In my previous post on wildfire, D4P argued that government should require the use of nonflammable roofs and other firesafe practices on homes near wildfire-prone lands. I responded that this should be left to insurance companies.
It looks like the insurance companies are taking care of the problem. “Spooked by devastating wildfire seasons, the nation’s top insurers are inspecting homes in high-risk areas throughout the West and threatening to cancel coverage if owners don’t clear brush or take other precautions,” says the Associated Press.
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What is changing? Katrina, 9-11, and other disasters have forced the insurance industry to sharpen its pencils and insist that people make more effort to reduce risks.
The working market sounds like a joke when people actually read your link, Randal:
So much for affordable housing in CA. The market will see to that.
So the market doesn’t know how to calculate risk and it builds in fire-prone land, then reacts to the existing condition.
Not sure how the market prevents fire-prone houses from going into new landscapes if the market doesn’t know how to calculate risk, but whatever makes your argument go I guess, eh Randal?
DS
DS,
I think what you are describing is known as rent-seeking behavior, not a market failure as you seem to imply. If firms are not actively taking risks into account, it is likely that they have had such risks implicitly or explicitly underwritten by some government agency or agencies at different jurisdictional levels.
On a related note, insurance companies are also often legally obligated to insure properties they otherwise would not as a condition of doing business in a state. For example, I believe it was the government of the state of Mississippi that wanted the insurance companies to pay for Katrina-related damages to property that were not covered under the actual policies as written. As a result, insurance companies will increase premiums for everyone and, if natural disasters, fires, floods, etc are at a minimum compared to the average, insurance companies will make hefty profits – the spread between their premium revenue, expenses and insurance payouts.
With Katrina they took losses. The next year (which was widely predicted to be one of the absolute worst hurricane seasons, EVER) had very few severe storms doing any damage at all. Upshot – insurance companies making profits.
People only seem to notice when insurance companies make a profit and not when they take losses, and then use the excuse of past profits to demand greater losses be inflicted on insurers, and then are shocked! shocked! that premiums go up and more properties are uninsured.
If people put enough houses with 200-foot cleared spaces around them in a forest it won’t be a forest anymore; it will be a park or a tree farm.
How about the financial institutions that lend money for people to build houses in fire zones? Are their interest rates a lot higher for homes in fire zones to account for the additional risk or are they relying on the insurance companies to take the risk for them?
Of course you all know by now that as an engineer and inventor I prefer the technical approach of building houses that can survive forest and brush fires and keep the people inside them safe. Then there will be the problem for awhile of convincing the banks and insurance campanies that the risk of loss for these safer houses is lower and they deserve lower insurance premiums and interest rates. There will also be the challenge of convincing permitting authorities that fire-safe homes with lower environmental effects should be allowed higher densities and more areas where they can be built.