The just-started fight over how and how much to pay for houses destroyed or damaged in the extensive and still-burning Los Angeles foreshadows yet another ratchet down in living standards for Americans. The notion that it is economically and politically unworkable to insure against climate change is just starting to take hold in the business community. But the immediate focus still seems to be on how to tinker with insurance, as in how to preserve the private insurance industry, as well the related issue of how not to have government budgets at various levels consumed by the costs of socializing these risks. And so the current fights are over who will bear costs, as opposed to trying to deal with systemic issues, such as how housing in many markets was already unaffordable to many due to neoliberal, rentier-friendly policies.
Forgive me for using a new article by Greg Ip at the Wall Street Journal as a barometer of what I call “leading edge conventional wisdom,” here among the finance executives and finance-connected policymakers. Ip for many years was the Fed reporter for the Wall Street Journal and was influential, seen as preferred outlet for the central bank’s thinking. After a stint at the Economist as its US economics editor, he returned to the Journal as its chief economics commentator. I think of him as banking’s answer to the Washington Post’s spook whisperer David Ignatius.
There’s an underlying incoherence to the Ip article, The World Is Getting Riskier. Americans Don’t Want to Pay for It. While he does a good job of setting forth many of the parameters of the problem, of climate change plus high real estate costs translating into loss exposures that are buckling and look likely to break the current insurance, model, he averts his eyes from what is sure to follow next. On the real estate front, high cost and/or thin coverage insurance will translate into much more stringent, as in generally much reduced levels of lending against property. That means lower real estate prices, which is a loss of wealth. This isn’t just at the individual level; think of all of the public pension funds and insurers (!!!) invested in real estate funds and public REITS. Even more telling, dean of quantitative investment analysis Richard Ennis concluded that the reason stock and real estate prices have become more correlated is that public companies have substantial real estate exposure, with the market value of owned real estate representing as much as 40% of the value of US traded equities.
What is disconcerting is that Ip rolls together other areas in which risks have been more and more socialized to argue that they will in the end need to be restricted somehow, specifically banking and health insurance. In the banking arena, the proximate cause goes back to the blatant Obama-Geithner-Bernanke failure to implement tough regulations in the wake of the global financial crisis. To remind readers, the US was in such a panic when Obama took office, and eager for strong leadership, that he could have made FDR-level reforms but instead chose to preserve the status quo ante as much as possible. An example: the extension of guarantees to money market funds on the same basis as banks, which pay deposit insurance for that privilege, should have been rolled back over time to a modest level, like $25,000, and the funds should have been charged FDIC-like fees for the privilege.
Instead, Ip cites the bailout of uninsured depositors in the Silicon Valley and Signature Bank as proof of the over-socialization of risk. Here I agree, but Ip fails to explain what went on. The uninsured depositors in both institutions consistent substantially of very connected individuals (why they had such big balances at banks as opposed to in Treasuries is beyond me, since these customers were typically sophisticated investors and/or had financial advisers), so this was a politically-driven rescue. The press misleadingly made much of companies that have to hold large balances at banks, if nothing else right before they issue payroll checks, when they could have been bailed out separately. Moreover, it is just about never mentioned that the Fed once offered accounts to banks for precisely this purpose, assuring the safety of funds on deposit for payrolls, but lobbyists got the Fed out of that business.
On the health insurance front, Ip is even more misleading. Nowhere does he acknowledge that the US has uniquely expensive healthcare. Here in Thailand, with GDP per capita of only $7,000, a visit to a doctor is 30 baht ($1) in a Thai hospital (nearly all doctors practice out of hospitals). Another indicator: rabies shots are famously expensive in the US. Here they are cheap, and I am told about half the Thais have had them (due to the large number of feral dogs around temples). And health care is considered to be high caliber by global standards due to the monarchy having made it a priority. That is likely a contributor to Thais now having a higher life expectancy than Americans.
So the high cost of insurance here is due to the supersized cost of medical care, which in large measure to neoliberalism and looting, such as allowing drug companies to advertise drugs on TV, which substantially contributes to pharma companies spending more on advertising than they do on R&D.
Yet Ip tries to sell the idea that evil Obamacare is the cause:
In fact, long before that [Luigi Mangione] shooting, the Affordable Care Act had constrained insurers’ ability to base premiums on risk, by prohibiting them from charging more to people with pre-existing conditions or denying coverage altogether.
The ACA also stipulated that insurers spend at least 80% to 85% (depending on the plan) of premiums on benefits. So while denials, deductibles and copays may, at the margin, affect profits, ultimately they serve to control premiums.
Help me. When the ACA was passed, the stock prices of insurers went up. That is because they were allowed LOWER benefit payouts relative to premiums than was prevalent at the time (90% was the norm then). And as most Americans know, Obamacare plans regularly offer thin networks and have such high deductibles so as not to qualify as what most think of as health insurance, but instead high-cost catastrophic coverage plans.
In addition, not only are Obamacare plans attractive for insurers, but they also represent only a comparatively small portion of the insurance market.1
But with this detour to establish where Ip is coming from, let’s turn to the main event, his take on Los Angeles and the looming problem of climate change damaging real estate on a widespread basis. From his story:
The latest example is California. Earlier this month, JPMorgan estimated the fires around Los Angeles had inflicted $50 billion in losses, of which only $20 billion were insured…..
Hundreds of thousands of homeowners shifted to California’s state-run backstop, the Fair Plan, whose exposure has tripled since 2020 to $458 billion. It has only $2.5 billion in reinsurance and $200 million in cash.
Ip does not source his claim about the FAIR plan. Other sources confirm the general picture is dire, but Ip seems to be over-egging the pudding. From the Los Angeles Times over the weekend:
Forking over billions of dollars could wipe out the plan’s $377 million in reserves, as well as $5.78 billion worth of reinsurance the FAIR Plan announced Friday it had. The reinsurance requires the plan to pay the first $900 million in claims and has other limitations.
“Reserves” and “cash” are not the same thing (FAIR can presumably sell assets to monetize more of its reserves” but the Journal under-reporting the reinsurance total is a serious lapse. The LA Times story usefully points out that most of the destroyed Los Angeles homes did not have insurance through FAIR, although its figures are number of homes, and not insured value:
Based on preliminary estimates released Friday, the plan said that it has insured 22% of the structures within the Palisades fire zone as defined by Cal Fire, giving it a potential loss exposure of more than $4 billion. And it has insured 12% of the structures in the Eaton fire zone, giving it a potential exposure there of more than $775 million.
So far, the plan said it has received 3,600 claims but expects that number to grow and has boosted staff to handle the volume. It said it typically receives claims representing 31% of its total exposure, but its actual losses can be different.
But either way, FAIR is set to be hit with more in claims than it can pay out. So what happens then? Again from Ip:
If the Fair Plan runs out of money, it can impose an assessment on private insurers to be partly passed on to all policyholders. In other words, the costs of the disaster will be socialized.
Notice the argument that follows:
A central feature of insurance is risk pooling: The combined contributions of the community cover the losses incurred by members of the community in a given year.
Another feature of private insurance is actuarial rate-making, that is, calibrating premiums to the customer’s risk. That’s to prevent “adverse selection,” in which only the riskiest people buy insurance, and moral hazard—the tendency to encourage risk by undercharging for it.
But some activities or individuals are so risky they could never obtain, or afford, private insurance. That’s when risk gets socialized. The federal government’s expansion since the 1930s has largely been through the provision of insurance: Social Security, unemployment insurance, health insurance for the elderly and poor, deposit, mortgage, and flood insurance and, after Sept. 11, 2001, terrorism insurance.
In other words, the coming climate change crisis, which indeed IS uninsurable, is serving to make an argument against all sorts of government provided guarantees, many of which would be affordable if properly run (start with Social Security, where the easy fix is raising the wage cap on payroll taxes, unemployment insurance, and deposit insurance, which is underpriced, albeit allegedly not severely).
A new article in Dissent by Moira Birss and MacKenzie Marcelin describes how the slow motion collapse of homeowner’s insurance is further along in Florida:
Florida’s political leadership has attempted to address these problems with market deregulation and financial incentives. Several public institutions also help to prop up the private insurance market, including Citizens Property Insurance Corporation, a nonprofit public company created as an insurer of last resort in 2002, and the Florida Insurance Guaranty Association, a state-run fund that pays policyholder claims in the event that an insurer goes bankrupt.
Despite these efforts, Florida is having trouble retaining large, national, diversified insurance companies, which are more financially stable and often more affordable…
Without this ability to spread risk, small insurers are much more dependent on transferring financial risk to other entities, like reinsurers (insurers for insurers), the costs of which they then pass on to consumers. And consumers in Florida are paying the price: homeowners insurance rates in the state are the highest in the nation, averaging over $10,000 per household per year. In some counties, people are paying over 5 percent of their income on policies with Citizens.
Despite these problems, Florida’s politicians have continued to prioritize creating favorable regulatory conditions for private insurers. One way they’ve done this is to impose a “depopulation” mandate on Citizens, meaning it must force some of its current policyholders off its plans and onto private plans, even if those plans are more expensive. Despite this, Citizens is now the largest insurance company in the state….
Policymakers in the state have responded with measures to raise Citizens’ premium rates and further encourage depopulation…
To address this issue, state leaders have permitted Citizens to levy emergency fees on nearly all statewide property insurance policies for as long as is required to repay debt. This means that a serious financial loss for Citizens and other Florida insurers could result in additional fees for residents already dealing with a catastrophe. The Florida Hurricane Catastrophe Fund (a state-run provider of insurance for insurers) and the Florida Insurance Guaranty Association are backed up by yet more emergency fees on policyholders, meaning they could face multiple stacking fees during a devastating hurricane season.
Unlike most pieces on this coming train wreck, the Dissent authors Birss and Marcelin are so bold as to propose a remedy. It’s impressively comprehensive, and could go a fair distance towards alleviating the severity of the coming train bearing down on large chunks of the built environment. But it does not acknowledge that a lot of communities should be relocated in full sooner rather than later, something societally we are not set up to do.
And as you can see, it suffers from other versions of the classic Maine problem, “You can’t get there from here,” starting with who will pay and how to get buy-in to the massive new government powers that would be necessary. We’ll excerpt a few paragraphs to give readers an idea:
If we want different outcomes, we must reimagine our disaster risk finance system so it reduces risk and provides protection fairly. That’s why we propose a new policy vision for home insurance in the United States: housing resilience agencies (HRAs). Given that insurance markets and much risk reduction and emergency management are regulated and managed at the state level, our policy proposal focuses on state- and territory-level implementation.
State HRAs would have two primary functions: to coordinate and oversee comprehensive disaster risk-reduction activities, and to provide public disaster insurance that offers equitable protection. An HRA in Florida, for example, might implement a roof-strengthening program in the historically Black Miami neighborhood of Liberty City so homes are better protected against hurricanes, and then provide affordable insurance for those same homes.
HRAs would coordinate and oversee comprehensive disaster risk reduction to limit damage before disasters strike. As such, HRAs would play a key role in land use policy by developing, implementing, and enforcing building codes for preventing construction of new housing and other infrastructure in high-risk areas, like easements or setbacks along coastal and other flood-prone areas. Such restrictions are essential to ensure that the rich don’t get to keep building in beautiful but risky areas and then demand disaster relief paid for with public money.
HRAs would also carry out holistic, community-oriented risk reduction and decarbonization for existing housing that would combine structural fortifying measures with energy efficiency updates. And they would institute comprehensive, science-based, equitable, and democratic mechanisms to proactively protect people at the greatest risk of disaster by supporting them in relocating to safer, affordable housing.
Even with all these risk-reduction measures, disaster insurance will still be necessary. And it is public disaster programs that provide the best way to spread the risk of unpreventable disasters and ensure equitable access to post-disaster recovery funds, all without the rent-seeking of private insurers. Coverage would be available for homeowners, renters, mobile-home dwellers, and affordable housing providers. Private insurers would still provide the standard policies that cover things like kitchen fires and burglaries, but the HRA would provide disaster insurance for all—a kind of Medicare-for-All system for home insurance.
Please read the article in full, since it has considerably more informative detail on developments in Florida. Despite the disaster in Los Angeles, Florida is the canary in the coal mine as far as home insurance “adaptations” to climate change are concerned.
But as for the remedies Birss and Marcelin propose, if we lived in a world where solutions like that were possible, we would not be in this mess in the first place.
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1 From Census.gov. The “direct-purchased insurance” category is overwhelmingly Obamacare but there are some like me who have oddball non-Obamacare direct-purchased policies:
- In 2023, most people, 92.0 percent or 305.2 million, had health insurance, either for some or all of the year.
- In 2023, private health insurance coverage continued to be more prevalent than public coverage, at 65.4 percent and 36.3 percent, respectively.
- Of the subtypes of health insurance coverage, employment-based insurance was the most common, covering 53.7 percent of the population for some or all of the calendar year, followed by Medicaid (18.9 percent), Medicare (18.9 percent), direct-purchase coverage (10.2 percent), TRICARE (2.6 percent), and VA and CHAMPVA coverage (1.0 percent).
