> If you have 10,000 customers in Los Angeles, and 5 million elsewhere, you can either isolate the LA customers and charge them the "real" price
That's the only way.
> which will be unviable as a business and probably politically touchy too
Why would it be? If you live in Los Angeles - doesn't mean you don't need insurance (even if it several times the cost of insurance in the safer areas).
> or you can include them in the broad pool
No, you can't. Your competitor who doesn't do this will offer cheaper insurance - because they doesn't distribute high risk of small group to everybody else.
> the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work.
Why would they do that? 20 bucks is 20 bucks.
> The concept probably works better if you have some concept of social cohesion to lean on
You mean if you with totalitarian governance deprive people of the ability to choose? Yeah, that could work. I mean, that's how the gulags were justified.
I'm trying to understand how what you're suggesting is different from mandating everyone just get a personal savings account, where they must pay some specified minimum calculated to cover them in the event of a loss of their personal property?
Are you saying that we should only pool risk between people in the same risk bucket?
How do you aim to determine the resolution of that risk? Not to mention calculating it accurately?
> Are you saying that we should only pool risk between people in the same risk bucket?
People should be free to make that choice even though it increases net costs for higher-risk or less-affluent individuals.
> How do you aim to determine the resolution of that risk? Not to mention calculating it accurately?
By allowing private actuaries to make these pricing decisions: skilled organizations will succeed, others will fail.
I'm trying to work out how what you're describing works, first I have to understand you before I can form an opinion on it :)...
Ok, I get how you want to value risk, independent actuaries. I suppose, there's some bias there as insurers might lean on them to adjust the risk to be more favourable to them and as they'll be repeat business, they're likely to comply, but let's assume we find some really honest ones.
So given say a pool of people with similar risk profiles, say young professionals in high earning careers, and you calculate that they're effective risk is the same so you pool them together.
Now, what do you believe an insurer would insure them against? And of the things, what would not take them out of the pool they've been placed in and put them into a different, perhaps smaller pool?
I'm not quite sure you understand what insurance are. You have risk, you don't want to have it, so you pay other people to took that risk away (to some extent). How those people are expected to assess risk? Somehow. That's their problem.
It's like how a hair salon owner evaluates the difficulty of a haircut. And generally, when you want to have simple haircut, but they are gonna charge you extra because Jason Statham is their client, and he has very sensitive and delicate hair ends, each of which requires a careful individual approach... You naturally start wondering what Jason Statham's hair situation has to do with your haircut.
> I'm trying to understand how what you're suggesting is different from mandating everyone just get a personal savings account
Because insurance will cover you even if your house burns down in the first year of coverage, whereas a personal savings account will have only a very small amount of money in it in the first year of home ownership.
That's the whole point of insurance.
I don't know where the idea came from that the purpose of home insurance is for people in low-risk homes to subsidize people in high-risk homes, but it's a very strange idea.
Right, that is the purpose of insurance, to take risk and spread it across a population.
Now the simplest way of doing that is you decide whether someone is "insurable" or "uninsurable" and then for everyone insurable, you define payout criteria and a fair pay in rate (premiums) which is based on your ability to calculate their risk and taking some extra on top for providing the service.
Your skill at:
1. assessing risk correctly as to whether you take them on as clients
2. calculating their risk correctly and mapping it to a price to charge them (premiums)
3. defining payouts in a way that allows you to pay out when things happen to your clients so others trust you to pay out, but not so often that you have no working capital
broadly determine how well you'll do.
You can do all kinds of other complicated things on top of that, but from what I can tell, the fundamental idea seems to be that given those considerations, the insurer pays out, so the fact that someone has a high risk home should be priced into their premiums or they should not have been taken on in the first place.
Now you appear to dislike that people who have different risk profiles are grouped together, what I'm trying to understand is how that works.
For example, in the case of the house burning down:
1. The insurer pays the homeowner out and increases their premiums
2. The insurer pays the homeowner out and places them into a different risk category of people who own similar homes, but have had their house burn down, works out their new premiums, which are now likely much higher as they're in a riskier category and it's likely that population is smaller.
I assume you're arguing for something like 2 to happen?
Or is it something else?
> Now you appear to dislike that people who have different risk profiles are grouped together
There is no problem with pooling properties with different risk profiles so long as each property pays premiums that adequately represent that property's risk profile.
Don't people who live in higher risk homes already pay higher premiums?
Do you believe that's not the case? Or that insurers are giving them discounts? Or are the risks miscalculated?
I'm in the industry: regarding California,the answer is that they aren't paying high enough premiums. Regulators have refused to allow catastrophe modeling to set rates, so fire prone areas are effectively getting a discount.
> I'm trying to understand how what you're suggesting
Nothing. It's definition of insurance - selling your risk.
> Are you saying that we should only pool risk between people in the same risk bucket?
I mean, why would people want to be in a bucket with people with higher risk?
> How do you aim to determine the resolution of that risk? Not to mention calculating it accurately?
These are the problems of insurance companies. At the end of the day, the consumer simply chooses the best price for his risk.