{"id":1236,"date":"2023-07-28T23:30:20","date_gmt":"2023-07-29T03:30:20","guid":{"rendered":"http:\/\/commoncents.blogwyrm.com\/?p=1236"},"modified":"2023-07-02T07:45:22","modified_gmt":"2023-07-02T11:45:22","slug":"california-burning","status":"publish","type":"post","link":"https:\/\/commoncents.blogwyrm.com\/?p=1236","title":{"rendered":"California Burning"},"content":{"rendered":"

In his book How to Lie with Statistics<\/em>, Daryl Huff points out that misleading statistics are used so often by members of the fourth estate that it is difficult to truly believe that it is due to happenstance and a poor understanding.\u00a0 It seems more likely that the use of misleading statistics to sensationalize is deliberate, although proving it so is impossible.\u00a0 In this way, there is overlap between his observations with that old maxim<\/p>\n

Once is happenstance.\u00a0 Twice is coincidence.\u00a0 Three times is enemy action. \u2013 Ian Fleming, Goldfinger<\/div>\n

So too goes for the law of unintended consequences<\/a>, where a new maxim of economics might be read as<\/p>\n

Once is happenstance.\u00a0 Twice is economic ignorance.\u00a0 Three times is active subversion.<\/div>\n

What brings this grim pronouncement to this month\u2019s column?\u00a0 Once again, the Wise of Sacramento have created a set of incentives that they claim will help the average California resident, but which are subverting the insurance market in the golden state.\u00a0 Large insurers are either scaling back (Chubb and AIG) or are refusing to issue new homeowner policies altogether, as is the case with State Farm and Allstate, California\u2019s 1st<\/sup> and 4th<\/sup> largest insurers of residential property.<\/p>\n

To be fair, in their press announcement, State Farm cited three reasons for their discontinuance of new policies: 1) increasing wildfire risk, 2) rising home construction prices that outstrip inflation, and 3) a challenging reinsurance market.<\/p>\n

\"\"<\/a><\/p>\n

Can all of these woes be laid at the feet of governance?\u00a0 Well, while California\u2019s state legislature is not entirely responsible for the first two items, they are certainly not blameless.<\/p>\n

In his article Of Course Home Insurers Are Fleeing California<\/a><\/em>, Mark Gongloff, of Bloomberg, points out that California \u2018NIMBYism\u2019 has driven non-affluent residents to build in higher risk areas.\u00a0 Once these homeowners are established in this high-risk zones, the state does little to protect them from wildfires as the CNBC\u2019s host of the discussion and analysis in the video Insurance is the effect not the cause, says III CEO Kevelighan on State Farm's California decision<\/a><\/em> points out:<\/p>\n

\nhttps:\/\/commoncents.blogwyrm.com\/wp-content\/uploads\/2023\/07\/Lack-of-Mitigation.mp4<\/a><\/video><\/div>\n

 <\/p>\n

Regarding the construction costs Gongloff points out that<\/p>\n

the only people who can build or rebuild in such places are those wealthy enough to afford skyrocketing premiums and fire-resistant construction materials and techniques. The result is \u201cgentrification by fire,\u201d as the Washington Post termed it.<\/div>\n

This, in effect, favors higher-end construction costs state-wide, an outcome that Sacramento seems quite content to ignore.<\/p>\n

But the most damning indictment against California governance is its insane regulatory structure.\u00a0 While the state legislature does little to curb estate development costs it seems quite comfortable in exercising its regulatory muscle to force insurance companies to keep costs artificially low.<\/p>\n

In her article Why insurance companies are pulling out of California and Florida, and how to fix some of the underlying problems<\/a><\/em>, Melanie Gall, Co-Director of the Center for Emergency Management and Homeland Security, Arizona State University, poses the question<\/p>\n

So, why did State Farm and Allstate only stop new policies in California and not in other wildfire-prone states like Colorado or Arizona?<\/div>\n

The obvious answer to this is California\u2019s proposition 103 that limits premium increases to homeowners, prohibit policy cancellations and require certain levels of coverage, all of which effectively eliminate ways in which the insurers can mitigate risk from the consumer side.<\/p>\n

According to Gall, the chief executive of the insurance company Chubb\u2019s<\/p>\n

\u2026mentioned restrictions that left it unable to charge<\/a> \u201can adequate price for the risk\u201d as part of the reason for its 2022 decision to not renew policies for expensive homes in high-risk areas of California.<\/div>\n

Steve Forbes, in his video California's Insurance Catastrophe Explained\u2014How Government Caused Another Crisis | What's Ahead<\/a><\/em>, puts the matter much more forcefully, blaming the regulatory structure imposed on the states insurers as keeping premiums artificially low.<\/p>\n

https:\/\/commoncents.blogwyrm.com\/wp-content\/uploads\/2023\/07\/California-premiums-v-other-states.mp4<\/a><\/video><\/div>\n

 <\/p>\n

This sentiment is shared by Gongloff, who writes that<\/p>\n

California has one of the lowest home-insurance rates in the country, as a percentage of median household income \u2014 less than Georgia and West Virginia, according to Bankrate data.<\/div>\n

Insurance Information Institute CEO, Sean Kevelighan, in a clip from the CNBC video cited above, lists the numerous issues that Proposition 103 turns a blind eye to.<\/p>\n

https:\/\/commoncents.blogwyrm.com\/wp-content\/uploads\/2023\/07\/Prop-103-Insurance-Limitations.mp4<\/a><\/video><\/div>\n

 <\/p>\n

The damage caused by California\u2019s heavy-handed regulatory structure doesn\u2019t end there.\u00a0 As Gall points out,<\/p>\n

California also has a unique \u201cefficient proximate cause\u201d rule<\/a> that forces property insurers to also cover post-fire flooding, such as mudslides. Rainy winters like 2023\u2019s often trigger destructive mudslides<\/a> in wildfire burn areas.<\/div>\n

The consequences (unintended or otherwise) of such perverse incentives is that insurance companies know full well the actuarial risk they are being forced to take but can do little to share that risk with the home owner.\u00a0 As a result, they are also impeded in getting reinsurance<\/a>, which Investopia defines as insurance for insurers, which transfers risk to another company to reduce the likelihood of large payouts for a claim, thereby allowing insurers to remain solvent by recovering all or part of a payout.<\/p>\n

Gall cites the rising costs of reinsurance by noting that<\/p>\n

Reinsurers\u2019 risk-adjusted property-catastrophe prices rose 33% on average at their June 1, 2023, renewal, after a 25% rise in 2022, according to reinsurance broker Howden Tiger\u2019s analysis.<\/div>\n

And, so, we find that rather than expose themselves to additional risk that could conceivable bankrupt the company, insurers are simply opting out.\u00a0 The consequences of this move are far-reaching.\u00a0 This leaves California as the insurer of last resort through their FAIR plan<\/a>, which provides basic fire insurance coverage for properties that can\u2019t secure policies through traditional means.<\/p>\n

Once again, Steve Forbes pulls no punches in his assessment of the scope and financial soundness of the FAIR plan.<\/p>\n

https:\/\/commoncents.blogwyrm.com\/wp-content\/uploads\/2023\/07\/FAIR_deficit.mp4<\/a><\/video><\/div>\n

Of course, one might think that Sacramento would change course when confronted with all of this overwhelming evidence of how California\u2019s regulatory structure is causing more harm than good.\u00a0 But, one would be wrong.\u00a0 The prevailing sentiment seems to be one in which \u2018greedy\u2019 businesses are blamed for not being good corporate citizens and must be forced businesses into doing things against their financial well-being, as Gongloff notes:<\/p>\n

The advocacy group Consumer Watchdog demanded that state Insurance Commissioner Ricardo Lara drag State Farm back into the market, claiming he has the authority under California\u2019s Proposition 103.<\/div>\n

Sadly, this debacle is only one battle in an ongoing, subversive war which California governance seems to be waging against common sense and the citizens of a once great state.\u00a0 Enemy action indeed.<\/p>\n","protected":false},"excerpt":{"rendered":"

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