See Insurance Startup Stand Has a Plan to Cover ‘Uninsurable’ Homes: The new insurance company raised $30 million and is writing policies in California wildfire zones by Yuliya Chernova of The WSJ.
This reminds me of what economists call "asymmetric information." This is a situation in which the seller knows more about a product than the buyer (sometimes the buyer knows more about something important like how healthy or risky they are as it relates to insurance). These markets do not operate optimally. If insurance companies don't know how healthy or risky you are, they can't be sure of how much your premiums should be. A good example is the used car market. Sellers usually know alot more about the product than the buyers.
This new company is trying to figure out how risky it would be to insure houses against natural disasters by using technology to assess the quality of the protections homeowners have added. It seems like insurance companies could not understand this very well before, hence the asymmetric information problem. If you have upgraded your house so it is less likely to burn down in a wildfire, that makes you less risky and your premiums should be lower. Now there might be an accurate assessment of that.
I played a game in class that touches on insurance. Click here to see the Lessons From the Supply and Demand Game.
Excerpts from the article:
"Mark Mitchell spent more than $100,000 to make his family’s home in California’s Santa Cruz Mountains more resilient to wildfires after it suffered damage when a nearby redwood growth burned in 2020. Despite his efforts, he couldn’t find an insurer that would cover the home for more than two years.
That is until Friday, when Mitchell signed a contract with Stand Insurance. “They are the only company that has been able to figure out how much we’ve done to protect our house and that it’s a reasonable risk to insure,” he said.
Stand is a new insurance startup that seeks to cover homes in areas other insurers are abandoning because of risks from natural disasters like wildfires and floods. The company says its simulation software allows it to better predict risk and identify improvements homeowners should make to increase resiliency."
"Stand uses software to simulate the physical effects of a wildfire on a home and to identify changes a homeowner should make to decrease risks. The goal is to find targeted alterations that don’t turn a home into a bunker or require clearing all trees on a property, for example, Preston said."
"Insurers have been trying to change how they assess natural-disaster risk with varying success. Startups have been introducing technology, including geospatial analytics and artificial intelligence, to help make better predictions."
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