Op-Ed: Why we need to fix disaster insurance markets this year and how to do it
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Insurance relies on mathematical laws that have built the modern insurance industry: when we pool independent risks together – risks that can’t be too extreme – a lot of great things happen. Losses become more predictable, uncertainty is reduced, and the maximum probable loss declines. What does all this mean? It means that it is easier for insurance companies to price policies and to be sure they will not face losses that will send them into insolvency.
These lovely mathematical laws do not hold, however, when everyone experiences losses at the same time and when those losses can be very large. That’s why a hurricane is so much harder for the insurance industry to cover than a single tree falling on someone’s roof, or why wildfires are so much harder than a one-off kitchen fire.
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There is a lot insurers could do to support greater investments in risk reduction. First, insurers need to play a role as advisors. They need to be more transparent about their risk information and risk tolerance to help communities identify and implement risk reduction strategies that will maintain insurability for their populations. Insurers, however, do not typically see such engagement as their role. And no firm wants to announce the need for escalating prices, but that information is essential to making sound development choices.
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But insurers can do more than provide information and guarantee they are accounting for the hazard mitigation investments made by policyholders and their communities. The time of rebuilding is a critical opportunity to build stronger and more resilient communities. At that moment, households need two things: funding to pay for the needed investments and support figuring out what to do and who to call to do the work (who is trustworthy, skilled, and has fair prices). Insurers can help on both counts.
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