I forgot to add the following point to my podcast. Critics of allowing insurance prices to float argue that the industry isn't competitive. At the end of my talk, I discussed barriers to entry that limit competition. I bet that most of these barriers are based on Regulatory barriers. In our "fintech" age, why can't non-insurers insure properties?
The second point I want to make pertains to "fairness". The Los Angeles Times would love to publish a story about how an elderly couple can't afford their higher insurance prices in their fire prone area. Are they victims? My answer is the following (and I'm doing new research on this topic).
In our emerging "convex" economy, why can't this couple either take out a 2nd mortgage on their home and cash out some of their equity to pay for their more expensive insurance OR why can't this family sell 20% of their home to a private equity investor? These "funky" contracts protect the homeowner without distorting market price signals.
You're exactly right: the regulatory barriers to entry are a significant contributing factor to the lack of availability. Exhibit A is the regulatory review that risk models are subjected to. No insurer wants to bear the cost in time and money to get a new risk model through the regulatory review process because as soon as they do, all of their competitors can then use that same model.
As a result, the Nash Equilibrium for the number of models approved for use in CA is ~2, and this leads to models that everyone in the industry know aren't accurate being used to set rates.
However, most insurers use multiple models for underwriting purposes and to inform them of the actuarially sound rate (underwriting and pricing are related, but separate disciplines).
Many states are "file and go" where insurers must file but can change rate plans easily. Unsurprisingly, they pay more for property insurance but generally find it easier to obtain and have more options to choose from.
I forgot to add the following point to my podcast. Critics of allowing insurance prices to float argue that the industry isn't competitive. At the end of my talk, I discussed barriers to entry that limit competition. I bet that most of these barriers are based on Regulatory barriers. In our "fintech" age, why can't non-insurers insure properties?
The second point I want to make pertains to "fairness". The Los Angeles Times would love to publish a story about how an elderly couple can't afford their higher insurance prices in their fire prone area. Are they victims? My answer is the following (and I'm doing new research on this topic).
In our emerging "convex" economy, why can't this couple either take out a 2nd mortgage on their home and cash out some of their equity to pay for their more expensive insurance OR why can't this family sell 20% of their home to a private equity investor? These "funky" contracts protect the homeowner without distorting market price signals.
Have you read this book?
https://www.nytimes.com/1997/10/12/books/the-high-cost-of-owning.html
You're exactly right: the regulatory barriers to entry are a significant contributing factor to the lack of availability. Exhibit A is the regulatory review that risk models are subjected to. No insurer wants to bear the cost in time and money to get a new risk model through the regulatory review process because as soon as they do, all of their competitors can then use that same model.
As a result, the Nash Equilibrium for the number of models approved for use in CA is ~2, and this leads to models that everyone in the industry know aren't accurate being used to set rates.
However, most insurers use multiple models for underwriting purposes and to inform them of the actuarially sound rate (underwriting and pricing are related, but separate disciplines).
Many states are "file and go" where insurers must file but can change rate plans easily. Unsurprisingly, they pay more for property insurance but generally find it easier to obtain and have more options to choose from.