Wednesday, 22 July 2015

A missing insurance market

I wonder if I'd be the only customer for this one.

Imagine a bolt-on to your existing home-owners' insurance. It specifies that, in the event of a substantial earthquake,* the insurance company immediately buys your house from you for a pre-specified price. No inspections, no claims adjustment, nothing. Big enough quake, they own your house as-is where-is. Maybe you could set it as an option for the policy holder, maybe you could set it as an automatic thing. Take the option, and you have a big deposit in your account to let you start over somewhere else. The insurance company then has, say, six months after the roads to your house are passable by truck and the port or roads out of town are open to get the contents packed into shipping containers and delivered to the nearest functioning port facility.

Advantages for the insurer:
  • No messing around with finicky owners. The insurer runs the repairs that they think are necessary to on-sell the house afterwards with no hassles. The timing of repairs is entirely up to them. They can contract with larger scale firms to run rebuilds over larger parcels if they want too. Owners are often picky about who they want as builders (we were!). The insurer owning the house has no worries about whether an owner is trying to fix things to as-new or whether he's trying to correct pre-existing damage.
  • The insurance on-sold home would be a sure-thing for future policies: everyone would know that it was fixed to insurer standards, so there would be no issues about the house's future insurability. 
  • Instead of a bunch of fragmented owners arguing over things like red-zoning, with flow-on consequence for the insurer, the insurer gets to have those conversations with the government. 
Advantages for the insured:
  • A certain fast payout for anybody who wants to flee. No hassles, no arguments, no waiting, no living in limbo. 
This seems an easy product to provide. I bet there'd be a lot of takers - or at least anyone who's experienced Christchurch would give it a good look.

I would want a clause in there that this part of the insurance contract - either terms or premiums - cannot be changed by the insurer except with two-years' notice: you wouldn't want foreshocks leading to policy cancellation.

* This would have to be legally defined, but anything Christchurch 2011 scale upwards: substantial parts of downtown ruined, town a nightmare, services shut down for weeks... you know the drill.


  1. I could be wrong but I believe the government pays sewer rates and probably water rates on schools, its own offices etc. What is probably being talked about are general rates that are assessed on land value or capital value and are applied to services such as libraries, pools, parks etc.

    The question probably opens up the thorny question of why businesses are made to contribute to "people" services such as libraries, art galleries at all. Arguing over whether the Crown should pay mIf I were LGNZ I wouldn't be pushing too hard on a first principles review of who pays for what.

  2. As someone who was red-zoned the best thing about it was the relative speed of settlement. Of course that wasn't really apparent at the time, but seeing the drawn out process others are going through I can see that the "here's some money now go away" option has definite benefits.

    It will be interesting to see if policies change in the future to allow the estimated rebuild cost to be paid out as cash up front, rather than the market value which is the only cash out option available on a lot of house policies.

  3. How attractive such an option would be largely depends on the expected time of redress from conventional policies. In the case of Chch, the reassuring noises coming from EQC, insurance companies etc meant that many of us didn't still expect to be out of our houses 4+ years later. Ex-post, the sort of option you're suggesting sounds like a no-brainer, but it might not have seemed so valuable ex ante.

  4. Crown-owned properties do pay a small service levy. But where tenants of crown-owned properties also consume the other city-provided services, it can get messy.

    Agree that the overall problem is thorny.

  5. I want to be able to pre-specify the price. My house is not worth $1m. But I want a $1m cash settlement in the event of major quake. Since I cannot cause major quakes, they should be able to charge a premium that would make it work: (risk of earthquake per year)*(one million)+margin.

  6. Interesting idea. In a way it's a further step on from the new insurance process where it is for a particular value that you choose.

    I can see some challenges, or at least areas where it might get 'interesting'. One would be the legal definition. As I understand it some houses in Chch were destroyed but some weren't touched. Using the simplest implementation of this idea, every house in Chch would've been sold to the insurance companies. That would've made life interesting for insurance companies and residents. Perhaps an easy process to revert ownership to the resident would be needed. But what would then happen if you took ownership back from the insurance company and six months later found that the underground pipes were stuffed?

    I suspect you could almost do away with the legal definition of an earthquake, or at least make it minor, but have a very good and quick process for reverting ownership back to the original owner. Or perhaps not take ownership for a week, and unless the resident agrees, but taking ownership and paying out would be the default.

    I wonder if owners might want to be incentivised to take ownership back where they know the insurance company is having to deal with 100k of houses?

  7. Thanks, Lindley.

    You could set it as an option, where the owner has the option to sell to the insurer within a couple months of a major event at the pre-specified above-market price.

    I suspect uptake would not be massive. A lot of people are really tied to their homes and want the home they have fixed; they underestimate just how gawdawful living in a ruined city will be and overestimate how competent the government will be in setting things to rights.

    I expect that homes on-sold after repair by the insurer would be insurable by that insurer, so any broken pipes found later would be covered by the policy.

    I'd want it only after a major earthquake to keep down moral hazard problems. An option to sell your house at will for above the market rate any time would be, well, very very expensive.

  8. Schedule 1 of Local Government Rating Act 2002 lists all the categories of property that are exempt from paying rates. As you would expect this list includes conservation estate, road corridors, rail corridors, wharves, airports, schools, hospitals amongst others. No explicit mention of Housing NZ properties or properties such as MSD offices although its possible that exemption comes from other legislation.

    s.9 of the same Act explicitly makes all these properties liable for water, sewer and rubbish collection rates if they receive those services. Given that many councils make a per pan sewer charge for larger properties schools and hospitals pay a large rates bill just for those services.