I come from the financial sector, and I noticed that there is one thing missing from this otherwise-excellent dialogue. There is a huge problem with insurer capacity. The capacity problem does not go away even if insurance rates could internalize every possible externality and there are no stranded assets or dysfunctional subsidies. The capacity problem is that massive events (hurricanes, earthquakes, wars) are lumpy, insurance contracts written annually, and capital markets are finite. As a result, insurers cannot write as much insurance as is demanded, even if the policies are perfectly priced. Think of taking a bet in which you put down $1, with a 50:50 outcome of either $3 or losing your dollar. Nice bet, no? Now think of putting down a million dollars, with the outcome either three million or losing your pension, house, and car. Not such a nice bet. This is the catastrophe risk problem.
The three usual answers to this problem are reinsurance--which smoothes the lumps among many insurers--catastrophe bonds (a kind of clunky reinsurance in capital markets drag) and exclusions, such as war risk. Exclusions protect the insurer, but have nothing else going for them. Reinsurance capacity is quite finite, and cat bonds are pretty inefficient, and perhaps also finite.
There is no good solution to this problem in the policy space, although I think that government insurance participations might help. Participations are not subsidies, since the government would simply add capacity, piggybacking on the insurers' (or reinsurers') risk assessments and rate and payout structures.
So true that it’s a global— not local —capital sector supplying insurers and reinsurers today. But more capital would enter the market if the returns were there.
Yes, that's true, but how to goose the returns? The reinsurance market is not very regulated, so "deregulation" won't work. A subsidy would work fine, but it's--uh--a subsidy. Financial repression on the overheated banking/shadow banking/"tech" sectors might encourage capital to move to insurance. But that's not going to happen without 51 Elizabeth Warrens in the Senate, 218 Katie Porters in the House, a Bernie in the White House and the federal judiciary of 1971.
Good question. Reinsurance rates are based on primary insurance, whether as quota share or excess of loss reinsurance. It’s essentially percentage of the primary insurance. So when reinsurers squeeze insurers with higher premiums, the primary insurer can a) pass it along to policyholders (tough because rate increases require regulatory approval), b) eat the additional cost (drive up their already poor loss ratios), or c) buy less cover (and put themselves at risk and possibly upset their AM Best rating).
So isn’t the only real way to have primary rates rise?
A very interesting podcast on a complex but fundamental topic. Since you're already thinking about 10 sequels, here are two issues you should consider addressing:
First, insurers don't just underwrite homes etc. , they are also a basic pillar of the fossil fuel industry. When campaign pressure stopped most insurers from underwriting new coal, it accelerated the transition from coal to clean energy. The same should happen for up-, mid- and downstream oil and gas projects. US insurers are way behind their European peers on this but it's cynical for them to drop home insurance customers while continuing to fuel the climate crisis by underwriting the expansion of oil and gas. Regulators should incentivize insurers to exit fossil fuel expansion.
Secondly, the insurance crisis is ultimately about who should pay for climate change. Why only talk about insurers, the state and individuals? Why not make the polluters pay? Insurers should take fossil fuel companies to court and make them pay up for the increasing costs of climate disasters, they way some of them forced tobacco companies to pay for the costs of smoking-related illnesses in the 1990s. As a minimum, they should support the current cases against fossil fuel companies in state courts. Check out https://www.context.news/climate-risks/opinion/who-pays-for-a-hurricane for some more details on this approach.
I'm not sure that anything could have a bigger impact on homeowner or business owner perception of climate risk than a cancellation letter from their insurance carrier that pointedly blames the cancellation on fossil fuel consumption. Maybe start there. Just slap people in the face by informing them that their pants are on fire & they need to stop consuming fossil fuels,....ASAP. It's criminal to encourage people to believe that the insurance industry or the government has a magic wand that will immediately solve or suspend reality.
Thank you for helping me rule out the annuity as a retirement savings plan. Annuities are the insurance industry’s savings/investment product backed only by the solvency of the insurer who issued it.
I’d already discovered that annuities are ridiculously complex, junk-fee-riddled contracts with returns no better than a CD. I was already not feeling wealthy enough to make the tax avoidance implications worthwhile.
In addition to all that, now I gotta try to research and guess whether the issuer is one Category 5 away from bankruptcy? No way.
I think it depends on the annuity. An immediate annuity is still badly overpriced (because insurance is sold rather than bought), but is the only way that most individuals without a pension can lay off the risk of outliving their savings. It's just like buying a pension. The other annuities--I agree, and wouldn't touch them with a ten foot pole.
Most annuities are backed by state insurance guarantee plans. They're not as good as FDIC insurance, and tend to have low caps. But there is no reason that an annuitant couldn't spread out over several insurers, although that might make the pricing even worse.
Thanks for a wonderful 'cast covering almost all the issues climate change has brought us--in one place. Wouldn't Federal regulation of insurance (long fought by the insurers) be a help in planning and mitigating both?
Just to weigh in from the Great Lakes region, two years ago we had 3-4 feet of snow when it warmed up to 40 degrees in February and rained.
Roofs collapsed all over the place from the weight of wet slush. Roofs leaked all over the place from water that pooled up behind ice dams that built up when the February rain froze solid.
Last winter we had maybe 6” of snow. Almost none. No snowmobile season. Very bad for tourism. Septic systems froze and backed up all over the place because without the insulation of snow cover, the frost line froze too deep.
This is what climate change costs us in flyover country.
Loved the attention in the episode. However, we need to address this fundamental fact: insurance is a for-profit industry. Homeowners insurance is also a highly state regulated industry. Insurers have to ask state regulators to approve their rates. They have to apply for rate increases and show their finances. State regulators then approve, deny, or approve a smaller increase. For years, state regulators have been denying requested rate increases. So, roll forward many years and it is not a surprise that the market is not working and insurers non-renew or exit entirely.
(E.g., in CA, the homeowners insurance industry average loss ratio from 2013-2022 was 108.1%, which means they lost money on average every year for a decade. Source: AM Best.)
Im making over 13k BUCKS a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do....quicksrich.blogspot.com
This is such important work. I'm growing perennial crops (fruit and nuts) in the middle of the Corn Belt and couldn't even get insurance for agritourism.
I just hope that someday someone maps the insurance industry org chart. I suspect there is little cause and effect between climate events, rates and insurance company profits except to use climate change as an excuse to reduce risk in ONE area of the corporate structure. (Here in the town closest to me in Iowa, the volunteer fire department is on its third insurance company. If they lose it, they will have NO insurance - and they have NEVER made a claim!) I got put in first class once quite by mistake and ended up eavesdropping on two insurance execs from two different massive corporations I never heard of. It was MIND BLOWING. Rates were not even on their radar but the latest mergers and acquisitions sure were.
When these arguments about rates and claims get made - and seem like common sense so they're easily accepted - they keep us from looking behind the curtain. For decades, insurance companies' biggest dealings have been in real estate and Wall Street, not homeowner policies. There's a whole lot more going on there we're not seeing but would make an excellent investigative piece.
"And if it comes out, if it's revealed that the climate risk in my community is much higher than had previously been understood, and insurance rates go up, property values go down, and property taxes go down."
Is this true for all of America? Property taxes are a percentage of property values?
In NZ, property taxes for local government is called rates. Property values don't change the overall amount of rates collected, they just change the share and distribution of the amount against each property.
In fact, since the post COVID asset bubble peak in 2022, property prices have dropped about 15%. But this year rates in Auckland have increased 8% due to inflation.
I come from the financial sector, and I noticed that there is one thing missing from this otherwise-excellent dialogue. There is a huge problem with insurer capacity. The capacity problem does not go away even if insurance rates could internalize every possible externality and there are no stranded assets or dysfunctional subsidies. The capacity problem is that massive events (hurricanes, earthquakes, wars) are lumpy, insurance contracts written annually, and capital markets are finite. As a result, insurers cannot write as much insurance as is demanded, even if the policies are perfectly priced. Think of taking a bet in which you put down $1, with a 50:50 outcome of either $3 or losing your dollar. Nice bet, no? Now think of putting down a million dollars, with the outcome either three million or losing your pension, house, and car. Not such a nice bet. This is the catastrophe risk problem.
The three usual answers to this problem are reinsurance--which smoothes the lumps among many insurers--catastrophe bonds (a kind of clunky reinsurance in capital markets drag) and exclusions, such as war risk. Exclusions protect the insurer, but have nothing else going for them. Reinsurance capacity is quite finite, and cat bonds are pretty inefficient, and perhaps also finite.
There is no good solution to this problem in the policy space, although I think that government insurance participations might help. Participations are not subsidies, since the government would simply add capacity, piggybacking on the insurers' (or reinsurers') risk assessments and rate and payout structures.
So true that it’s a global— not local —capital sector supplying insurers and reinsurers today. But more capital would enter the market if the returns were there.
Yes, that's true, but how to goose the returns? The reinsurance market is not very regulated, so "deregulation" won't work. A subsidy would work fine, but it's--uh--a subsidy. Financial repression on the overheated banking/shadow banking/"tech" sectors might encourage capital to move to insurance. But that's not going to happen without 51 Elizabeth Warrens in the Senate, 218 Katie Porters in the House, a Bernie in the White House and the federal judiciary of 1971.
Good question. Reinsurance rates are based on primary insurance, whether as quota share or excess of loss reinsurance. It’s essentially percentage of the primary insurance. So when reinsurers squeeze insurers with higher premiums, the primary insurer can a) pass it along to policyholders (tough because rate increases require regulatory approval), b) eat the additional cost (drive up their already poor loss ratios), or c) buy less cover (and put themselves at risk and possibly upset their AM Best rating).
So isn’t the only real way to have primary rates rise?
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-homeowners-insurers-net-combined-ratio-surges-past-110-81711947
Look at that history of loss ratios for twenty years.
A very interesting podcast on a complex but fundamental topic. Since you're already thinking about 10 sequels, here are two issues you should consider addressing:
First, insurers don't just underwrite homes etc. , they are also a basic pillar of the fossil fuel industry. When campaign pressure stopped most insurers from underwriting new coal, it accelerated the transition from coal to clean energy. The same should happen for up-, mid- and downstream oil and gas projects. US insurers are way behind their European peers on this but it's cynical for them to drop home insurance customers while continuing to fuel the climate crisis by underwriting the expansion of oil and gas. Regulators should incentivize insurers to exit fossil fuel expansion.
Secondly, the insurance crisis is ultimately about who should pay for climate change. Why only talk about insurers, the state and individuals? Why not make the polluters pay? Insurers should take fossil fuel companies to court and make them pay up for the increasing costs of climate disasters, they way some of them forced tobacco companies to pay for the costs of smoking-related illnesses in the 1990s. As a minimum, they should support the current cases against fossil fuel companies in state courts. Check out https://www.context.news/climate-risks/opinion/who-pays-for-a-hurricane for some more details on this approach.
I'm not sure that anything could have a bigger impact on homeowner or business owner perception of climate risk than a cancellation letter from their insurance carrier that pointedly blames the cancellation on fossil fuel consumption. Maybe start there. Just slap people in the face by informing them that their pants are on fire & they need to stop consuming fossil fuels,....ASAP. It's criminal to encourage people to believe that the insurance industry or the government has a magic wand that will immediately solve or suspend reality.
Thank you for helping me rule out the annuity as a retirement savings plan. Annuities are the insurance industry’s savings/investment product backed only by the solvency of the insurer who issued it.
I’d already discovered that annuities are ridiculously complex, junk-fee-riddled contracts with returns no better than a CD. I was already not feeling wealthy enough to make the tax avoidance implications worthwhile.
In addition to all that, now I gotta try to research and guess whether the issuer is one Category 5 away from bankruptcy? No way.
I think it depends on the annuity. An immediate annuity is still badly overpriced (because insurance is sold rather than bought), but is the only way that most individuals without a pension can lay off the risk of outliving their savings. It's just like buying a pension. The other annuities--I agree, and wouldn't touch them with a ten foot pole.
Most annuities are backed by state insurance guarantee plans. They're not as good as FDIC insurance, and tend to have low caps. But there is no reason that an annuitant couldn't spread out over several insurers, although that might make the pricing even worse.
https://substack.com/home/post/p-152592632
AN OPEN LETTER TO MY GLOATING MAGA NEIGHBOR
You Know Who You Are: Your House Still Draped in MAGA Banners, Red Hat Firmly on Your Head, and Truck Plastered with Trump Stickers
Fantastic episode. Just came here to say that. Thank you!
Well - this isn’t mine, but it’s one of the best things I’ve read on Substack re an alternative take on climate policy, and its reasons for failure. https://open.substack.com/pub/thewholetruthpublications/p/just-say-no-to-performative-policy?r=49mkzc&utm_medium=ios
Excellent episode. Insurance is the tip of the spear of climate impact and it affects nearly everyone .
Thanks for a wonderful 'cast covering almost all the issues climate change has brought us--in one place. Wouldn't Federal regulation of insurance (long fought by the insurers) be a help in planning and mitigating both?
Just to weigh in from the Great Lakes region, two years ago we had 3-4 feet of snow when it warmed up to 40 degrees in February and rained.
Roofs collapsed all over the place from the weight of wet slush. Roofs leaked all over the place from water that pooled up behind ice dams that built up when the February rain froze solid.
Last winter we had maybe 6” of snow. Almost none. No snowmobile season. Very bad for tourism. Septic systems froze and backed up all over the place because without the insulation of snow cover, the frost line froze too deep.
This is what climate change costs us in flyover country.
Loved the attention in the episode. However, we need to address this fundamental fact: insurance is a for-profit industry. Homeowners insurance is also a highly state regulated industry. Insurers have to ask state regulators to approve their rates. They have to apply for rate increases and show their finances. State regulators then approve, deny, or approve a smaller increase. For years, state regulators have been denying requested rate increases. So, roll forward many years and it is not a surprise that the market is not working and insurers non-renew or exit entirely.
(E.g., in CA, the homeowners insurance industry average loss ratio from 2013-2022 was 108.1%, which means they lost money on average every year for a decade. Source: AM Best.)
Im making over 13k BUCKS a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do....quicksrich.blogspot.com
This is such important work. I'm growing perennial crops (fruit and nuts) in the middle of the Corn Belt and couldn't even get insurance for agritourism.
I just hope that someday someone maps the insurance industry org chart. I suspect there is little cause and effect between climate events, rates and insurance company profits except to use climate change as an excuse to reduce risk in ONE area of the corporate structure. (Here in the town closest to me in Iowa, the volunteer fire department is on its third insurance company. If they lose it, they will have NO insurance - and they have NEVER made a claim!) I got put in first class once quite by mistake and ended up eavesdropping on two insurance execs from two different massive corporations I never heard of. It was MIND BLOWING. Rates were not even on their radar but the latest mergers and acquisitions sure were.
When these arguments about rates and claims get made - and seem like common sense so they're easily accepted - they keep us from looking behind the curtain. For decades, insurance companies' biggest dealings have been in real estate and Wall Street, not homeowner policies. There's a whole lot more going on there we're not seeing but would make an excellent investigative piece.
"And if it comes out, if it's revealed that the climate risk in my community is much higher than had previously been understood, and insurance rates go up, property values go down, and property taxes go down."
Is this true for all of America? Property taxes are a percentage of property values?
In NZ, property taxes for local government is called rates. Property values don't change the overall amount of rates collected, they just change the share and distribution of the amount against each property.
In fact, since the post COVID asset bubble peak in 2022, property prices have dropped about 15%. But this year rates in Auckland have increased 8% due to inflation.