The Risk of Insurance

Insurance has a wonderful history in society.  Those who can sustain financial loss take a payment from those who cannot in exchange for some level of coverage.  The value creation here is substantial, especially when the likelihood of a claim is low.  So, life insurance for young people tends to be inexpensive and the person or company writing the agreement will tend to make a lot of money.  All this is of course a matter of how the dice rolls!

No wise person would want to sell insurance knowing full well that the claims will bankrupt them.  That would be considered stupid, wouldn’t you think?  In fact, can you imagine working for a company that did this repeatedly?  You would certainly know that the day was coming when the roof would cave in.

Well, the recent situation in the Gulf is a case in point.  We all heard that Houston floods routinely.  That was no surprise.  Yes, the amount of rain was more than we have seen in the past, but flood losses are almost routine there.  So, what happens when flood insurance is subsidized based on making home ownership more affordable?

Well, the article shown here indicates it may have gone too far: “Harvey Proves Flood Subsidies Must End.”

It seems we all have a lot to learn about public policy and how risks are priced into the markets … or not.

We are in a huge transition within the electricity pricing discussion.  We are beginning to see risks in natural gas time based pricing as well.  It seems we should be having a dialogue now before the storms hit.


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