As an individual, we view insurance as just a policy that we are either forced to buy or we choose to buy as we believe there is a real potential of loss. But insurance is more than just a pooling of risk to cover a group of individuals from potentially negative outcomes.
Property insurance:
The latest home insurance results for the vast majority of insurers in the US has been lackluster the last few years. A great example is Florida, where more severe weather has been depressing insurer underwriting results. Climate change is suspected of producing more severe weather patterns while we enter an El Niño cycle in the Atlantic Ocean, making hurricanes more likely due to warmer weathers.
Yet, we have consumers complaining that their home insurance costs are getting too high to be affordable. I’m sorry, but when you are paying $8,000 a year and the insurer has had to rebuild your house (and your neighbor's house) once every ten years, you can see how this is a losing business proposition.
The sad truth is that a secondary purpose for insurance is to encourage better behavior and better risk management. We penalize drivers with demerit points on their license to encourage safer driving. We charge doctors with more medical malpractice claims higher premiums. By charging higher premiums to insure homes in areas that are more likely to be wiped out by a hurricane, we are encouraging people to move away from high risk areas and to build homes elsewhere.
Auto insurers:
Similarly, auto insurers have not been doing great. Large awards due to seriously injured individuals in car accidents cost a boat load in continuous care to keep these people alive. This type of bodily injury loss is what has traditionally caused a lot of problems. However, in more recent years, the advancement of more and more sensors and cameras on vehicles has caused large cost inflation on the property damage side. It turns out, it costs a lot to replace the systems in your bumper that allow your Tesla to drive itself.
Driving a car is statistically the most dangerous activity that we take part in on a regular basis. It is much safer to travel using a train or airplane (yes, even in these times of Boeing planes losing doors mid-air). It makes sense that we have built more and more safety features into vehicles. The downside, is the fact that more insurers are declaring vehicles a total loss after an accident because the cost of repair is becoming greater than the used replacement value of the vehicle.
The increasing price of auto insurance should be telling all of us to take it easy, drive more carefully, and practice defensive driving. I've always assumed that if another driver has a chance to be an idiot, then, they will be. Having faith in your fellow human being on the road can be a bad idea.
Take away:
Beyond the obvious purpose of insurance, we shouldn’t overlook the fact that it is a great tool to encourage better risk management from the individuals or corporations purchasing the cover. Insurance should be seen as a powerful signal to stop and think about what types of risk we as individuals and corporations are about to take. If we're going to build a house in the middle of wildfire country, we should think twice.
Further reading:
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