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Putting a Value on Risk
Insurance companies who cover homeowners and commercial buildings are in the business of insuring risk. If they guess correctly, they win, get to keep more of the customers money and go use that elsewhere to generate some more profits. If they guess wrong, they lose, and have to pay out in large sums, a very simple concept but quite complex today with various computer models driving the executive decisions and at what level premiums are set at. But really, how good are these catastrophe model programs, and are they adequate in dealing with fast changing climate and the economics of the fluctuating mortgage and property markets?
Companies that rely too heavily on cat-model data "are subjecting their businesses and their customers to the volatility of computer models," says Ms. Clark, who now runs a Boston cat-model consulting business. "The models are being used as if they produce definitive answers rather than uncertain estimates." Ms. Clark says she advises clients to use them in conjunction with other factors, such as broad historical data. ed.z.: We have a major big mess with all the various general climate predictions coming out all the time, and they are constantly fine tuning measurements and plotting trends, etc. Once you start factoring in all the variables, how good can the results really be? And trying to guess what a piece of property might be worth years from now is also seemingly getting much harder. I think these guys have a rough job trying to get it pretty accurate, so it seems like they would be constantly erring on the side of extreme caution. Perhaps an alternative way to deal with the risk and normal throw away insurance plan might be established, similar to a medical savings account plan, but applied towards an emergency rebuilding fund instead. Just a thought. And if you ever go to sell the property, and haven't tapped the fund or still have some left, along with any investment income that fund might have accrued, you could cash it out or use what has been built up as part of the transfer deal you manage with the next buyer. They do it with life insurance/annuities, why not houses (caveat, maybe they do and I just don't know about it)?