Saturday, July 12, 2008
Floods and paying for risks
I hold Steve Webb in very high regard but I am not sure he is pointing the party in the right direction with the latest statement on flood insurance.
Insurance does not pay to cover certainty. If it is certain that a house will be flooded in the next 12 months the appropriate twelve month premium is the cost in full of replacing the damaged property. The better we are at predicting flood risks and identifying high-risk properties the higher the premiums on those properties will be.
That is how insurance works. Any other argument is to take the position of Canute’s couriers.
For properties with an extremely high flood risk, for which complete flood-avoiding defences are not feasible, we may need to move into another strategy altogether. For example, payments to help adapt the properties, and the lifestyles of the people who live in them.
Wiring the houses so electric points are situated high on the walls. Developing sealing flaps to place over ventilation bricks, to reduce damp penetration if water comes that high. Developing built in sealing barriers for doors that can be raised by householders.
There are real property benefits to living in attractive areas like riverside locations. The downside of that location cannot be entirely insured against.
Unless you envisage a kind of National Health Service for flooded houses, free at the point of use.
Incidentally, the point about insurance and certainty is the reason why all insurance-based health-care systems are doomed. With better long-range diagnostic techniques the identification of long-term health costs for individuals will begin to push premiums up towards levels where they are effectively pre-pay subscriptions for actual costs. It may be that by about 2050 only an NHS style finance structure is even theoretically viable if low-income people are to have any sort of coverage.
Insurance does not pay to cover certainty. If it is certain that a house will be flooded in the next 12 months the appropriate twelve month premium is the cost in full of replacing the damaged property. The better we are at predicting flood risks and identifying high-risk properties the higher the premiums on those properties will be.
That is how insurance works. Any other argument is to take the position of Canute’s couriers.
For properties with an extremely high flood risk, for which complete flood-avoiding defences are not feasible, we may need to move into another strategy altogether. For example, payments to help adapt the properties, and the lifestyles of the people who live in them.
Wiring the houses so electric points are situated high on the walls. Developing sealing flaps to place over ventilation bricks, to reduce damp penetration if water comes that high. Developing built in sealing barriers for doors that can be raised by householders.
There are real property benefits to living in attractive areas like riverside locations. The downside of that location cannot be entirely insured against.
Unless you envisage a kind of National Health Service for flooded houses, free at the point of use.
Incidentally, the point about insurance and certainty is the reason why all insurance-based health-care systems are doomed. With better long-range diagnostic techniques the identification of long-term health costs for individuals will begin to push premiums up towards levels where they are effectively pre-pay subscriptions for actual costs. It may be that by about 2050 only an NHS style finance structure is even theoretically viable if low-income people are to have any sort of coverage.
Labels: flooding, insurance, NHS
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Risk of flooding will be taken into account in the property/rental price of a riverside property. The state should be providing flood defences as a public good but providing insurance to lower income families, or anyone at all, is several steps too far. The analogy to healthcare does not work. If the insurance costs too much then people can move house/area. If rent rises in an area we don't try to support those people that maybe can't afford that increase. We do provide healthcare because somebody can't move body like they can move home.
I fear this is a case of good intentions; poor thinking.
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I fear this is a case of good intentions; poor thinking.
Wednesday, November 07, 2007
Credit Crunch - are we going to be Piper Alphad into a crash?
The financial turmoil after the sub-prime mess in the USA continues. Sombre question – are we going to be 'Piper Alpha' cursed?
Piper Alpha was a North Sea oil rig that exploded in 1988 killing 167 people. After cleanup and compensation for victims the owners put in an insurance claim for £1 billion (one thousand million pounds). Because of re-insurance deals the result was a tide of claims across the insurance industry that finally totalled £16 billion. This wrecked Lloyds of London and caused the complete reorganisation of insurance in the City of London.
Why is this relevant to today’s credit problems? Well the primary insurers in 1988 sold on part of the risks to other insurers in various financial packages, and they in turn repackaged part of their risks in other financial instruments and sold them on. Sometimes the primary insurers purchased these repackaged instruments without realising they were actually taking on again part of the risks they had sold on. Come the day of reckoning and the claims went round and round and round…some people having to pay several times.
The sub-prime mortgages (sold to people who are bad financial risks) at the heart of today’s problems presented a risk for the original lenders. They repackaged some of this risk in further financial instruments and sold them on to other people, many of whom repackaged several of those packages and sold them on again – and so on and so on. Bottom line, nobody actually knows how many rounds of this pass the parcel act went on, nor what the actual level of dud values is incorporated in financial securities underpinning otherwise quite respectable holdings. Nobody knows what will happen in a Piper Alpha like unravelling goes the rounds.
The uproar in the Financial Markets is chronicled for example in the Financial Times, Daily Telegraph, Guardian and Independent.
I rather suspect that the concept of ‘a market’ is about to get one of its periodic mass bad press episodes, of the kind wearily summed up by ‘John Kenneth Galbraith’ in the phrase 'Financial Genius Comes before the Fall'. Of course the financial markets are not ‘The Markets’ that give choice in a free economy – but since defenders of ‘market systems’ have been shy of emphasising this elementary fact we cannot complain if the general public conclude for the next few years that markets in general are evil and political poison. The political and economic results could be grim, as Cicero notes…
Piper Alpha was a North Sea oil rig that exploded in 1988 killing 167 people. After cleanup and compensation for victims the owners put in an insurance claim for £1 billion (one thousand million pounds). Because of re-insurance deals the result was a tide of claims across the insurance industry that finally totalled £16 billion. This wrecked Lloyds of London and caused the complete reorganisation of insurance in the City of London.
Why is this relevant to today’s credit problems? Well the primary insurers in 1988 sold on part of the risks to other insurers in various financial packages, and they in turn repackaged part of their risks in other financial instruments and sold them on. Sometimes the primary insurers purchased these repackaged instruments without realising they were actually taking on again part of the risks they had sold on. Come the day of reckoning and the claims went round and round and round…some people having to pay several times.
The sub-prime mortgages (sold to people who are bad financial risks) at the heart of today’s problems presented a risk for the original lenders. They repackaged some of this risk in further financial instruments and sold them on to other people, many of whom repackaged several of those packages and sold them on again – and so on and so on. Bottom line, nobody actually knows how many rounds of this pass the parcel act went on, nor what the actual level of dud values is incorporated in financial securities underpinning otherwise quite respectable holdings. Nobody knows what will happen in a Piper Alpha like unravelling goes the rounds.
The uproar in the Financial Markets is chronicled for example in the Financial Times, Daily Telegraph, Guardian and Independent.
I rather suspect that the concept of ‘a market’ is about to get one of its periodic mass bad press episodes, of the kind wearily summed up by ‘John Kenneth Galbraith’ in the phrase 'Financial Genius Comes before the Fall'. Of course the financial markets are not ‘The Markets’ that give choice in a free economy – but since defenders of ‘market systems’ have been shy of emphasising this elementary fact we cannot complain if the general public conclude for the next few years that markets in general are evil and political poison. The political and economic results could be grim, as Cicero notes…
Labels: crash, economics, Financial markets, Galbraith, insurance
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