In the world of insurance, the idea is to collect lots of premiums and hopefully pay out little. If there is a payout, the avenues of re-insurance are there for companies to hedge their losses to a wider and potentially wealthier group of companies. The people who determine the policies, we all pay are called actuaries who have degrees in actuarial science – the discipline that applies mathematical and statistical methods to access risk. For most of us know, have low insurance rates, not collect against accidents to keep low insurance rates, but because of various law regarding use of the automobile and having a mortgage, insurance payments never go away.

Natural disaster are the worst thing for an insurance company, because it is nature everyone should be covered, if everyone is covered expenses quickly rise. The issue is what happens after the disaster has gone and rebuilt has started and life returns to normal. Changes in rates can happen.

In an article by Andy Sullivan of Reuters, the wildfires in Los Angeles affected all aspects of the city including the wealthier areas. The Pacific Palisades is one of the most expensive neighborhoods in the US, it was also one of the most affordable insurance costs in the country. Reuters examined insurance and real estate data to come to the conclusion.

The scale of the losses anticipated, changes in regulatory issues, and now that a wildfire has gone through the neighborhood – the risk of another likely will send insurance premiums upwards.

Philip Mulder, an University of Wisconsin professor noted measured against home values, insurance costs were cheaper in the Palisades than in 97% of US postal codes.

This relatively low-cost insurance was from consumer-friendly regulations in California kept a lid on prices, but the insurance companies have been scaling back the coverage they offer.

Sangmin Oh, a finance professor at Columbia School of Business and other researchers found that homeowners in more loosely regulated states effectively subsidize homeowners in states such as California where the industry is more regulated, despite the risk levels.

Homeowners in Pacific Palisades paid a median insurance premium of $5,450, according to data complied by Dr. Mulder and Dr. Keys of Wharton. The amount is less than residents paid in Glencoe, near Chicago. It was also less than those in paid in New Orlean’s Ninth Lower Ninth Ward.

In California, consumer-friendly policies led to price controls which limit price increases. The insurance companies are struggling to make a profit and 7 or the largest 12 insurance companies have paused new policies. In addition, 1.72% of policies were dropped in 2023.

The alternative is a state-run insurance which provides bare-bones policies. More than 450,000 homes were covered by the California Fair Access to Insurance Requirements plan in September, 0 40% increase from a year earlier. The fund is administered by the state but funded by insurance providers.

Linking to dividend paying stocks, some of the big insurance companies have been a wonderful investment, but as there are more natural disasters, the profitability falls. In a natural disaster happens all classes of insurance are hit, will rates increase and coverage become more barebones? can companies raise rates to ensure margins?

There are more questions than answers, till the next time – to raising questions.