Under-insurance15th September, 2017
Hurricane/Tropical Storm Harvey highlights the impact of under-insurance. What does it mean and what, if anything, should be done about it? Is it a worldwide problem?
Starting then with earthquakes in New Zealand and floods in Bangladesh, is insurance coverage for the buyer just the same issue of risk/reward odds as for the seller of cover?
The answer is always reactive by the buyer and starts of as proactive by the seller. The buyer doesn't imagine that his life might be destroyed by an earthquake (in New Zealand) while in Bangladesh it's just a regular (annual) sense of hopelessness.
And in Houston? The pro-active seller of insurance operates in a market subject to supply and demand. But even with prices under pressure there was/is the knowledge of physical and geographical factors which influence the risk of flooding in the Houston area.
The potential buyer of cover would have to assess his personal risk of flood damage. "But I've lived here for 20/30/40 years and have never suffered a flood. Why should I buy cover?"
Do you see how this personal message rings true anywhere in the world? It's therefore not so surprising that, even in the most highly valued real estate in the world, there is invariably a wide gap between economic and insured values: Katrina about 55%, Sandy about 70%, Andrew about 40%, Ike about 75%, Wilma about 60%, Ivan about 75%, and Harvey estimated at about 75%.
All hurricanes/storms. No earthquakes. Just wait for that anticipated earthquake in the subduction area NW of California.
Maybe the answer is compulsory premiums paid into non-profit funds under government control to cover the shortfalls? Otherwise, as global warming brings about evermore catastrophes, under insurance will become an overwhelming problem.