California E&S Insurance

All private insurance is, is actuarial math about the risks that a covered event occurs multiplied by the expected payout. This results in an annual expected value they would have to pay. They increase premiums to a set markup to cover risk, then charge that. Let’s say there is a 2% chance that fire destroys your house on a given year, and it would cost $1m to rebuild your house. 2% x $1m = on average, insurance would need to pay out $20k to you per year as the statistical expected value. If FAIR accurately assessed the risks individually for each property, and priced their service to break even, this property should cost exactly $20k per year to insure. Over the course of a human lifetime, that 2% per year fire risk may never happen. You pay insurance forever and don’t get anything back. C’est le vie. Or you may get unlucky, and 2% per year risk might happen 2-3 times in your life, so you ‘profit’ off insurance. Neither one of these scenarios is wrong, because insurance is just a service, not a piggy bank. It’s intended to calculate risks, then charge you to cover that risk. The only reason to buy insurance is because you don’t have access to $1m to rebuild if a covered event happens. If you are rich enough and don’t have a mortgage, you can even self-insure. Instead of buying insurance, you just invest your wealth into say stocks and bonds, and simply sell some or borrow against them if you need to cover something. Self-insuring is financially the same as buying break-even government insurance, but with the added risk that if you have back-to-back events, you may go broke. Private insurance does this same thing, except they add in a profit margin, partly to cover the risk that multiple covered events happen in too quick of a succession. So premiums would be slightly higher all else equal. The only reason FAIR is way cheaper than private insurance, or is the only available insurance, is because Prop 103 capped the rates private insurance could charge. But it didn’t cap payouts. So for high risk areas, Prop 103 effectively made it impossible for private insurance to Not only make money, but pretty much guaranteed they would lose money every year. So they pulled out. FAIR does not charge high enough premiums to cover their risk, and solely relies on getting massive bailouts (e.g. a backdoor premium) to make their books balance. TL;DR. A government run, break-even, non-subsidized housing insurance would likely only be about 5-8% cheaper than private insurance, assuming they could adequately price in risk for each individual homeowner.

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