If you don’t cap prices on something the insurer is expecting to be destroyed, wouldn’t they just set the price of the policy to be the price of the thing it insures, effectively making it worthless?
It most likely would just be a significant portion.
Once a place is hit by fire, it takes a couple of years to be as susceptible again. Or, if it’s not been a recent hit, the odds of any individual place being hit in a given year is probably sub 25%.
So the insurance company would probably charge something like 20-25% of the value. Which, yes, is hugely unaffordable for 99.9% of people. But if you’re super rich is probably still worth it, as the reason the price is that high is that there’s a pretty good chance your house burns down in the next year or two, so you would come out ahead in that scenario.
Then again, once you’re rich enough to afford that level of insurance premium, you’re probably rich enough to just float the risk yourself. So yeah, probably pretty worthless across the board, even at levels fairly significantly lower than 100% of the replacement cost.
It’ll go up, sure. There’s nothing magical about the price of the property, though, as a line for making insurance worthwhile. You pay an annual rate, and an insurer will just expect that whatever you’re paying over the will pay for the cost of the property within the period of time until they expect the property to burn on average.
If it’s a hundred years, it might be – discounting, for simplicity, the time value of money – 1% of the property value annually. If it’s six months, it might be 200% the value of the property annually. The 100% mark isn’t a special line in terms of insurance making sense.
It’d certainly make the property more expensive to own as that percentage goes up, but that’s true whether you insure it and spread that risk over many houses or don’t insure it and pay for the loss of the thing yourself.
Isn’t it though? If my choice is to pay 200% of the value of the property annually or to not have insurance, why would I opt to have insurance? The best they could do is pay out less than I paid them.
If you don’t cap prices on something the insurer is expecting to be destroyed, wouldn’t they just set the price of the policy to be the price of the thing it insures, effectively making it worthless?
It most likely would just be a significant portion. Once a place is hit by fire, it takes a couple of years to be as susceptible again. Or, if it’s not been a recent hit, the odds of any individual place being hit in a given year is probably sub 25%.
So the insurance company would probably charge something like 20-25% of the value. Which, yes, is hugely unaffordable for 99.9% of people. But if you’re super rich is probably still worth it, as the reason the price is that high is that there’s a pretty good chance your house burns down in the next year or two, so you would come out ahead in that scenario.
Then again, once you’re rich enough to afford that level of insurance premium, you’re probably rich enough to just float the risk yourself. So yeah, probably pretty worthless across the board, even at levels fairly significantly lower than 100% of the replacement cost.
It’ll go up, sure. There’s nothing magical about the price of the property, though, as a line for making insurance worthwhile. You pay an annual rate, and an insurer will just expect that whatever you’re paying over the will pay for the cost of the property within the period of time until they expect the property to burn on average.
If it’s a hundred years, it might be – discounting, for simplicity, the time value of money – 1% of the property value annually. If it’s six months, it might be 200% the value of the property annually. The 100% mark isn’t a special line in terms of insurance making sense.
It’d certainly make the property more expensive to own as that percentage goes up, but that’s true whether you insure it and spread that risk over many houses or don’t insure it and pay for the loss of the thing yourself.
Isn’t it though? If my choice is to pay 200% of the value of the property annually or to not have insurance, why would I opt to have insurance? The best they could do is pay out less than I paid them.
Say I plan to sell the house in three months and want a three month term, maybe.