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Wednesday, August 31, 2005

Does insurance work?

Posted by: Hammer / 8:26 AM

No answers here, just questions. If you live in a flood plain, tornado alley, fault line, or hurricane zone, you must pay a significant insurance premium on your property, right? Then we figure out the chance that your property will be destroyed, multiply that by the value of your property, and that's (more or less) your insurance premium. Rather, that's the insurance premium related to disaster. You would pay additional insurance for theft protection and personal injuries occurring on your property, plus whatever other coverages you want.

Does the insurance market work? Did the people on the Gulf Coast have access to competing insurance companies and policies at reasonable prices? Did the insurers properly calculate the risks? Do they have sufficient reserves to compensate their policy holders?

According to the sports pages we've had 3 category 5 hurricanes in the last 100 years. How much does it cost to protect our cities from a category 5 storm compared to a category 3 storm? The storms are inevitable (and, due to global climate change, are sure to be more frequent and more severe), but is the damage controllable? Are we making rational choices about where to spend our money?


By and large, insurance does work. I'll talk about why it sometimes doesn't at the end of the post. But, generally speaking, there are competing companies who price their product according to what the actuaries calculate the risk to be, and what the market will bear. The companies cover themselves in the event of catastrophic losses by buying reinsurance for themselves. It's sort of like having an excess umbrella on top of your basic coverage. Flood insurance is a little different, however. If you live in a flood plain you are required to have flood insurance. Flood insurance is sold by individual companies, but somehow the government backs it up. So most of the damage from flood on the coast (at least up to a certain number of feet above sea level) would be covered. So too the damage in New Orleans since it is obviously a flood plain. The idea of having the government in effect subsidize people foolish enough to buy a place in a flood plain used to drive me crazy until I bought a condo in Fort Myers, FL. Now I think it's a great idea.
If the insureres don't properly calculate their risks, they end up losing money. The market is pretty efficient in this regard, and the policy holders end up covered because of the reinsurance I spoke of above.
The damage is certainly controllable. We have created an ecological nightmare in Louisiana through the actions of the Corps of Engineers (there was some stuff in today's STrib on that, quotes from "Afalatchia"). And, we allow people to build houses and businesses in places that are untenable, such as New Orleans (see the discussion on flood insurance, above). In truth, what we should do right now is to forbid anyone from relocating in New Orleans. Shut down the city and rebuild it in Baton Rouge or someplace upriver, on higher ground. Otherwise, in another 100 or 50 or 10 years, the same thing will happen again.
Now, why doesn't insurance work sometimes? Because we allow the insurance companies - and in particular life and health insurers to cherry pick risks. You can't for example, get health insurance to cover a preexisting condition. Well, the whole idea of insurance is to pool risks so that everyone pays something to protect against bad things for a few people. If we allow insurance companies to only insure healthy people, then there will be no claims, and the people who need help won't get it.

By Anonymous therealrepublican, at 12:24 PM  

There will be quite a few interesting debates about coverage. What amount of damage as caused by wind? By falling rain? By rising waters? By the storm swell? You might have different insurance covering different risks.

I agree it doesn't make a lot of sense to build a population center in a bowl surrounded by water. I don't think we can relocate the port, though, which means we'll have to have people working there.

By Blogger Hammer, at 12:54 PM  

"sure to be more frequent and more severe" due to global climate change?!? Got any facts to support that?

The history of US hurricanes sure doesn't...check out

By Blogger Captain Liberty, at 3:51 PM  

How 'bout ,this from The US
Global Change Research Program, a government agency started by the first President Bush:

About the future, as greenhouse gas concentrations rapidly increase over the next century: "There is little consistent evidence that shows changes in the projected frequency of tropical cyclones and areas of formation. However, some measures of intensities show projected increases, and some theoretical and modelling studies suggest that the upper limit of these intensities could increase. Mean and peak precipitation intensities from tropical cyclones are likely to increase appreciably."

Speculative? Sure. But what prediction isn't?

By Blogger Jambo, at 4:16 PM  

Or this from the Union of concerned Scientists:

The links between hurricanes and climate change

The series of hurricanes that battered the southern and eastern United States in 2004 have raised questions about the link between hurricanes and global warming.

The intensity of the strongest hurricanes is projected to increase due to the higher sea surface temperatures in a globally warming world. Precipitation from hurricanes is also likely to increase appreciably, leading to flooding and mudslides. In addition, hurricane storm surges will be larger due to sea-level rise from melting ice and snow and the thermal expansion of ocean waters. At greatest risk of larger storm surges, of course, are low-lying coastal areas along the Gulf Coast, such as Florida's Panhandle, Alabama's Gulf shores, and southern Louisiana.

Scientists cannot say at present whether more or fewer hurricanes will occur in the future. Even if the number of storms remained constant, however, more powerful hurricanes with stronger winds, higher storm surges, and heavier downpours would have a greater potential for damage, including increased risk to human life, more floods and mudslides, increased coastal erosion and damage to coastal buildings and infrastructure, and increased damage to coastal ecosystems such as coral reefs and mangroves.

"Global warming is not necessarily causing more hurricanes, but it may well be causing bigger and more powerful ones," says James J. McCarthy, a biological oceanographer at Harvard University and lead author of the climate change impacts portion of the Intergovernmental Panel on Climate Change's (IPCC) Third Assessment Report (2001). "Warmer seas fuel the large storms forming over the Atlantic and Pacific, and greater evaporation generates heavy downpours. With warmer, saltier tropical seas, the IPCC has projected larger storms, heavier rainfalls, and higher peak winds."

By Blogger Jambo, at 4:18 PM  

Here's one more link, this time to New Scientist.

The guy mentioned at the end is a bit of a nay-sayer on the topic in a couple other articles I came across so, yes, the issue is far from resolved. Still, you've got to get a kick out of soemone involved in the debate being named Landsea. Well, I do anyway.

By Blogger Jambo, at 4:29 PM  

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