ECON 101
Insurance generally is a market where risk is traded.
A decade of regional fires in the North Bay continues to cast a shadow on these counties (I think of the North Bay as including Lake, Marin, Mendocino, Napa, Solano and Sonoma counties). Some of the outmigration from our region in net was affected by the fires due to displacement, fear The home insurance maze By Robert Eyler
volume to the detriment of insurance company balance sheets and profitability. The explanation for this is relatively simple: as a financial institution, if costs are rising and we know the genesis of those costs, we reallocate the cost portfolio to reduce those costs and simultaneously focus on generating
more investment revenue. In insurance markets, the complication is both social and economic. Some homeowners, even those that own their homes outright and still demand insurance (a prudent decision for many reasons), may choose not to insure their homes because of rising costs or a belief of relative safety or a mix. Unfortunately, location is a blanket issue (like the driver’s age and where the driver lives are blanket ways to categorize risk in auto insurance markets), so folks that are reasonable risks and live in areas where wildfire is unlikely get included in regional pricing models.
of and actual annual fires, smoke from fires here and elsewhere… and then the pandemic happened. Lake County had a devastating fire in 2015 and has fewer housing units as a lingering effect. The Camp Fire in Paradise (Butte County) and the Woolsey Fire in Malibu in 2018 darkened the shadow effect in ways slowly coming to fruition: home insurance. Insurance generally is a market where risk is traded. As policyholders, we are concerned about the risk to other assets if insured assets are damaged or unusable. Insurance is an asset to policyholders (homeowners,
e.g.) that offsets a low-probability liability but a cost that can be financially devastating. Insurance companies are financial institutions and are much like banks and credit unions. They attempt to profit from outpacing forecasted claims with revenues from investing premium payments and investor capital. In California, primarily as a result of both our recent fire history and other disasters on the West Coast over the last 10 years (fires in Oregon and Washington as examples), insurance premia are more expensive; in some cases, you cannot maintain current insurance because your insurance company has decided to stop covering your home. Wow! For those homeowners that have borrowed to purchase a home, home insurance against a fire (the focus is on fire, but a wide array of additional insurance can be taken) is mandatory based on lenders wanting to offset risk to their shared asset with the borrower (lenders have a lien on your property when you have a mortgage, but you are the owner unlike the auto loan market). However, insurance companies have a slow, regulated process in California to change premium pricing. Much of the recent price surge or removal from the regional market is years in the making, exacerbated by claims locally and in other areas that have experienced fires and other disasters, increasing claims
It will take years for insurance premiums to slow their growth and for the chaos to subside, and that assumes we have stable fire seasons, no major earthquakes or storm seasons. Climate change will not help the long-term outlook either. Financial markets are already looking at rising interest rates over time as risks due to climate change come to fruition in real estate markets and beyond. For many homeowners in the North Bay, the next three to four years is likely a time when the costs of home insurance may lead some homes to come on the market prematurely due to rising insurance costs. Economics suggest (as a point of positivity) there may also be entrepreneurship in a market that has learned lessons from the past and is preparing for a riskier future. . g
Dr. Robert Eyler is professor of economics at Sonoma State University and president of Economic Forensics and Analytics in Sonoma County.
May 2024
NorthBaybiz 29
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