The financial crisis has reduced the number of A++ A.M.Best rated homeowner insurance companies selling insurance in California to just a handful (such as Chubb, Tokio Marine, and Amica the last time I looked 2 years ago). In the next big disaster, how many of the lower-rated companies will be able to pay claims? Especially after the financial system crashes again — it’s in a “Dead Cat Bounce” now.
And as the financial and energy crises worsen, the number of insolvent insurance companies will increase, their cash reserves further driven down by fewer people able to afford insurance.
Everyone’s wondering what the tipping point will be that will crash the financial system, balanced on a knife edge. Perhaps a Richter 8+ earthquake near Tokyo, Los Angeles, or the San Francisco Bay area would be enough to send the financial system into a tailspin.
“Some estimate that the cost of a massive earthquake in Tokyo could reach $2 trillion dollars, sinking Japan into great debt and possibly setting off an economic crisis and this could damage the world economy by setting off a series of negative events that spiral out of control” according to Jeffrey Hays in “Large Earthquakes and Large Future Earthquakes in Japan“.
Just the damage of the Fukushima earthquake alone could cost up to $308 Billion.
And let’s not forget other candidates like Class 5 Hurricanes and tsunamis.
Even the lucky homeowners who get insurance money may not receive enough money to recover, since prices for declining energy and other scarce natural resources will be so expensive. Rising prices do not mean that there’s inflation — in the initial deflationary crash (credit/debit), scarce resources will rise in price. This is why deflationary collapses are so cruel — the wages of those still employed are stagnant or falling, at a time when more and more are unemployed, and essential scarce resources like food and energy keep rising in price. When the debts are wrung out of the system, then inflation or hyper-inflation can occur, but right now, with 600 trillion in debt, any money printing is swallowed up in the great black hole of debt.
Cash is king in a deflation. The last thing you want is any debt, and if you lose your home or have some other kind of health or auto claim, you can’t afford the risk of having an insurance company that is likely to delay or deny your claim, or not be able to pay you.
In the short-term, over the next 2 to 10 years, rebuilding of homes and infrastructure will get even worse than now, because after every disaster, insurance companies grow more sophisticated at denying or low-balling claims. Like bankers and wall street, they too have their private army of lobbyists making whatever they do legal, even if by rights their executives ought to be in jail.
I know this from my own personal experience. My home was one of the 3,500 homes that burned down in the Oakland 1991 firestorm. After that, thanks to my hero Ina DeLong, we formed groups by insurance company to compare how we were being treated. DeLong told us that “insurance companies are just like the Mafia, but they don’t dress as well”. DeLong was on “60 Minutes” after she quit State Farm management because of how she was being asked to handle the claims from the Loma Prieta earthquake.
There are various “buckets” of money you are trying to get after your home is lost. The first one was living expenses for one year, and right away we could see that minorities, single women, older people, and other vulnerable families were getting less money at the weekly policyholder meetings Ina DeLong had started for each major insurance company (she attended many, but not all of the meetings).
Then, after we spent half a year working with a claims examiner to “rebuild” our house, nail by nail, board by board, counter top by counter top, so the value could be assessed, resulting in a 2 inch high document, we were made a low ball offer, which we accepted to get on with our lives. And then this offer was retracted and we were suddenly switched to another examiner and the whole process started again from scratch. We were told this was because the new examiner didn’t understand the old examiner’s methods.
And why were we switched? Because our first examiner had had a family emergency. We called to leave a condolence message on the phone of our first claims adjuster, who lived in Oakland (many adjustors were brought in from other states). To our surprise, she picked up the phone at the office, and said “What family emergency?”
And this despite the fact that we were ahead of 99% of other homeowners, who had needed to hire architects to reconstruct the plans of their homes. But we had the plans — the former owner was a contractor who’d added on to our house and still had them.
We knew of people who were already on their 3rd claims adjuster (and after 2 years, we knew of people on their 8th), so we knew what was coming, and despaired of ever getting on with our lives. And most importantly, of being able to cope with the end of the living expense money, which only lasts 1 year. Yet meanwhile you have to pay rent PLUS your mortgage and property taxes.
How to protect yourself
A must read book about how insurance companies deny claims is: Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It by Jay M Feinman. It’s worth reading before a disaster because it will give you some ideas on what you can do now, before a crisis strikes.
Consumer Reports has an issue on insurance every year. Their September 2012 issue rates 15 Homeowners insurance companies and had other good advice.
United Policyholders is dedicated to protecting the public from insurance corporations. There are many great articles, especially in these categories: Library, Roadmap to preparedness and Roadmap to recovery.
Jeffrey Hays. April 2009. “Large Earthquakes and Large Future Earthquakes in Japan“. factsanddeetails.com
Solomon Moore. 7 May 1997. Insurer Sued Over Alleged Forgery Courts: Valley couple claims State Farm used document containing a forged signature to avoid paying quake claims. Los Angeles Times.
David Rutledge. 4 Nov 2010. Estimating long-term world coal production with logit and probit transforms. International Journal of Coal Geology (85) 23-33.
United Policy Holders. July 2012. Tip of the Month. uphelp.org