The real problem is that we're politically/socially unwilling to transfer the risk to the people who are responsible for creating it: Wealthy coastal landowners believe that the cost of home insurance should be about $2000/year. If their properties actually cost $200,000 per year to insure, then that's what they should have to pay! If they don't like it, they should either build something cheaper (that's the other half of the product) or move to somewhere with less risk.
Tornados are almost the perfect example of an insurable hazard: Very low probability, very high damage, very widely distributed across the affected areas:
https://mrcc.purdue.edu/gismaps/cntytorn#
Click around that neat interactive map, you'll see that the tornado is typically a few miles long and a few hundred yards wide, there are a few thousand severe tornadoes scattered all over the Midwest and somewhat fewer on the east coast in the past 70 years. It's not feasible to build houses everywhere that will stand up to an F5 tornado throwing cars. But they only cause a total loss of a tiny fraction of all houses in the country, and there are relatively few choices anyone east of Texas can make that would meaningfully impact their risk.
You could price insurance premiums at the risk of a tornado times the cost of the insured assets, plus a 10% administrative fee/profit margin, and those rates would be affordable. Maybe a handful of people would choose to live in Colorado instead of a few hundred miles east in Kansas because the cost of this 'tornado insurance' was higher in Kansas, but even in Tornado Alley it wouldn't be unaffordable.
Conversely, if you look at the hurricane incidence and storm surge risk map:
https://coast.noaa.gov/hurricanes/#map=4/32/-80
https://experience.arcgis.com/experience/203f772571cb48b1b8b...
and population density along the gulf coast:
https://luminocity3d.org/WorldPopDen/#7/28.541/-88.011
It's clear that people are choosing to build houses in the narrow strip of low-lying land that's right along the coast and vulnerable to high-probability storm surges! If insurance was priced at cost of assets + administration times risk of loss, it would be really, really expensive.
> If their properties actually cost $200,000 per year to insure, then that's what they should have to pay! If they don't like it, they should either build something cheaper (that's the other half of the product) or move to somewhere with less risk.
Or build something adapted to the risk it faces. In my home town there are houses that were built on flood plains that have recently been flooding every 5 years or so. Luckily they are brick and in order to get these covered you now need to install flood barriers over the doors, and your ground floor has to be adapted to flood without sustaining damage (tile floors, special plaster etc.)
Now when we have a severe flood warning people will move their valuables upstairs if they're house floods they just have to clean out the mud. There are also a couple new houses right next to the river that float and rise and fall on stilts when the banks burst.
I think most people would go for adapting their designs, but insurance companies would have to make that offer first since they ultimately decide which designs are insurable for which amounts.
> we're politically/socially unwilling to transfer the risk to the people who are responsible for creating it
This is important. Insurance was invented 2000+ years ago but aggressively deploying technology that worsens floods, weather, and fires is only around ~100.
> The real problem is that we're politically/socially unwilling to transfer the risk to the people who are responsible for creating it
A lot of the responsibility falls upon governments who are lobbied by developers to zone areas for development that should never have been zoned for development in the first place.
I talked to somebody who owned a beach house in South Carolina about 5 years ago and if he wanted flood insurance it would cost $5,000 / month.
The real issue is global warming causing an exponential rise in tail risk events. It's exponential because even a linear shift in temperature causes an exponential rise at the tails (look at how a normal distribution works).
Insurance is based on statistics. The math they use assumes stationary distributions. Insurance companies can't deal with shifting distributions well so they take the losses and then exit markets.
Global warming is going to mess up insurance as we know it for that reason. Not sure property insurance, but all kinds of insurance.
This is mostly a probability nitpick:
Most disasters follow power laws and other fat tail which don't have the same effects in the tail as a Gaussian. If you shift 1/x^a by c, you "only" get a polynomial increase.
But also, if you shift the mean of a Gaussian, the increase isn't exponential, it's super exponential (e^(x^2) to be specific).
> Insurance is based on statistics. The math they use assumes stationary distributions. Insurance companies can't deal with shifting distributions well so they take the losses and then exit markets.
Sure they can, that's why they hire statisticians. They routinely deal with insurance of much rarer events where we have much worse models than climate change. They're just banned from charging the actual rates, because it's politically unacceptable.
They exit markets due to regulations banning them from charging the true cost of risk. Large insurance companies don’t just go broke. They have re-insurance that caps their losses. It’s becoming far more difficult to get reinsurance and the premium caps make reinsurance unaffordable for the insurance company so they leave. The business model is managing the money - they don’t much care about the claim losses over the long term and taking 1 percent of rising premiums to be a manager is a solid business model.