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.
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.