As the Wall Street Journal’s Greg Ip reported last month, the Los Angeles fires had caused an estimated $50 billion worth of losses, but that only $20 billion worth of those losses were insured. Insurance markets not allowed to function properly help explain the mismatch.
Consider what helped instigate insurer State Farm’s partial exit from California before the fires, including the dropping of insurance policies on 9,500 houses that burned in January. Some will point to the latter and comment on how wise State Farm was, but such a comment is childish. State Farm is in the insurance business. Which means it’s not in the business of turning away the chance to insure homeowners against the unexpected. One problem was price controls. Insurance regulators in California have consistently limited the ability for home insurers to price the insurance to reflect locational risk.
What’s important is that fires and risk of same wouldn’t deter insurers from entering a freely functioning market. Quite the opposite. Which is similarly no insight. Exactly because forest fires have always been the California norm, those risks have made California a great market for insurers. But for an inability to properly price the risk.
As a more recent Wall Street Journal report indicated, in recent years insurance regulators had been “allowing” 6.9% increases in home-insurance rates despite insurance-company actuaries calculating that bigger rate increases were required to bring prices in line with risks. From this, it’s no reach to point out that there weren’t enough insurance policies in place once the Los Angeles fires hit.
Which requires even more fish shooting in the most crowded of barrels. When artificially low prices are decreed, it’s only logical that the falsely priced product will be insufficiently available. In other words, State Farm’s partial exit from California was the seen. The unseen was all the other potential insurers that never even bothered with a state whose regulators had so forcefully mispriced risk.
Ip reports that hundreds of hundreds of thousands of California homeowners “shifted to California’s state-run backstop, the Fair Plan” amid the insufficiencies borne of price controls, but there’s a reason people go to great lengths to avoid patronizing government-run anything. Are you listening, TikTok critics? Ok, that’s a digression. Back to the misnamed Fair Plan, Ip reports that it only has $2.5 billion worth of reinsurance and $200 million in cash. Which is a problem when it’s remembered that $30 billion of worth of Los Angeles losses aren’t presently covered by insurance.
It’s all a reminder of many things, most of all that price controls don’t even sound good in theory. They’re cruel. Always and everywhere. See the bare store shelves from the former Soviet Union if the latter doesn’t make sense. Price controls personify scarcity when abundance is needed.
Looking ahead, California also has rules limiting rent increases. They can’t exceed 20 percent in any given year. Except that all-too-many Californians are presently looking to rent something – anything – after losing their houses in the fires. It would be a waste of words to point out what corrupted price signals will do here, and to the detriment of Californians desperate to achieve normalcy in a stretch defined by a lack of it.
