OK, assume $200k/loss. It would take 400 policy premiums to make up
the direct loss. Assuming the ancillary costs are 100% of that would
still be under 1000 paid premiums _per annum_ to make up for the
one-time infrequent loss. I don't have data at hand, but I'd venture
the percentage of US homes having a full loss annually is far less than
one in a thousand. (Only to point out things may not be so bleak for
the underwriters as you seem to be trying to make us think... :) )
Where homeowners' underwriters tend to have problems is not in
individual home policies but in areas prone to widespread disasters
such as flood, hurricane, earthquake, etc., where a whole region gets
hammered at one time. Unfortunately, as they were reminded in the Gulf
and FL the last few years, one can not apply the individual recurrence
interval per household in a region independently for common-cause
events and remain actuarially (sp?) sound over the long haul.
nevertheless the premiums MUST cover all costs and some profits so the
business can remain in operation. lets not forget theres probably a LOT
of overhead running a insurance companies, agents fees, commisions,
underwriters, investigators to find fraud, let alone inspecting and
managing repairs so people cant steal by covering stuff up.
anyone who has had a claim knows what a hassle between contractors,
insurance company and mortage company...........
now most probably SHOP for lower cost coverage, who volunteers to pay
more to cover fires and perhaps shock hazards from old obsolete K&T
I just gave them 100% over a claim and showed on that basis using your
postulated numbers it only takes an annual claims rate less than otoo
0.1% to make it up. Double or triple that and actual experience is
still far below that level, I am certain for individual losses.
Well, my experience has been pretty much the direct opposite -- I have
had claims paid promptly, fairly, and all dealings have been very
professionally managed. I think it has more to do with making a
selection of an insurer with a good reputation than anything else. Of
course, I've not had a complete loss (thank goodness) but I really have
no qualms that if I did the resulting angst would be compounded by the
insurance company who underwrites our coverage.
We have been through sizable losses owing to storm damage over the last
several years in this small city where two years running small
tornadoes and major hail storms required over 80% of all roofs in the
entire town to be replaced along with sizable other wind-related damage
to the extent of several homes and businesses were completely totalled.
In the ensuing aftermath of the several boards I sit on, losses for
their facilities were as high as in the $100k range and up each year
and we had _no_ difficulties whatsoever with any of them. Of all the
stories in town, I am only aware of one particular contracted adjusting
firm that was initially very penurious in their evaluations and invoked
the ire of many who had their coverage from the firm which hired this
particular adjusting firm. After several complaints to the local agent
and confirmation by him that the adjustments did not seem in line with
actual damages and others, this firm was replaced by the underwriter
and each case revisited. I am sure there were a few cases that were
not settled to the complete satisfaction of the homeowners as is
inevitable, but certainly, overall, the situation was handled quite as
well as could be expected.
Well, as was noted in a thread in one of your previous jousting bees on
the subject, there is little definitive data that really proves
conclusively that K&T _by itself_ really raises the risk that much.
So, overall, it is highly doubtful K&T is raising your rates very much
as compared to other factors. If you're concerned that it is, then I
suggest you continue to shop for the underwriters who _do_ proscribe
against it (if you can find any) and their rates should reflect their
improved actuarial experience and be lower than their competitors to
account for it.
The latest statistics I have say that of 100 homeowners, one will have a
total loss over 20 years. So yes, total losses are a very infrequent
But they're also only a very small part of what insurance ends up paying
for -- there are a lot of $1000 burglary claims and $10000 kitchen fires
for every total loss, and they come out of the same premium pool as
If an insurance company can identify particular classes of homes that
are more likely to have losses, and if their actuaries can develop
reliable estimates of the extra risk, they can implement appropriate
surcharges so that lower-risk policyholders aren't subsidising higher-
If the insurance company can identify hazards that increase risk, but
can't come up with reliable actuarial estimates of the risk, then it's
hard to develop an appropriate surcharge and get it approved by
insurance regulators. That's where the company tends to either decline
to insure that type of risk or accept it without a surcharge.
email@example.com is Joshua Putnam
Precisely, and well put. I would have thought the 1 loss/2,000
homeowner-years still somewhat high, but certainly in the realm of
reality. I was only doing the pseudo-actuarial excercise to
demonstrate that while speaking of $100-200k losses sounds absolutely
huge, when spread over the risk pool, there's a lot of revenue
providers who don't have the claims to make up for it. And, granted,
there are many more smaller claims than total losses, but hallerb seems
fixated on the one so I simplified the argument. (Also, note that I
gave them the benefit of assuming 100% "overhead" in the major loss
category in part as knowing there are other claims as well as simply an
estimate of costs associated only w/ payout of total-loss claims) As
you note, the actuarial data are the key thing and having sound data
soundly applied are imperatives to maintaining a healthy position as an
underwriter (and having sufficient assests to "ride out" the inevitable
short-term statistical fluctuations, of course. :) ).
As to the specific subject risk at hand in the current discussion, I
suspect (although I'll grant I don't have any inside information) that
the situation is a combination of not sufficient solid data that the
particular item itself was a root cause combined with insufficient
losses from claims where the item could have been at fault to make it
come to the forefront in an evaluation of where to put actuarial
research investment and the knowledge that it is a relatively small
fraction of all homes already and that percentage is going down all the
time. Consequently, it is simply not an area that has sufficient long
term payback to the insurance industry to invest in the necessary
effort to develop rate premiums specifically against K&T. So, as you
also note, they resort to either the occasional or regional/local
declining to underwrite or, perhaps, require the inspection that it
meets the grandfathered code requirements.
Still, at least here, it has been far more common for the actual
requirement to be replacing fuse boxes rather than sound K&T wiring in
all the old houses that have been refurbished as part of the local
revitalization project refurbs. Most of these will eventually get
completely rewired as part of a major reconstruction effort, but that
may take the new owner some 10 years or more and what we're doing is
getting first-time homeowners into something they can afford and that
is safe _first_. In order to do this, it makes no sense to put
resources into something that isn't a problem. In some cases, the
condition of the wiring has been so poor as to make that a part of the
mandatory first stage reconstruction to make the house safe for
habitation, but often it has not been.
Anyway, I've said all there is to be said, and more.... :)
As I think I noted elsewhere, it seems that the industry in general
forgot about common-cause in a period of low activity in the SE US and
in a competitive fervor grossly underevaluated true risk from a
catastrophic event. It will take some time for these effects to be
absorbed and a new equilibrium to be achieved. But that type of risk
estimation is totally apart from individual homeowners.
If your actuaries have a good handle on the added risk a repeat-DUI
customer represents, and your insurance commissioner will approve
appropriate surcharges, you insure the repeat-DUI customer because he's
likely to be just as profitable at very high premiums as a safe driver
at very low premiums.
Nobody has been suggesting misrepresentation or concealment.
But in many parts of the country, many insurance companies don't even
*ask* about K&T wiring. They may ask a more general question, like "is
any part of the wiring obviously indadequate or in need of
replacement?" They may ask whether the home has fuses or a breaker
Why would they do that? Various reasons.
If a large share of local housing stock still has some K&T circuits,
refusing to insure them would cost the company more business than simply
charging a premium that includes the slightly higher risk.
The average homeowner is not an electrician and can't be expected to
know much about the home's wiring, especially what's inside the walls.
Asking them about K&T wiring wouldn't necessarily get useful
If the company does interior inspections on older homes, the inspector
is likely to be a more reliable source of information than the customer.
My own homeowner's insurance application *did not ask about K&T at all.*
The interior inspection was ordered based on the age of the home, the
inspector looked over the wiring, checked what loads were on what
circuits, looked for signs of overheating in outlets and the panel, etc.
The company approved the insurance based on the application and
If the inspector missed some awful wiring flaw that causes a fire,
there's no basis for denying a claim -- I fully answered all their
questions, they took advantage of their opportunity to inspect the risk,
they decided to accept the risk.
firstname.lastname@example.org is Joshua Putnam
Its also possible a insurance company sees more OVERALL claims in homes
with K&T wether or not the wiring was at fault.
so they refuse to insure or surcharge heavily?
remember they are in the business to make money.
perhaps older homes have more water damage or other troubles?
Thinking of people I know who had fire.
A neighbor of my wifes sister in MD. They came home put car in garage
and friends picked them up for dinner. when they returned home there
was no home total loss after 8 month fight with insurance company. I
was in part of this home it was truly gone. they only reused
foundation. fire caused by vehicle in garage.
good friends had fire, cat knocked over lamp they were home. $135,000
damage to a 90K home insurance on structure ONLY, their roof was bad,
insurance company sold new company wouldnt cover them. forced place
coverage on structure only.
my next door neighbors car caught on fire in driveway, fire went up
front of home. realtively minor damage about 40 grand, mostly to
elminate smoke odors.
a good friend had trees hit home during terrible storm, 30 thousand
damage for roof structure and minor water damage.
the above gals next door neighbor, fire destroyed home total loss.
about 150 grand plus possesions
a old friends home hit by lightning many years ago, about 30 grand
damage minor fires thruout home.
Its amazing I didnt realize how many people I know had home disasters
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