When Insurance is Important
Affordability and availability are a must
In the past year, I have witnessed how insurance markets can disrupt life plans. A buyer of a first home in Houston cobbled together enough money for a downpayment, tolerated 7% APR 30-year mortgage rates, and was heading toward closing with the requirement to secure homeowners insurance. Went to their Farmer’s agent and was quoted $10k for a year of coverage on an $800,000 dwelling. He called USAA because his wife had familial access and was told “no,” given the street address and an old roof, a cosmetic problem for the insurer in a windstorm-prone part of our world. Insurers don’t like their version of a catastrophic peril: a single event can cause the insurer multiple claims. Home fires are typically independent events, which insurers can easily manage unless the potential fire risk is uncontrollable. Population centers promise insurers revenue. However, they bring risk, and insurers cannot conveniently diversify if the insurer’s insurer, a reinsurer, doesn’t want to play because of how they perceive the risk.
Wildfire risk isn’t an independent risk event and is a problem in California. If you own a home in a remote location surrounded by the beauty of coastal hillsides, good luck finding coverage at a price you would deem reasonable. Even a Silicon Valley executive with a 7-figure vacation home on the Central Coast pukes at the thought of a six-figure annual premium. “Let’s sell,” is a thought. But, there isn’t much market depth among the rich, much less when insurance availability throws a potential buyer toward self-insurance. Wealth makes individuals more risk-tolerant but doesn’t make them risk-loving. Generally, people are rational, and living where insurance is available and affordable is good decision-making.
Chapter 8 begins today, the first of three installments over the coming weeks that complete Economics-Based Personal Finance. “Risk, Risk Management, and Insurance” focuses on protecting your highest, sustainable living standard.
Today: Risks, how to identify them, and how to manage them using a nifty conceptual device called a “risk matrix.”
Excerpt:
