams and planners that they should do what it takes to stop the disaster, then they’ll worry about remediation. Of course with Trump coming in and California having voted for Harris, I fully expect a juvenile payback attack rather than a policy of caring for all Americans.

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Mark that wasn’t what I was saying. You said other people from other states are in the same pool of risk as other states. Intercst explained that People in Florida are in their own risk pool as is every other state.

Are you trying to tell me that someone in Nevada that is buying home insurance is in the same risk pool as someone in Florida?

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Yes. Because that is what a President is supposed to do.

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