All I see in the article is the discussion of "profits".
I would think the PR department could come up with something about "trying to keep costs competitive for our customers" or something like that. Instead they're telling California and Florida customers to take a hike ... along with 11% of their employees.
When is the last time we heard a company enact a company-wide, 50% cut in officer's salaries and a freeze on their compensation?
In the distant past, insurance companies used actuaries to price policies, so that the companies could make informed, rational decisions like "for people in this risk category, if we want to make X% profit, how much do we need to charge for that coverage?" Instead it became "insurance company M is charging $N for this type of policy, we have to charge something similar or else our customers would switch." Along comes Hurricane Andrew in 1992 and years of 'selling policies at a price point instead of using actuarial math to determine what the real cost would be' turned into a major disaster as it turned out that dozens of insurance companies were selling policies below the actual cost of those policies. Most of those insurance companies went out of business. 30 years later, and most insurance companies are still making bad decisions.
My point, and I think there is one in here, is that insurance companies have been making terrible decisions based on marketing instead of basing them on what the actual risks involved are.
California's fires and Florida's weather are a lot more risky than people are willing to admit. Some coastal states have passed laws prohibiting the consideration of climate change in insurance and governmental decisions. Those states are also seeing insurance companies performing strategic withdrawals from those markets. But they aren't as big as CA & FL, therefore they don't get the media attention.
I don't think that's a fair characterization of how pricing works in homeowners insurance. Every time you want to change prices, you need to justify the price change to the regulator using the actuarial math. The regulator's own actuaries review the actuarial math and, if they don't agree, will not change allow the rate change.
One of the hardest things about insurance is figuring out the probabilities of very unlikely events. Hurricane Andrew was a moderately large storm that directly hit three major population centers - Miami, Ft. Myers and New Orleans. That circumstance is infrequent enough that modeling it statistically leaves a wide range of uncertainty.
I would think about insurance as more of a smoothing mechanism of inherently uncertain outcomes. When something happens that's unexpected and causes a larger loss, that is typically recouped by the industry over a few years of higher rates. That way the industry is still absorbing volatility, which is valuable to their customers, but doesn't require that they be 100% correct about the probabilities of infrequent events.
This is right, there's a lot of regulatory capture and cronyism, so it's far from perfect, but the real story is that actuarial tables are not keeping up with 500 year events becoming 50 year events and 100 year becoming 2-5 year events. The pace of change and severity of events is unprecedented and no one can figure out how to keep profits rolling.
In California home insurance companies cannot take into account any future forecasts (including climate change) when setting rates, only past events. There are also yearly caps on how much they can raise rates. The results of these policies on the state of home insurance in California speak for themselves.
Rates are still set by actuaries lmao. Insurers are getting out of Florida because they legalized insurance fraud and everyone got a new roof on the insurance companies, not the weather.
You ignored the role of government, where the government has to approve insurance pricing and reserves. And the political incentive to push for lower premiums for votes.
Also, pretty sure actuaries are still pricing risk, based on how many people in these organizations’ directories work at insurance companies.
It seems that Farmer's has determined that's the situation they find themselves in in Florida, and logically conclude that the only winning move is to not play.
Why are people surprised when a company operates in its’ own best interest? Why should we expect anything else? Insurance companies are just about moving dollars around and hedging risk. Being perturbed about this is like being mad about your dog barking at the mailman.
If someone said I’m going to start free climbing the tallest buildings in the world - but I need insurance - the company will tell you to get lost because the risk outweighs the reward. This is what insurance companies are doing all over the place (fl/ca) because those environments are truly becoming uninsurable.
But then people are shocked and awed when the situation happens with them. Why? An insurance company is not a charity it’s just a profit engine. Don’t get mad at the dog for barking at the mail man :)
Suppose you are an insurer. You model the risk for your insurance product (suppose it's car insurance) and realize you need to charge $100/mo to make money after paying out all the claims. However, you have a competitor that is bad at modeling risk. They are charging $50/mo for their car insurance, and customers are flocking to them. Should you attempt to stay in this market? If you lower your prices, you will eventually get knocked out; if you keep them high, you will not get any customers.
Alternatively, suppose cars become super risky and you need to charge $10,000 a month to insure the car, and reasonably conclude that no one is going to pay that, and after you pay for marketing and overhead and payroll, you will still lose money if you try to sell the insurance product. Do you stay in the market?
It's especially funny to see everyone in the comments complaining that the insurance company is "only thinking about the short term".
There should be no marketing if it's mandated. These companies should not be run for profit since having insurance is required by law in many situations.
You’re describing socialism and we are operating in a capitalist society. I’m not advocating for or against but it’s naive to make these claims about how this should just be pure, devoid of evil and provided by the state. This debate will go on until the end of days.
I am describing a socialistic policy, which I think private but mandatory for-profit insurance makes a great case for. We already have government controls in place, if we lived in a "capitalist society", there would be no such thing as a health insurance mandate. We live in a hybrid world designed for regulatory capture and corruption, with our required payments flowing straight to executives and shareholders instead of actually providing a public good.
Stay in the market because the competitor will be put out of business once their customers actually start filing claims. Then customers come back to you.
This only works if you can stay profitable enough long enough for it to start to happen. The fewer customers you have, the riskier your pool, and the higher your prices have to be. Suddenly $100 becomes $125 becomes $150 for the same or less profit.
It's safer to just get out of the market entirely. You can always go back in but if you stay in too long it could wipe you out entirely.
If all your customers are flocking to the undercharging competitor, you're out of the market anyway and your costs are effectively zero since you don't have anyone filing claims. There's no practical scenario where the competitor, which is losing money on each customer in aggregate, lasts longer than a company with no customers.
Picking up nickels in front of a steamroller can appear profitable for a shockingly long time, as the traders using the "I'll just naked short VXX for easy money!" periodically find out.
The insurance mandates are for things that impact either your life or other people. I don’t want your judgement proof ass hitting me with your car without the ability to fix it, nor do I want you using emergency medicine as a pediatrician. Thus, mandates.
The problem is when you combine "mandated" with "for profit". The two should never go together. If it's mandated, I want exactly zero of my dollars going toward executive compensation, dividends, stock buybacks, advertising, sales...
You're currently paying for that neat little 3d animated gecko under threat of US law.
In 32 of the 50 states, you can post a surety bond instead of buying the otherwise state-mandated auto insurance.
That list includes my state. I buy auto insurance because it's more convenient (and cost-effective) than going through the bond posting process, arranging my own claims-handling and legal representation in the event of a loss, etc.
I pay $1220/yr for insurance for two cars and two drivers (and for coverage well above the state minimums and excellent customer and claims service). IMO, it would be crazy for me to turn down that deal.
Especially when the alternative is half a million dollars cash sitting in an account you can't legally access for anything else, or use as collateral for anything else, and you won't realistically have half a million dollars cash ever.
I looked into a surety bond specifically for auto insurance thinking I might be able to earn a bit of interest on $100-200k cash, get a small dividend, and "break even" in half a dozen years or so. The reality was pretty grim, basically if you're not already actively searching for things to do with 6 or 7 figure sums, it's not worth the time, and that's ignoring the logistics of having someone available for the claims processing side.
Food is provided by for profit companies, and buying food is mandatory for the sheer majority of people. Yet on the whole it's mostly a functioning market with mostly stable prices, apart from the recent spikes of trumpflation.
The problem is lack of competition, both in pure number of companies due to consolidation, and also widespread collusion between what should be independent companies in the form of adopting the same business policies, software, and even surveillance databases (aka customer records).
the government doesn't mandate home insurance - the mortgage companies do - if you can pay cash for your house, the govt is not going to mandate you to insure it. If someone (a bank) owns 80% of the equity in your house, better believe they are going to make you insure it.
The mandate is for driving a vehicle on public roads, which is absolutely not a right. You can decline paying for-profit companies for insurance by not driving.
The healthcare argument is different and reasonable. The lack of a taxpayer-funded health scheme in the United States combined with making it illegal to opt out of being alive (and requiring health insurance) is nonsense.
It is not odd. It is lobbying - have the government force people to pay you. In the case of autos, they're dangerous and deadly. Too many people should not be allowed to drive. But due to other lobbying, public transit is unavailable in the US, so you must drive in order to have a job, or reach grocery stores.
The issue in Florida is also idiosyncratic to the state -- in addition to macro factors such as an increase in reinsurance costs (driven by increased cost of capital) and increased weather volatility (driven at least in part by global warming), Florida has had an issue with insurance fraud. They had a set of laws and court cases, unlike any other state in the country, that created a financial incentive for contractors to inflate (or make unnecessary) insurance claims. They would work in concert with litigation mills to further inflate the size of those claims. The way the laws were setup it often allowed the attorneys to get a 3x multiplier on their fees (which they would inflate to begin with).
So you would have a situation where a roof needed to be replaced, should cost $30k. A roofer comes up with an estimate for $60k (and maybe pays the homeowner back a $10k kicker), gets the homeowner to sign over the insurance policy to him. Then he hires a lawyer who spends $50k of his time litigating the case. Let's say the court sides in favor of the insurer and awards $30k, the lawyer still gets $150k (3x multiplier on the $50k of fees).
As a result you had Florida accounting for 8% of the homeowners insurance claims nationally and 75% of the lawsuits nationally. There are billboards for insurance attorneys EVERYWHERE in florida.
The phenomenon impacted big national companies like State Farm that have similar claims handling procedures across their book. So State Farm would handle claims exactly the same in Florida as in Illinois and get sued 10x more often in Florida because of the financial incentive to sue. It also impacts Florida's state-owned insurer, which does compete very vigorously in the market and is the largest insurer in the state.
Fortunately Florida took a really good stab at fixing the problem with some legislation passed last December. It will take a while to see if the legislation worked, however. Meanwhile we still have the macro factors (climate change, reinsurance costs) to contend with.
https://bestsreview.ambest.com/edition/2023/february/Florida...
The issue in CA is idiosyncratic to the state. In 2020 the average price of homeowners insurance in CA was $1,241 and in Illinois was $1,144. It probably doesn't make sense for California to be only 8% more expensive than Illinois.
There are many problems in Florida in addition to heat engines getting better at what they do = huge insurance fraud problems, restrictive work practices, shortage of stuff to make/fix roofs, shortage of local roof fixers = fukkit, lets walk
I think there's a price of work element too. In my mother's area, insurance is cheaper because a plumbing job will cost 60€/hour (+ 30€ for the intervention). I'm pretty sure the costs are more like 120/150 in my area.
This is an unhelpful and tone-deaf response. I don't think anyone is "surprised" that companies act in their own self-interest. If they are surprised by anything, it's that the system that made mandatory the concept of insurance for a dignified, modern life (what we name in shorthand as "the economy") continues to allow for rug-pulling of this magnitude which obviously results in net-negative outcomes for society as a whole.
> it's that the system that made mandatory the concept of insurance for a dignified, modern life
You're talking like this is some kind of conspiracy theory, when there's not really any other way it could work. Banks will not give you a mortgage without home insurance, because then it would be an unsecured loan against an asset which would be worthless, with them eating the loss, if the house was destroyed. That's not sinister: nobody wants to loan against an ephemeral asset. And car insurance is mandatory because if you hit somebody, causing a million dollars of lifetime medical bills, and you don't have insurance, you've just fucked their life over with no possible recourse.
What stops the bank from taking out their own policy and charging a higher interest rate on the mortgage to make up for it. Offer two interest rates: One rate for insured homes, one rate for uninsured homes. If that were offered, I'd definitely take the higher rate and choose to have the bank insure my home: Mortgage interest is tax deductible but home insurance isn't.
Nothing stops them, but lenders are not necessarily in the business of lending money for homes and then collecting interest for 30 years.
Lenders are mostly in the business of underwriting loans so that they conform to certain standards, such as those set by the government (fannie mae/ginnie mae/freddie mac/etc), and then selling them to the government after which their cash flows then get sold to investors looking for fixed income investments.
So it might be too much work to for little return to step outside of this optimized system and custom design a mortgage product, especially when the alternative is government subsidized mortgages whose interest rates you will not be able to beat.
>Mortgage interest is tax deductible but home insurance isn't.
Since 2017, 90% of US tax filers do not itemize, and so they cannot deduct home mortgage interest.
Due to the drastic increase in the standard deduction as part of 2017 Tax Cuts and Jobs Act. The standard deduction is scheduled to drastically decrease as of Dec 31, 2025, though.
Assuming the structure of the current economic system follows some kind of inevitable (natural?) law is part of why you are unable to reason beyond the logic of the markets we contend with today.
Markets have taken many different forms, have been entrusted with different sets of responsibilities to different degrees, over the course of economic history.
Perhaps it makes more sense now to develop a fiscal institution to run insurance than to continue to rely on a market-based solution.
Nothing in life is free. There must be balance. Regardless of whether an insurance company is public or private these bedrock issues of “can we remain in the black?” will remain. A “fiscal institution” that is losing money on claims will fail. Plain and simple.
Accounting is different when you're a government that issues its own currency. There is no such thing as losing "money" when such conditions exist. I didn't recognize the difference between fiscal and monetary policy until I appreciated this fact -- maybe it will help you too. The perspective then changes to losing domestic economic activity, which would surely occur if lives are ruined because their assets are destroyed before preparations have been made or eventualities prevented.
Well since your are the one proposing changes, what makes you think that a “fiscal institution” (whatever that is) would be more effective than the current market based solution. Don’t mention your feelings for extra credit.
What is your angle exactly? It's hard to understand the underpinnings of your perspective here.
Systems do sometimes collapse, but I would prefer to look at it as "we are smart enough to study these systems and act in the social best interest when failure is imminent or has already happened, and responsible enough to work to improve the society that makes our lives possible."
The world is physically changing. Weather patterns are shifting. Hot is getting hotter. Wet is getting wetter. Wildfires are becoming larger, more prevalent and more destructive. Sea levels are rising. Ocean temperatures are rising.
Parts of the world are becoming inhospitable for human life. We can try as we might to terraform and engineer against it but Mother Nature will win.
At some point as an insurance company or even whole industry needs to look at the data and assess whether the juice is worth the squeeze. These companies - despite marketing materials - don’t care about fixing your home. They are only interested in risk versus reward. When the operating environment becomes too risky you either raise prices astronomically (this is happening) or you pull out entirely because your customer base simply can’t afford it (this is also happening).
Regarding the stance that we are smart enough to outsmart these problems - I agree but also disagree. What do you do when all signs are pointing to no and the cost of potential solutions far outweighs any benefits? You cut your losses and move.
All the facts you state about the environment are true. But it makes zero sense IMO to make this an individual decision governed by the whims of the market and replicated anew across every single person. That is a purely reactive stance and, being humans, we can do better than that.
We are smart enough to be proactive about these sorts of things, and considering we already have such an apparatus called "the state" to use to our benefit, we can provide assistance to people to reinforce their homes or move when necessary (in a rote economic sense, to keep them net-positive productive, in the utilitarian sense; in a humanistically compassionate sense, to keep them dignified) instead of trying to guide systemic patterns of behavior by punishing individuals for making impossibly complex choices regarding where they chose to and already do live.
If enough insurance companies decide to stop doing business in Florida, Florida is welcome to create a state-run insurance company to serve its residents.
That's literally the apparatus of the state (in both senses of the word) used to the benefit of the residents. That may just have the effect of moving the problem from "my insurance premiums are too high" to "my taxes are too high", because at the end of the day, someone has to be paid to fade the risks inherent in insuring the property against perils.
In Florida Citizens is the largest homeowners insurance company and it competes vigorously with the private market.
The issue with Citizens is that it does create a lot of financial risk for the state, especially since it doesn't buy as much reinsurance as a private company would.
as opposed to the whims of a few unelected bureaucrats? influenced by the whims of the politicians trying to buy votes?
> We are smart enough to be proactive about these sorts of things,
no, "we" are not. Let's suppose you are, for the sake of argument. What reason is there to think that the sort of people who get appointed to regulatory bodies are equally smart? As opposed to just "well-connected."
People often forget that many dog breeds were bred for work - like alerting and defense.
If you have a 3 year old child crying in a restaurant, can you get mad at it? No. You can pat it on the back and take it outside to respect the space and other patrons, but you can’t get mad at a child for crying. Same analogy. Don’t get mad at nature doing nature things.
What they are really saying is that they can’t effectively model the risk.
Say you were an insurer… would you want to take risk for Florida hurricane losses knowing what we know?
If we want a functional insurance market in these places, we need a student loan type solution - make the Feds the reinsurer and have the insurance company mostly administer the policy.
Floridians who want me to shoulder the bill for insuring their beachfront property against hurricane damage can go to hell. Pay for the insurance yourself or move to a place where disasters aren’t common.
I live in Oklahoma. Contrary to popular belief, getting your house destroyed by a tornado is unlikely. But hailstorms are on the rise and roof replacements are becoming more frequent because of them. Insurance has gone up A LOT for everyone, regardless of insurer, and for me despite installing hail resistant shingles last time. I am wondering what happens when people here can no longer afford insurance even though these are not luxury second homes. My agent told me that Texas and Oklahoma are becoming the most expensive states to insure.
It's more that those states are becoming the most expensive to maintain intact houses in, with the increased insurance a side effect of that. I know someone in TX that has needed a new roof like 6-7 times in 10 years because of hail damage - the insurance company has been bleeding money on their house for a decade, but that's because the house has actually been sustaining significant damage every single year. The only answers to that over any length of time must be: 1) improve roofing so that they're not sustaining damage so frequently (even if it increases costs), 2) decrease the value of housing so much that replacing the roof out-of-pocket every year just becomes 'cost of doing business', or 3) stop living there because it's just intrinsically expensive. "Pay $1k yearly insurance and average $10k yearly damage" for a whole region is not going to last much longer.
I think I am paying 3500/year now, up from 2800. My house is on the larger side (4 bedrooms), so far, I've had 2 roofs (one on my prior smaller house) in 20+ years. For me it's been 1 roof every 10 years. But I know someone who got a roof replaced and it was immediately destroyed again by a second storm. I on the other hand, fought with State Farm for 6 months about some dumb piece of metal that was dented. So, while we got hit by the second storm and likely sustained more damage, it didn't matter.
It's becoming more difficult to find a place to live that does not have some potential issue, be it water, weather, heat, cold, earthquakes.... supervolcanos :)
That would be option 1 - I could easily see insurance companies saying that insuring a shingle roof costs 2-3x what insuring a metal roof costs, but then it's a question of who pays to replace an existing shingle roof with a much more expensive metal roof? The existing structure is insured for its replacement costs, not an expensive upgrade in the case it's damaged, but clearly current prices don't actually accurately reflect current risks.
Should be "easy" for the insurer to say "you get one more shingle replacement, then we dump you." At that point, the customer either buys a metal roof or moves. Market functioning correctly, no?
This is one thing I've never really understood about the market for insurance. Wouldn't the customer's best answer be, "OK, thanks for the new roof, I understand that you're dropping me, so I'll just switch to your competitor"?
And then wouldn't it be in the interest of the insurers to maintain a shared list of "bad" (unprofitable) customers and freeze them out? Which is already a bit of what credit scores are for?
Insurance companies handle this today by either refusing polices on uninsured homes, or pricing those policies much higher.
"Your previous insurer dropped you, there must have been a reason."
And, yeah, when applying for a policy, the questionnaire should include "have you filed a claim for X, Y, Z in the last 2 years?" Auto insurance does this already.
Yes, in fact I have that as part of my roof, mostly for looks, I guess. It obviously doesn't ever leak, but it did get banged up pretty good and insurance ended up replacing it because of that. Personally, I could get used to just having a dented-up but sound metal roof for 50 years, and some people here do that. I'm not sure what the effect is on their insurance rates.
It would likely be required by mortgage companies because a new roof is 20-30k on the low end. Otherwise the risk of losing their investment is quite high.
This is such an American reply and one that as a European, I find mildly amusing.
Where do you live that’s so safe and disasters are uncommon and aren’t on the increase?
Everywhere will have different risk factors, the American attitude seems to be ‘I won’t pay for anyone else, even if it means I ultimately will have to pay more’.
Remind me again what part of Europe predictably and regularly receives 160 kmh winds at the same time as 3 meter floods? Are you allowed to build wooden houses along the beach there?
If you build your house in an area like that and fail to build any sort of protection for expected conditions, why in the world should your losses be subsidized by everyone else?
When the cost of insurance for your beach house is too high, that is a signal that you are at extreme risk, not a signal that you should pass a law to make the rest of the country pay for the portion of the risk that you can’t afford.
The point is that "insurance at market prices" should be considered part of the all-in cost of the house, and that if you can't afford it, you shouldn't have that house. Surely even as a European you agree that if you can't pay $10 million for a house on the French Riviera, then you don't get to have a house on the French Riviera; once you conceptually include insurance into the total cost of the house, the exact same logic applies.
There are some kind of risks everywhere, but denying the fact the some places are dramatically more risky kind of misses the point.
Where I live, hardly any disasters - tornado about every 100 years, last time there was huge wildfires was just after WWII, zero risk of flooding - biggest 'risk' I have is being snowed in for a few days as I dig out - there are plenty of places that have a much lower risk profile - and people like me, that pick where we live based in part on the risk, shouldn't have to pay extra insurance to cover people who willing choose to live in low-lying, flood prone areas.
You’re quite right, but I’m not sure it’s a practical solution. While those are populous states, as someone not living in either it is not super attractive to start subsidizing people who choose to live in increasingly disastrous zones.
Yes, flood insurance and some other examples, but my objection isn’t based on platonic ideals of equally bad policy for everyone, it’s based on pragmatic ideals of not extending bad policy more widely.
Let the market price insurance. At most I might support a mandatory tax on profits that is set aside to cover exceptional future losses, kind of FDIC-like.
> it is not super attractive to start subsidizing people who choose to live in increasingly disastrous zones
At the risk of taking this down a political path, I'll take this a step further. States like FL who fall into this bucket are further aggravating as they are also the ones that espouse personal responsibility & small government.
I'm not personally against subsidizing these things. But I am against people screaming until they're blue in the face that they hate socialism and then cry foul when their insurance rates are too expensive for them to afford.
What does a small government ideology have to do with a private insurance company making a business decision? You're injecting politics because you don't like the politics of Florida as you see them, which is fine, but it doesn't really fit here.
When their insurance rates get to be unaffordable and/or their homes are destroyed without insurance the complaints tend to shift to being that the government should do something to help them out of the predicament.
I'm 100% fine with an individual choosing to not pay going insurance rates and choosing to live in a risky environment. I'm also 100% fine with that person eschewing the idea that government should be subsidizing anything. I'm 0% fine with such people coming back and complaining that the leopards ate their face.
There already is a federal program for uninsurable properties (for flooding only, I believe). They take whatever insurers reject. By my understanding, people just keep building on the same spot, even if it floods constantly, therefore they are a huge drain on the program.
I don’t see a solution honestly. With global warming large parts of the world will become uninsurable. And we shouldn’t expect insurance companies/the government to carry that burden just because someone decided to live there.
A lot of these people are stuck in the situation. While they can get flood insurance to rebuild the property, they can't afford to abandon the property, and they can't find anyone to sell it to. So they are in a cycle of rebuilding the property, waiting for a flood, then rebuilding it again.
There is a pretty obvious solution in my mind: The federal government offers homeowners a buyout for them to move out of that property. If they choose not to take the buyout, they are removed from the flood insurance program.
This would save the government a lot of money over time, even if they made the buyout significantly higher than the property value.
So rather than having insurance customers in other states subsidize Floridian homeowners so they can replace their property after damage, you'd rather have taxpayers in all states subsidize Floridian homeowners to buy out their homes? That's the same thing with extra steps, except now people who bought bad properties walk away with a nice bag of cash.
Eventually, we're going to have to abandon much of the vastly overpriced property along the seashore. Parts of Hollywood and Miami are already below sea level. We aren't willing to build the sort of dykes that one sees in Netherlands (homeowners will sue because it blocks their view of the sea), and we're too car-centric to let cities turn into Venice.
So we're going to buy those folks out anyway. This year, next year, 20 years from now. Eventually. It would be better to start now. New Orleans should have been abandoned already.
Why should we buy them out? Nobody forced them to buy beachfront property in the first place. If the property ends up being abandoned, it's abandoned, and the owner should lose their investment.
You're acting like a buyout is inevitable when it's not. The last thing we should do as a society is a multi-hundred-billion / trillion dollar buyout of beachfront hotels and luxury property.
> You're acting like a buyout is inevitable when it's not.
The wealthy beachfront property owners will point the media's cameras at the also-destroyed properties of the poor and elderly in the area, saying "How can the USA let these poor people lose everything!" We, the stupid taxpayers, will fall for it and bail everyone out.
I agree in an ideal world; but in the real world there is a 0% chance Obama is taking a loss on his Martha’s Vineyard property.
What the perso you are responding to is saying is that we should start in incentivizing people out of such properties now versus it happening over a longer period at a higher cost. Either way some people are going to probably have to move so we may as well get ahead of it
Personally I'd remove it from the National Flood Insurance Program. If the buyer can get a private company to insure it then the sale can go through. If the buyer cannot get a private company to insure it then the sale can only go through if they are not using a mortgage (mortgaged properties legally have to carry flood insurance). Couple this with plenty of disclosures so the buyer is aware they are taking on significant risk.
Yeah, we'd have to condemn the home as part of the process to avoid that. Or at least flag it as uninsurable, so any buyer would have to bring cash and be willing to eat a total loss.
I'm no free-market zealot, but in this case it seems like the market has spoken. They shouldn't live there!
Of course, there are ways to be humane about this, given that tearing people apart from their communities is bad for society. The government could taper off the program slowly, giving communities time to relocate. Or they could provide damage payouts with the stipulation that they are used to relocate somewhere else with lower risk, not rebuild in the same spot.
But to indefinitely subsidize building in doomed places? Doesn't seem right. I'm sure there's nuance I'm missing, happy to be enlightened.
I don’t think you are missing any nuance at this point.
If the amount of uninsurable properties is (comparatively) small, it’s way easier to throw some money at them and keep everyone happy. I think that’s the basic premise of the program.
Everything changes when, for example, a large chunk of South Florida becomes uninsurable or inhabitable, potentially displacing hundreds of thousands. I don’t think we have anything in place for that scenario.
People will always be willing to pay a premium to live near the ocean. There are some places where that premium will be too high except the very very wealthy - living on a barrier island - for example.
In order to enjoy living in places where nature exact a larger toll - near the ocean, on a mountain that gets dry and doesn't have a fire station nearby - homeowners will need to invest in hardening their homes, invest in buying more expensive insurance and will need to make sure they have the financial buffer to rebuild if their home is damaged by the weather.
As the ocean rises, we will need to move more inland.
I would think that the market would also adjust towards building more hurricane resistant housing like earthquake proof buildings in San Francisco and Tokyo
Read the act 1 section, or listen to the podcast. This has been tried and it's basically impossible in a capitalist system with local democracy.
https://www.thisamericanlife.org/762/transcript
That federal program is broke as a joke, and it generally comes with extremely high deductibles and poor payouts.
It’s easy for states to regulate insurance companies for political points, which you’re seeing in California and Florida. However, insurance markets collapse slowly and then very very quickly when the math stops working out.
The national flood insurance program shows one of the downsides with government participating in the private market (there are some plusses as well) - their rates were set too low, and that created a group of people who were politically motivated to agitate to keep them low. It's very hard to find the political will to raise insurance prices on those people, even though the majority of people/voters understand that it's a subsidy that doesn't make sense - first because its not fair, second because it encourages outsizes risk taking.
That federal program, even with high deductibles, completely subsidizes their customers at the cost of taxpayers. They massively underprice the hazards, at the taxpayers ends up being on the hook at the cost of people who decided to built
(and rebuilt) "their house on the sand"
Isn't the essence of pooled-risk insurance that a vast minority of policies will represent a disproportionate number of the claims in any given time period?
Yes. But not from the same group of people over and over again. At least not in the laissez faire style systems where the market would stop assuming uniform risk and increase insurance rates to the expected values based on the probabilities of the specific circumstance. In a dirigiste economy, state would choose certain social factors to protect and keep the distribution of costs uniform for the betterment of the whole society. But even in those systems, I am not sure we should have beachfront properties or similar as factors.
(Sorry about my lack of proper vocabulary and jargon in this comment, I seem to have forgotten all of my vocabulary relating to sociology and economics.)
> even in those systems, I am not sure we should have beachfront properties or similar as factors
If beachfront properties have substantial risks that inland properties don't (such as flooding from storm surge*), then not using is_beachfront? as a factor will end up being a subsidy to the owners of beachfront properties.
Which ends up being the issue with any insurance programs for the uninsurable. 100 percent of the time, it will end up being a subsidy to the policy holder. If it weren’t, they’d be insurable.
Exactly. And a market in general wouldn't ever create those programs themselves if they don't provide any direct or indirect profits. So these would be state directed.
I am not sure we have any disagreement anywhere. :)
> If we want a functional insurance market in these places, we need a student loan type solution - make the Feds the reinsurer and have the insurance company mostly administer the policy.
If the problem is stated that way, I think a lot of Americans are going to realize how little they care about Florida's insurance market.
Maybe you shouldn't have beachfront South Florida real estate if you can't afford the out-of-pocket cost to fix it when it gets wrecked from a hurricane.
Is that a controversial statement? Beachfront property is not a human right. If it's too expensive to insure, then it becomes available only to people who don't financially need insurance - or those who are willing to risk going without it even if they would need it financially.
I think you mean there is nothing that they would likely lose a suit over.
There is plenty to sue over. Statistically, are the laid-off employees older, more male/female, or more minority representative than the national workforce? Were any verbal promises of no layoffs or ongoing work made by anyone to any employee in those states? Do any municipalities in those states have unique notification other laws around layoffs?
Anyone can sue anyone for anything. If I sue you for emotional distress because I allege you like clowns and that bothers me, it will be thrown out (rightfully) more or less instantly. But a huge layoff at a national corporation? There will be thousands of nuisance suits and probably tens of maaaaybe suits given the complexity of state and federal laws.
I hate to be that person, but this is the future. Because of climate change, more of our country is barreling towards "uninhabitable".
It's not Farmers fault that we released too much CO2 and now wildfires and hurricanes are way worse and getting even more worse.
If the people of California and Florida want insurance so they can build matchbox houses in high risk disaster zones, then they can start a public insurance fund and pay for it with their own taxes.
From my understanding, this subsidy to people living in flood prone areas was basically untouchable due to Florida’s status as a swing state. I wonder if that has or will change due to Florida no longer being a swing state.
For sure insurance companies have a chance to act as a forcing function to drive better building codes, fuel management, etc. Those are hard things, especially for existing homes, but it's a simpler calculation for a homeowner to put $100k into a retrofit of it will save them $10k a year in insurance...
I've always wondered if insurance companies do this but maybe I never hear about it. Like lobbying for safer urban design, or R&D into flame resistant building materials etc. Or maybe just purely investing in companies that do those sorts of things.
RE: this is the future, what is the reasoning behind the sudden (post COVID it seems) squeezing of profit from everywhere? Seems like every business is pushing profit over employees or customers. Price gauging, layoffs, all of it without any reason besides "more profit". Why the sudden influx of greed?
Every business has always pushed profit. The only thing that changes is whether or not they have the negotiating power to get it.
These are operating margins, not profit margin, but page 7 should still give an idea for which businesses have more pricing power than others. And of course, bigger companies getting bigger means businesses might simply be gaining negotiating power overall.
That page of chart drives me crazy from an information visualization point of view.
All of those charts could [and should] have the same Y axis scaling, including being anchored at 0% at the origin, and the information would be much more easily consumed at a glance.
I'm not sure it's particularly sudden influx, but rather a reaction to economic conditions changing. When money is cheap, economies are expanding, and the equity markets are going gang-busters as a result (from late 2009 [or maybe back to late 2002] through late 2021), it's a relatively easy environment to borrow to expand your business [as an operating company] or to engineer returns to shareholders above the risk-free investment alternatives [as a financial company].
Now, risk-free investments (such as a 30-year US Treasury) are yielding 3x what they yielded just 3 years ago. That dramatically changes the calculus when considering whether to invest in a risk-free or a risk-on asset.
To me, it would be weird if companies acted the same way in such a different environment rather than weird that they act differently.
Inflation has a lot to do with it - wasn't long ago huge tracks of houses in Florida could be had for $250K - now a lot of those places are selling for close to $1M - if a company has a lot of those, their risk has quadrupled.
> the people of California and Florida want insurance so they can build matchbox houses in high risk disaster zones,
This has always been the case in Florida. Insurance simply costs more to compensate for risk. Flood insurance is separate in the US (and very costly).
California might have more to do with the regulatory and legal environment.
> now wildfires and hurricanes are way worse and getting even more worse.
What happened to the climate/weather distinction? So, every hot day and hurricane is evidence if the earth warming? Every cold day and blizzard is a temporary local weather event, not indicative of the long term trend?
> What happened to the climate/weather distinction? So, every hot day and hurricane is evidence if the earth warming? Every cold day and blizzard is a temporary local weather event, not indicative of the long term trend?
> All I see in the article is the discussion of "profits".
> I would think the PR department could come up with something about "trying to keep costs competitive for our customers" or something like that.
Keeping pricing competitive and staying profitable are both things that a business has to do when it doesn't have a monopoly (or oligopoly). It can't stay profitable for long while losing customers, and it can't keep customers w/o having competitive pricing (or quality). It's a tight rope to walk. Which of these they talk about will depend on what audience they are talking to.
I am the CEO of a tech company that provides homeowners insurance in hard to insure places.
I don't think it's really a bad thing for a company like Farmers to cut costs. Insurance companies are by and large pretty bloated from a cost perspective and could do to be more efficient, reduce overhead, use more technology.
It's very common for homeowners insurance companies to have expense ratios of 30-40%. So if you are paying $3000 per year thats ~$1000 EVERY YEAR that is being wasted on branches/agencies you don't visit and corporate overhead.
Could this also be as a result of cancelling policies in certain states? For example, withdrawing from Florida means an entire FLorida team/department is no longer required or in as much quantity.
Speaking to folks I know who work at Farmers, it's a mix of both. There are non-California and non-Florida working employees who were also laid off. No idea on the exact spread but it's not negligible.
You pay for talent. A business at this level is an entity that provides value to a lot of customers, and creates an ecosystem of velocity of cash flowing through employees families, vendors, suppliers, investors, etc.
Cutting officer salaries would accomplish little, except accelerating talent loss.
Man those SaaS products are so expensive, cut those programmers salaries - might be a corollary.
> overly generous executive pay ... it costs me money
But how can you prove that? The very justification for generous executive pay is that you couldn't get most people to do that role because it's so demanding and without these particular people, revenue/profits would tank. (slight exaggeration, but I don't think by much).
> The very justification for generous executive pay is that you couldn't get most people to do that role because it's so demanding
That's also my justification when I eat a second bowl of ice cream. Surely nobody else will want this ice cream. I guess I'll just have to eat it myself.
Overly generous is by definition excessive, not everyone paid at or above market rates is worth it. Someone making 5 million a year could actually be worth the money. So, it’s not a universal failing at every company, but there’s many examples of such things happening.
Private equity is much maligned, but it has turned around some failing companies by gutting upper management then having a new IPO which worked out fine.
It'd be great for investors if the top positions were paid mostly / entirely in stock. That way we can entice a good CEO with high pay and our interests will still align.
Paying people with stock is more expensive than paying with cash because of the uncertainty involved. Executives adjust for risk premiums just like anyone else.
Further, suppose you setup long term options and the stock tanks for something completely outside of an executive’s control. They aren’t going to sit around waiting for useless options to vest so you need to increase their compensation package to keep them. Thus they aren’t taking the same risks as investors.
"Work" is not measured in hours or effort put in. If it were, it'd be absurd for CEO's to get paid as much as they do.
Instead, "work" is measured exclusively by output. How much happier is the customer now that you've done your work? How much of that happiness translated into an actual transfer of resources from the customer to the company?
Seen through this lens, it's obvious that a couple of smart decisions at the top can easily outweigh years of grunt work by thousands of employees.
Now it's just a question of getting the best decision makers and leaders into the top positions so as to maximize overall value creation. But that's much, much easier said than done.
I'll assume you are arguing in good faith, but I doubt it, considering your tone.
I did not say anything about a leaderless company. I said that the current perceived value of C-suite contributor is way over-inflated. That culture can and should change.
Ok, let's look at how a bad CEO can affect a company. When Zuckerberg decided to pursue the Metaverse, he took Meta's market cap from $1.1T in September '21 to $244B in October '22. 1 year, $850 billion in value destroyed. So, it should be clear now that one person can have a lot of power over the business. How much should they be compensated when they wield that much power? I'm guessing you think it's less than $1M per year.
I don't have a number in mind, my feeling is directional.
I also don't think compensation is the only/best tool to prevent or punish bad decsion making. There have been cases where developer/dba have put companies out of business with a poor decisions. We don't pay them millions of dollars to 'get the best' we put processes in place to prevent issues like that. Otherwise, I'd suggest doing the same thing to the bad CEO that you'd do to other employees: fire them. That's why you have a board.
A major example of this was the decline of Intel (that they are trying to reverse) that was driven by an inane diversion of $$ by accountants who spent billions on 'share buybacks' instead of R&D = the inexorable fall from grace.
I have never understood this buyback philosophy and spoke against it(my whispers in a hurricane). It was done to increase the share price - it failed, buckets with no bottoms are hard to fill.
Intel now has the chips program they now hope will fill the bucket - they should spend more on the bottom. TBF to Intel, they have stopped the BB and have (hopefully) repaired the bucket and might regain their lost stature. I see another bad act in the form of patent 'mining', a high brow form of trolling.
> I have never understood this buyback philosophy and spoke against it(my whispers in a hurricane)
Buybacks come from net income (profit). A business always has a choice of using the profit to pay the business’s owners (via dividend or buybacks) or to invest it back into the business (such as spending on R&D).
Obviously, what portion of the profit is ideal to spend on R&D and what portion of the profit to pay to owners is not an objective truth.
And buybacks are nothing special, except that they allow more flexibility in how to reward the owners.
Never confuse the textbook economics with the reality of individual incentives. Company management used the low interest rate environment of the recent past to borrow money that was then used in buybacks. Executive management generally is in a no-lose situation with regard to compensation, there may be long-term incentives, but the CEO generally can exit within the term of their employment contract with a sizable payout even if they blow up the company. The board is supposed to prevent such tactics, but US corporate governance is largely about cross-pollinating memberships so that CEOs can all vote 'yes' on each other's pay packages.
Due to inflation people with large amounts of capital have little choice but to invest somewhere. Ultra safe bonds are also ultra low yield which limits options.
The alternative to buying a business that has borrowed too much and hence will have poor return on investment is to not invest in the business. It is always a choice to take more risks than the bare minimum (i.e. buying USG debt).
If a business borrows money, and people still buy the shares, then that means people are willing to bet the amount borrowed will still allow for a sufficient return on investment. So where is the problem?
US government debt is only safe in that it guarantees a small loss. It isn’t an option for say a retirement fund looking for a long term income stream. Money has value, but for an hedge fund or wealthy individual it’s also a hot potato they want to trade for something else.
> If a business borrows money, and people still buy the shares, then that means people are willing to bet the amount borrowed will still allow for a sufficient return on investment.
The problem isn’t with the company but with the market. Sure the value of those companies adding debt drops with the reduction in their expected ROI but that’s not the end of the story because you need to consider how that money is reinvested.
Suppose the S&P collectively borrowed 10 trillion dollars doing this. Each company that takes part is as you say a worse choice, but the overall market is now inflated with this money so everything becomes a worse investment simultaneously. Which then sends some money back to the original companies who issued dividends/ buybacks with borrowed money.
>US government debt is only safe in that it guarantees a small loss.
Yes, that is what safe means. Risk and reward. Reward without risk is simply expanding the supply of money, aka inflation, aka reduced purchasing power of the currency.
>Suppose the S&P collectively borrowed 10 trillion dollars doing this. Each company that takes part is as you say a worse choice, but the overall market is now inflated with this money so everything becomes a worse investment simultaneously. Which then sends some money back to the original companies who issued dividends/ buybacks with borrowed money.
If everyone did it, then it is not a "worse" investment, it is simply keeping up with the reduction of the currency's purchasing power (e.g. all businesses taking advantage of covid stimulus). But it is a nonsensical premise anyway, since there are insufficient lenders to lend the S&P $10T, and the limited number of lenders will, on average, do due diligence when lending, even to S&P companies.
Anyway, back to the point was hand, which was refuting yborg's claim that business leaders can just borrow willy nilly and pay themselves via gains in stock price via buying back shares.
The only situation this happens is when the business has large stockpiles of cash saved abroad, and so instead of bringing it into the US and having to pay taxes, they are able to borrow money at near 0% interest rates because lenders know they have such huge stockpiles of cash abroad and healthy cash flows. Delaying tax liabilities is simply the logical thing to do when the government has set fiscal policy such that you can find lenders to lend to you at near 0% interest.
The US Bond market is $52.9 trillion and the S&P has a 37 billion dollar market cap. This isn’t the kind of thing that could happen in an afternoon, but it’s not as crazy as you might think.
Lending like this shouldn’t change purchasing power for real world goods much, the point is it specifically impacts investors.
> Anyway, back to the point was hand, which was refuting yborg's claim that business leaders can just borrow willy nilly and pay themselves via gains in stock price via buying back shares.
Sure, but my point was what happens to individual companies is different than what happens to markets. If half the companies on the S&P did this then the other half would see a small price spike. The price spike in other companies would also increase the valuations of companies that borrowed, not by enough to fully offset the borrowing but still more than zero.
Borrowing isn’t required here, if Google issued a dividend for the majority of it’s reserves a significant fraction of that money would get reinvested in stocks and a small fraction of which would go back to Google.
I would think the PR department could come up with something about "trying to keep costs competitive for our customers" or something like that. Instead they're telling California and Florida customers to take a hike ... along with 11% of their employees.
When is the last time we heard a company enact a company-wide, 50% cut in officer's salaries and a freeze on their compensation?