Ron Paul, the Hamilcar of Presidential Candidates

[Razgovory]

Having lots of homeless people isn't in the disinterest of the group?  I strongly suspect that people have a disincentive to not have their home destroyed by Tornadoes even with FEMA.  I really don't think of living in Ohio as reckless risk taking.

The disincentive is in buying insurance.

Yeah, FEMA does more then just buying up destroyed property.  Hell, I think they help even if you do have insurance.

[DGuller]

"There is no risk that is too high, only a premium that is too low."

Lloyds of London

I am telling you historical facts, you are responding with theory.  There may be ways of overcoming or ameliorating adverse selection but IRL private insurance companies either didn't think these would work or thought it too much trouble to bother.

Adverse selection is not really a good reason that I can see.  If you have adverse selection, it means that insureds know more about the risks than the insurer.  That may be the case in health insurance, but it's highly unlikely for property insurance in this day and age.  Maybe that was true in 1950ies, but insurance market was extremely uncompetetive and unsophisticated back then.

[The Minsky Moment]

Local and plot specific factors play a significant role in determining flood risk, likelihood and severity of losses.  It may not be impossible insurance companies to create comprehensive databses to track this kind of information, but I would question whether it would be worth the effort in terms of profits to be earned.

Given that the private insurance market had withdrawn from flood insurance for decades at the time the NFIP was put into place, it seems to me the burden is heavily on those who would claim that it would magically fill the gap now if the government withdrew.

[DGuller]

Local and plot specific factors play a significant role in determining flood risk, likelihood and severity of losses.  It may not be impossible insurance companies to create comprehensive databses to track this kind of information, but I would question whether it would be worth the effort in terms of profits to be earned.

Given that the private insurance market had withdrawn from flood insurance for decades at the time the NFIP was put into place, it seems to me the burden is heavily on those who would claim that it would magically fill the gap now if the government withdrew.

We have models now that work at a very fine resolution.  Hurricane models can give you address-level results.  That wasn't in place 20 years ago.

[MadImmortalMan]

Are you saying these tech advances may have created an environment where it could actually be done then?

[alfred russel]

 Something that I don't think anyone has mentioned is that relatively rare major disasters that nevertheless destroy communities are difficult to insure through anything but massive insurance companies (and even they will be reluctant in some cases). The odds may be 1-100 that a car will be stolen in Miami in a given year but if one is, a Florida insurance company there will be able to pay for the loss with the proceeds from 99 other policies. However, the odds may be 1-1000 that a major hurricane will destroy a coastal home in Miami, but if one does, the other 999 homes in the community are probably severely damaged too. An insurance company is going to find it difficult to pool the risks that could destroy a city, especially since we organize our insurance companies on a state by state basis.

There is probably something to the idea that flood insurance is mispriced and doesn't sufficiently discourage people from living in floodplains, but that doesn't seem to really apply to tornadoes in my opinion. The chance of a tornado destroying any specific home is remote and the risk is distributed across a large part of the country. The odds of flood damage are concentrated in certain areas that are typically well known to be flood prone.

[MadImmortalMan]

Ah. So you'd have to be selling policies to people like me who live halfway up a mountain in order to spread the risk out enough.

[alfred russel]

Ah. So you'd have to be selling policies to people like me who live halfway up a mountain in order to spread the risk out enough.

If you are a Florida insurance company, there is really no way to sell enough policies to protect against a major hurricane blasting Miami. The insurance companies got hammered when one did--and now the state government has felt the need to step in as many of the insurance companies pulled out. The next major hurricane in Florida is an insurance disaster waiting to happen--though this time it will be the state that takes it on the chin.

[Iormlund]

I thought what insurers did in those cases was to spread the risk among other insurers. IIRC here there's also a mechanism where a special fund (I think similar to deposit insurance funds) will step in and assume part of the cost in case of severe circumstances.

[alfred russel]

I thought what insurers did in those cases was to spread the risk among other insurers. IIRC here there's also a mechanism where a special fund (I think similar to deposit insurance funds) will step in and assume part of the cost in case of severe circumstances.

You can reinsure risks.

[PJL]

Ah. So you'd have to be selling policies to people like me who live halfway up a mountain in order to spread the risk out enough.

If you are a Florida insurance company, there is really no way to sell enough policies to protect against a major hurricane blasting Miami. The insurance companies got hammered when one did--and now the state government has felt the need to step in as many of the insurance companies pulled out. The next major hurricane in Florida is an insurance disaster waiting to happen--though this time it will be the state that takes it on the chin.

But why did they leave rather than massively increase the prices? Or would have meant that no-one would have bought the insurance anyway?

[MadImmortalMan]

I would think there would be some that would still buy it. Lots of banks even require you to carry certain types to protect the mortgage collateral.

[Razgovory]

I think this blaming the victim thing is a bit silly.  Cities tend to be built where they are economically useful.  It would be difficult to build a City like New Orleans that serves as a port on the Gulf of Mexico and the Mississippi river on top of some mountains in Idaho.  Likewise, tornadoes are pretty common in the US.  There are few places where they don't strike.

[Iormlund]

But why did they leave rather than massively increase the prices? Or would have meant that no-one would have bought the insurance anyway?

Probably second one. For example, the costs of my Crohn's in the last 4 years have amounted to at least € 100k. Any insurer would ask me for a premium impossible to pay in a country with a median salary of just € 13k.

[DGuller]

Something that I don't think anyone has mentioned is that relatively rare major disasters that nevertheless destroy communities are difficult to insure through anything but massive insurance companies (and even they will be reluctant in some cases). The odds may be 1-100 that a car will be stolen in Miami in a given year but if one is, a Florida insurance company there will be able to pay for the loss with the proceeds from 99 other policies. However, the odds may be 1-1000 that a major hurricane will destroy a coastal home in Miami, but if one does, the other 999 homes in the community are probably severely damaged too. An insurance company is going to find it difficult to pool the risks that could destroy a city, especially since we organize our insurance companies on a state by state basis.

There is probably something to the idea that flood insurance is mispriced and doesn't sufficiently discourage people from living in floodplains, but that doesn't seem to really apply to tornadoes in my opinion. The chance of a tornado destroying any specific home is remote and the risk is distributed across a large part of the country. The odds of flood damage are concentrated in certain areas that are typically well known to be flood prone.

That is a problem, but that's what reinsurance is for.