Insurance premiums worth all the real estate in America 2002

The insurance companies are trying to raise homeowner insurance rates another 6.9% in Texas. They say it’s because of increased risk of loss.

With all my living costs going up, I did some simple math and discovered an astonishing fact. Over a thirty year period of paying homeowners insurance, I will pay premiums equal to half the value of my home. In short, to insure my $125,000 home, it will cost approximately $65,000 over thirty years assuming all things remain the same.

This $65,000 figure is a simple addition of premiums. It doesn’t calculate the value of that money if I invested the stream of payments instead. I’m no financial guy, but if I invested the $65,000 stream of payments over the thirty year period it would probably equal at least the full value of my home. This means after thirty years of paying premiums, I will have given the insurance company an amount equal to the total worth of the property they are insuring.

If my simple thinking is correct, then there is something even more amazing here. Look at all the real property in America from coast to coast, and assume that most of this property is insured at the same basic rate as my house. If this is true, then Americans are paying a whale of a lot of money. If we add up the investment potential of all those premiums over a thirty year period, then the insurance companies are receiving an amount of money equal to all the real property in America.

This is a huge payout to the insurance companies. To justify this kind of money, you would expect to see massive property loss. Yet when I travel around and look at all the houses and buildings, I don’t see vast losses of real property. In fact most houses and buildings stay intact for more than thirty years. Occasionally you see an apartment fire or house fire or a swath of storm damage, but generally there is not widespread loss of real property.

Except for New Orleans which has yet to be rebuilt, Americans have not seen the kind of loss and damage that would require insurance companies to receive compensation worth all the real property in America. And if we did, I’m not sure the insurance companies would be quick on the scene with their checkbook. If New Orleans was the standard, then we can expect problems from the insurance underwriters in the event of a disaster.

The insurance companies are telling the public that higher construction costs are the reason for the high rates. This makes sense to a point, but the insurance companies no longer guarantee full replacement of a home. An article in the newspaper last week reminded people that if there is a major disaster, then the insurance company will not cover the rise in construction costs due to a shortage of contractors and material. Therefore if a disaster strikes, then the homeowner is responsible for paying the inflated value of construction. This means that homeowners are assuming the risk that they paid the insurance company to cover.

Given this, I wonder how the insurance companies can ask the legislature for a price increase based on increased risk. It looks to me like the homeowners are taking the bigger risk.

The newspaper article last week suggested that people carefully read their insurance policies. I read my policy and was stunned by how little coverage the policy offered. I have never made a property-loss claim so it was surprising to see the numerous exclusions in coverage. Frankly my property is not well protected, yet my premiums to the insurance company are worth the full value of my home over a thirty year period.

I would probably be better off insuring myself. Most occasional losses like a new roof or removing fallen trees could be paid from the money saved by not paying premiums after just a couple years. I could even afford a new more efficient air conditioning system by not paying premiums for two years. Yet if I made a claim for a new roof and then a year or so later made another claim for a new air conditioner, the insurance company would launch an investigation and demand that I make no more claims.

So why is the insurance company taking so much money when the return payment to policyholders is nowhere near what they collect?

And if it is vastly cheaper to cancel insurance and assume the risk yourself, then that defeats the original intent of insurance to pool community risk among all the people. But with the level of pricing that exists today, the insurance companies are treating customers as their personal piggy bank. Nobody begrudges a guy making a profit to feed his family, but it seems excessive when insurance companies are reaping a fortune equal to all the real property in America. That is a lot of bananas.
 
It seems logical to me that if homeowners could opt out of homeowner insurance and establish their own self-insurance funds, then they would be creating a pool of personal wealth instead of enriching large companies. This self-insurance fund could help people meet critical needs throughout their lifetime, including health care and retirement.

If people were given the option to self-insure their real property, then the insurance industry would have to change tactics. Instead of getting chummy with the legislature to exact premium increases, those big companies would have to sit down face-to-face with ordinary folks and present a reasonable offer to attract our business. This competition would bring new innovative products to the market.

People in America deserve a frank discussion about property insurance premiums and they dang well deserve more options from a free marketplace.

Gene Haynes