Two recent articles in the Sacramento Bee give rise to the discussion of an insurance company’s public responsibility vs. the need to be profitable in its operations: “As California Burns in December, This Legislation Could Protect Homeowners” and “Property Owners in High Risk Fire Zones Should Pay More for Fire Insurance.”
With the recent wildfires in various parts of the nation, insurance companies are having to take a hard look at the role they are to play moving forward. If they are to be profitable, some alternatives are:
- cancelling policies in potentially high risk
- raising premiums for policyholders in those affected areas, excluding the peril they are most concerned with from coverage and building into their rate structure those potential losses
- requiring all their insureds to bear the additional expense.
An article dated December 26, 2017, written by Jennifer Montgomery, Chairwoman for the Placer County Board of Supervisors, and published in the Sacramento Bee, announced she had introduced The Wildfire Safety and Recovery Act. This act in California would help protect responsible homeowners from significant insurance rate rises or cancellations due to wildfire risk.
It appears this legislation was borne out of the concern that even though people had taken preventative measures to protect their homes in the event of wildfire, insurance companies had doubled, tripled, or cancelled policyholders. What principle of doing business should allow an insurance company to act in this way? The principle is, the insurance company raises its rates at its own peril.
This response has to do with the free market we are so blessed to work in. Let me explain.
Somewhere along the way, a group of investors saw a void in the marketplace and formed a company to fill that void. They established a business model which would allow them to fill that void and at the same time allow them to make a profit on their risk. When something happens in the marketplace which changes the business model, the investors have a right to adjust to that change so they can still reach their financial objectives. In a purely capitalistic market, they have no obligations to bear the brunt of changing societal needs. It does become a balancing act between finding a way to stay profitable in the marketplace, and leaving the marketplace and investing elsewhere. Since no insurance company has a monopoly on the market and competition plays such a major role in the marketplace, legislation establishing rates is an overreach of government. The marketplace will adjust and govern itself. Where one company sees a circumstance as a liability to its operations, another finds it to be an opportunity. Case in point is the Chubb Insurance Company forming defensive fire teams in California where they send two men teams into high risk areas to do preventative actions prior to a fire reaching the area. They clean away flammable materials, clean gutters, close up vents, and install water sprinklers in homes where the insured has opted into that service. Chubb has found this preventative action less expensive than the expense of the devastation of a wildfire. Will others follow? Wait and see.
Having expressed the above, there are some actors whose reputations are less than stellar and the buying public needs some protection against unscrupulous business practices. Every state does have a department of insurance charged with that oversight ability. They review business practices, analyze rate structures, and handle complaints. They should not micromanage any one particular company or favor one above another.
In summary, passing legislation which does not allow the insurance company to consider the true costs of the risk they face opens the door to governmental takeover in the form of subsidies. The insurance industry does not have the luxury of running in the red; so when its reserves are exhausted because real life risks cannot be properly accounted for, we can expect taxes and other financial regulations to be imposed upon one of the miracles of our capitalistic systems. The insurance industry will continue to meet the need to be publically responsible while maintaining profitability as long as it is left to reasonably govern itself. (These thoughts were influenced by article written by Brian Adams, “Property Owners in High Risk Fire Zones Should Pay More for Fire Insurance,” Sacramento Bee, December 26, 2017.)
image credit: https://www.cnbc.com/2017/10/10/apocalyptic-images-from-the-deadly-fires-in-northern-california.html