THE COMING INSURANCE CRISIS

The catastrophic California fires will hit every New Zealander in the pocket. That’s because all insurances world-wide, are pooled.

That’s hardly surprising after all if you’re in the insurance business your first and most important client and thus initial step as an insurance company, is to insure yourself.

So when one buys an insurances policy, the company selling it basically clips the ticket; this a sort of finder’s fee, but thereafter promptly sells down most of the exposure into a pool of other insurance companies, all taking a small portion of the risk.

When the twin towers atrocity occurred in New York over 20 years back, New Zealand premiums rose sharply as our share of the loss.

The Californian fires are of such a dimension they will add a huge burden for our home-owners finding their insurance renewal premiums soaring. So too with all other policies but the home-ownership one, being the largest most folk incur, will cause much financial distress.

So what to do about this?

If your home is mortgage free which currently roughly a third in New Zealand are, this percentage half the number of 30 or 40 years earlier when houses were smaller, much poorer in quality and thus cheaper, you could decide to bear the risk yourself.

That’s not silly. Houses burning down are highly unusual events.

Alternatively, the mortgage-free owner could cut his premium by perhaps insuring for half the house value. This would cover most likely claims but more important, in the highly unlikely event the house is destroyed, this home-owner will have sufficient funds, albeit now with a mortgage, to rebuild.

All homes whether rented or supplied by the government, or other entities, will cop the same leap in insurance costs. It follows therefore that if one subscribes to the overwhelming evident social benefit of a home-owning democracy, the state subsidising premiums, perhaps by 50%, is a rational government collective action.

This will cap premiums to a reasonable level for owners and so too rentals for tenants.

While I personally have a skeptical view on military expenditure, most folk seemingly accept it as worthy and thus a reasonable solely government function. So too sharing insurance premiums collectively via central government is analogous. Conversely there’s no rational reason for central government, our largest property owner with schools, hospitals, police stations and numerous other buildings, to insure them.

Far better for it to bear the risk and accept the occasional loss, as opposed to the alternative of paying massive insurance premiums on such a huge asset base.

There are other policies most people buy such as car insurance. No need for the state involvement there, indeed with higher premiums it’s likely to lead to more careful driving.

Commercial buildings will cop it but over time this added cost will reflect in higher rents.

Currently, there’s a world-wide trend, as in New Zealand, to cut back on the massive and in many cases, ludicrous growth of central government bureaucracies which have evolved over the last half century.

But no-one is suggesting no role for central governments, rather the attacks are on the evolvement of nonsensical and indulgent activities, of which there are many.

This has arisen for the reason I’ve out-lined before in this Blog, specifically that all expenditure comes into two categories.

First there’s sensible well considered purchasing specifically when people are spending their own money.

Then there’s the cavalier thoughtless expenditure this when people are spending others money. That’s by far the biggest category and applies to central and local governments and managers of large corporations.