2024 Tropical Weather Thread

efil4stnias said
Ok so I get the premise here. However, how do you develop rates for this product? (Pricing)
Obviously if I live in Kansas (tornado), my insurance will be much higher than Wisconsin ( blizzard). But by how much?

And another aspect to keep in mind. Insurers take in premium, invest it, and make a return to build their loss reserves. Premium taken in ALONE will never cover a cat loss. So they have to let that money (premium in) work and make more money (investment return ) to go toward thier reserves ( money set aside for losses). Normally they have a formula to calculate expected losses for a geographic area. Folks in a higher risk area, pay more. Folks in lesser risk area pay less.
Does the Feds go into investing the premiums to build up reserves? Think about the sheer magnitude of premium they would need to pay, in one year, 2 wildfires, 4 Hurricane, 3 flood events and 20 Torandic events affecting 5 million homes and businesses. The losses would be in the 500 billion range. They would need to insure 20 million at 25k per just to have liquidity. ( ability to meet the loss costs)
And that's assuming you can get 20mm to sign up at 25k in yr 1. Because we are in a peak cycle of weather events that are much more devastating than 20 years ago.

Then you get to risk rating.

So how do they assess tornado risk vs flood risk vs wind risk vs blizzard risk etc etc and develop rates ? Folks along coast will birch about cost vs someone in Kentucky. Or Ohio. And someone in California (quake/wildfire) will birch about cost vs coastal.

The idea I would put forth is that the Fed create a "superfund" that acts as REINSURANCE for private insurers that have to pay into fund (along with Congressional funding ) to cap private insurer losses at a number and then remaining loss payment comes from superfund.
But it HAS TO BE UNTOUCHABLE. Even if it builds up to 1 trillion in reserve, can't be accesses for anything other than cat loss weather events.

But now as I read that, what denotes a cat loss? Any weather event? Are they there for even 2 houses flooding after a heavy rain in Uptown ? Now you have 50 states worth of THAT EXPOSURE And Cat claim risk...whew that's a ton of premium needed.

I don't have the details and I'm sure you know more about the specific issues than I do since I'm on the end of what happens when it all goes wrong and you are on the end of how do we stop it from going wrong, but it would take serious government contribution/subsidy to make it worthwhile for insurers much like flood insurance. The advantage would be that they would mostly know their risk because there wouldn't be huge fees for attorneys to litigate was it flood or wind driven rain, was it mudslide or landslide, etc. But this is an issue for everyone in this country whether it's because they live is an area that has natural disaster or because they count on products from those area, or they would be hurt by the downturn in the economy if say the ports on the Gulf Coast can't operate due to workers with no place to live. It's also a problem created by all of us so the risk should be spread to all of us.

No doubt there were be lot of issue to work out. But I don't see much of an alternative. The point would be to spread the risk as wide as possible to keep rates down while also providing coverage based on the idea that the larger the risk pool, the lower the risk on any individual policy. The rates would need to be set similarly to how the access flood risk, you just add in all the other risks which of course has it's issues but I don't think they are insurmountable.

As always the devil is in the details, but something like this seems to be the only alternative. Otherwise soon nobody will be able to get a mortgage or own a home because of homeowners insurance rates. And areas of the country will become unlivable because the risk of disaster without insurance coverage will make it impossible.

That all being said, we more than likely lack the political will to do anything like this because people living in places with no recent natural disasters won't want to have to pay for it despite the fact that they count on those areas for necessities and benefit from the economy that that those place form the base for.

But I am curious since you are in the insurance industry, what do you think is the solution to the ever rising cost of homeowners' insurance?