The more I hear of State Farm not writing insurance policies in Mississippi, I increasingly think, “Let’s go back to first principles. What is the purpose of insurance?”
A hero of mine is responsible for setting up one of America’s oldest insurance companies and denying coverage to certain properties.
Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin’s company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses.
This still doesn’t answer my question of the reasoning behind lender-mandated insurance on property and how it helps when insurance companies are allowed to practice redlining, in this case for a whole state. My reading indicates that, for all the money and complication it involves, the industry isn’t regulated very well.
According to the Insurance Information Institute’s latest report on Hurricane Katrina payouts (note that this is what companies, not individuals or the state, have reported; emphasis mine),
– The property/casualty insurance industry will pay out an estimated $40.6 billion on some 1.7 million claims in six states for Hurricane Katrina alone. By contrast, Hurricane Andrew, the previous record-holder, resulted in $15.5 billion in losses in 1992 ($20.9 billion in today“s dollars) and 790,000 claims.
– Insurers have paid out nearly $15.5 billion in homeowners insurance claims to hurricane victims in Louisiana and Mississippi.
– Insurance company claims payments equal 11% of state income in Louisiana and 10% in Mississippi.
– Another round of federal aid ($107 billion) has begun flowing into the region, which will augment the insurance industry“s payments to help support further reconstruction.
With this in mind, if it is mandatory for us to possess strong property insurance while paying a mortgage, shouldn’t the availability of such insurance be mandatory as well?
The entire state of Mississippi. Louisiana, Alabama, Florida, Texas, what next – the entire Gulf Coast? No more insurance for future veterans of American wars? No more insurance for the states encapsulating tornado alley and all of California? Also realize that the less that is insured by a given company, the more the rates will go up on that which is insured. Bend over and take it, the rest of “safe” America.
The bottom line – You pay in to protect your investment against damage. Should damage occur, your premium increases or you are dropped altogether, not before a struggle to get back at least a percentage of the money paid in. All in all, insurance works only when you pay in and no damage ever occurs, in which case you’re out all of that money.
Some suggestions:
1. Make like Kuwait where, like taxation, insurance is illegal. Seriously, when has anyone ever got their mandatory insurance’s worth? [Edit: a Kuwaiti may purchase life, disability or overseas-business insurance in Kuwait if he wants, but no one carries auto and home insurance, not even expats. My dad was involved in a car accident once and he paid out of pocket. It cost him a lot less than his last 16 years of paying into the American insurance system. Thieves.]
2. Forget the national giants. How about a large Gulf Coast-based insurance company that meets lender criteria?
I am against all insurance. The whole concept stinks. But the idea is so ingrained people can’t even imagine getting along without it. That’s why I was so intrigued by your mention of Kuwait. Thanks for passing that little bit of information.
Well, the reason that mortgage lenders require insurance is pretty clear: you buy a house for $200,000 with $20,000 down. The house burns down. You stop paying your mortgage, and the lender’s out $180,000.
I’m curious -how does this work in Kuwait? What happens if you have a car wreck, or your house is destroyed, and you don’t have the money to pay for it?
Insurance works when it spreads risks over a large population. THe problem is that an obvious way to make money as an insurer is to reduce overall risk by eliminating high risk customers; thus we are left with the same problem that insurance was supposed to help fix.
There’s an inherent contradiction in the idea of a for-profit insurer.