MIDLIFE [FIRE]-19, Saturday, January 18, 2025 – Insurance; Not a Blank Check.
So, where do we start regarding understanding insurance, and how it pertains to the Los Angeles wildfires?
How about a history lesson? That said, this is commentary, but the history excerpts are necessary, and provide a foundational context for understanding what insurance is, and what insurance is not.
Let us jump right in.
Note to Self: There was no pet insurance until someone figured out that Investors could make money from your love for your pets. Yet, there is no insurance for a starving child, but there is penal code for neglect. Hint, hint. Meaning, insurance does not arbitrarily cover risks, nor the losses from bad outcomes. Bad things happen, but that does not mean that there is an insurance settlement on the proverbial horizon. Sometimes we just suffer loss in life, a non-indemnifiable risk; no one is going to make you whole, you just lose.
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The nature of insurance.
“The main concept of insurance—that of spreading risk among many—is as old as human existence.
“Whether it was hunting giant elk in a group to spread the risk of being the one gored to death or shipping cargo in several different caravans to avoid losing the whole shipment to a marauding tribe, people have always been wary of risk. Countries and their citizens need to spread risk among large numbers of people and move it to entities that can handle it” (1.).
But note that last item, “move it to entities that can handle it,” also known as Investors, people with money, and who are willing to put their money at risk for a profit, a return on their investment. That is the nature of insurance.
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So, when did insurance start?
“Insurance has had a long history and its starting point can trace back to different times depending on the type of insurance. It has its origins in the Babylonian empire, Medieval guilds, the Great Fire of London, and maritime insurance” (1.).
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A chronology for context.
Cargo ships and Babylon:
“The concept of insurance dates back to around 1750 B.C. with the Code of Hammurabi, which Babylonians carved into a stone monument and several clay tablets. The code describes a form of bottomry, whereby a ship’s cargo could be pledged in exchange for a loan. Repayment of the loan was contingent on a successful voyage, and the debtor did not have to repay the loan if the ship was lost at sea.1” (1.).
Craftsmen in the Middle Ages:
“In the Middle Ages, most craftsmen were trained through the guild system. Apprentices spent their childhoods working for masters for little or no pay. Once they became masters themselves, they paid dues to the guild and trained their own apprentices.
“The wealthier guilds had large coffers that acted as a type of insurance fund. [For example, if] a master's practice burned down—a common occurrence in the largely wooden cities of medieval Europe—the guild would rebuild it using money from its own funds.” (1.).
Exotic goods, shipping, and the New World:
“In the late 1600s, shipping was just beginning between the New World and the Old, as colonies were being established and exotic goods were ferried back. The practice of underwriting emerged in the same London coffeehouses that operated as the unofficial stock exchange for the British Empire. A coffeehouse owned by Edward Lloyd, later of Lloyd's of London, was the primary meeting place for merchants, ship owners, and others seeking insurance.2
“A basic system for funding voyages to the New World was established. In the first stage, merchants and companies would seek funding from the venture capitalists of the day. They, in turn, would help find people who wanted to be colonists, usually those from the more desperate areas of London, and would purchase provisions for the voyage.
“In exchange, the venture capitalists were guaranteed some of the returns from the goods the colonists would produce or find in the Americas. It was widely believed you couldn't take two left turns in America without finding a deposit of gold or other precious metals. When it turned out this wasn't exactly true, venture capitalists still funded voyages for a share of the new bumper crop: tobacco.
“After a voyage was secured by venture capitalists, the merchants and ship owners went to Lloyd's to hand over a copy of the ship's cargo manifest so the investors and underwriters who gathered there could read it” (1.).
So, with Investors in mind, pay close attention here, “Those who were interested in taking on the risk,” not those who were obligated.
“Those who were interested in taking on the risk signed at the bottom of the manifest beneath the figure indicating the share of the cargo for which they were taking responsibility (hence, underwriting). In this way, a single voyage would have multiple underwriters, who tried to spread their own risk by taking shares in several different voyages” (1.).
Life and fire insurances in England, France, and Holland:
“Life insurance began to emerge in the 16th and 17th centuries in England, France, and Holland. The first known life insurance policy in England was issued in 1583” (1.).
“In 1666, the Great Fire of London destroyed around 13,200 homes. London was still recovering from the plague that had begun to ravage it a year earlier and an estimated 100,000 survivors were left homeless.4
“The following year, property developer Nicholas Barbon began selling fire insurance as a personal business, which was then established as a joint-stock company, the Fire Office, in 1680.5” (1.).
Importing insurance to America:
“Insurance companies thrived in Europe, especially after the Industrial Revolution. Across the Atlantic, in America, the story was very different. Colonists' lives were fraught with dangers that no insurance company would touch. For example, starvation and related diseases killed almost three out of every four colonists in the Jamestown settlement between 1609 and 1610, a bleak period that came to be known as ‘The Starving Time.’8” (1.).
“In 1752, Benjamin Franklin and several other leading citizens founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, modeled after a London firm. The first fire insurance company in America, it was structured as a mutual insurance company, and Franklin advertised it in The Pennsylvania Gazette (which he owned). Like modern insurers, the company sent inspectors to evaluate properties whose owners were applying for coverage and rejected those that did not meet its standards; rates were based on a risk assessment of the property. The Contributionship issued seven-year policies, and claims were paid out of a capital reserve fund.2” (2.).
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The takeaway grounded in history?
Insurance is not a right, it is an investment construct created by Investors, one from which an individual, the insured – at a cost – can take risk that is mitigated to some degree by an Investor.
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Enter, the ongoing Los Angeles wildfires, and the uneducated outrage by those who do not understand insurance.
The broader discussion of situs, the location of property for legal purposes, and where one resides regarding insurance, is conceptionally no different than choosing to live on the Texas Gulf Coast. Take Galveston Island, for example, where there are their own unique perils, risks, like fluvial, pluvial, and coastal flooding, and hurricanes.
Let this sink in:
“’It is apparent that the American West is in big trouble. We’ve seen extreme heat, extreme drought and now wildfire conditions which are pointing toward needing to incentivize development in slightly safer areas, or at least to think about withdrawing federal support for infrastructure in areas that become uninsurable,’ [former Obama administration science adviser Susan Crawford],said” (3.).
What we are in part witnessing is a disconnect between those individuals who chose undue risk – those who live in wildfire-prone Los Angeles County, yet elect incompetent public servants who do not responsibly mitigate wildfire risks – then blame insurance companies – Investors who are unwilling to invest their money in high-risk markets – for wildfires that burned down his or her house.
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Now, in the aftermath of an ongoing disaster, both California Governor, Gavin Newsom, and Los Angeles Mayor, Karen Bass, recently issued executive orders, pledging to expedite rebuilding.
Newsom claimed that, “victims who have lost their homes and businesses must be able to rebuild quickly and without roadblocks.” He went on to say that his executive order, signed Sunday, January 12, 2025, will, “help cut permitting delays” (3.).
Mayor Bass promised even more virtue and irresponsibility. Bass’s executive order was issued on Monday, January 13, 2025.
Likely incapable of writing the order herself, Bass stated, “’This order is the first step in clearing away red tape and bureaucracy to organize around urgency, common sense and compassion’ […] ‘We will do everything we can to get Angelenos back home’” (3.).
What is the problem you ask?
Well, will she, “get Angelenos back home? Unlikely, nor is it even plausible. Set aside the health risks from acres of charred land and debris, the clean-up costs of which will likely be bore by the State and federal governments, building costs will be too great for most evacuees. Take for example the building standards necessary to mitigate the risks of future wildfires, the average former resident-homeowner, now toxic lot owner, will only increase costs. Without the appropriate building standards, what Newsom called “roadblocks," and Bass called “red tape and bureaucracy,” no Investor, insurer, will be willing to take that investment risk.
In my hometown of Friendswood, Texas, after extensive flooding in 1979, certain homeowners were given the option of either having contractors come in and elevate their homes, or, allow the Federal Emergency Management Agency (FEMA) to buy them out. Where the homes were bought-out by FEMA, the homes were torn down, and the residential lots have remained vacant ever since.
On Galveston Island, Texas, referring to the below image of the southeast end of the Island (the green pins are unrelated homes For Sale), there are parcels of land that extend into, or are fully located under, the coastal waters of the Gulf of Mexico. Some are privately owned; some entity owned; while some are owned by the State of Texas. The risk to build? Un-mitigable. The cost to build? Cost prohibitive, and that is assuming a city or county building permit would ever be issued in the first place by city or county officials.
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My point? Where we live is a choice, to include the required individual household, or business, budget necessary to afford the associated insurance costs, if insurance is even available. Plausibly, Los Angeles is unaffordable for most former resident-homeowners, now toxic-lot owners.
Take southern California for example.
“’In Pacific Palisades and in the Eaton Fire, once the fire got into the urban area, it wasn’t really a vegetation or a forest problem,’ said Peter Gleick, a hydrologist and the co-founder of the Pacific Institute. ‘It was structures burning one after another and setting fire to their neighbors. So that raises a whole question about what kind of urban development we should have. What kind of building materials should we allow?’” (3.).
So, although I do not agree with the “climate change” propaganda and narrative threaded throughout Reference (3.), the cost and risk analysis specific to rebuilding are an irrefutable calculus. This brings us back to the reality that not all former resident-homeowners will be able to afford to rebuild, at least not without gross subsidy, and or downsizing. City officials, and residents alike, will in fact have to ask, what kind of urban development is even feasible?
Summary:
Publicly, there is a lot of shortsighted commentary taking place in Los Angeles, much of which is rightfully due to the shear magnitude of loss, and the likely resulting feelings of displacement and despair. What many residents and talking heads aired on news and social media seem to fail to realize is that Investors, insurers, did not pull out of parts of Los Angeles because of the risk, they pulled out of parts of Los Angeles due to the lack of reward. Think about it. In theory, the average homeowner could not afford the risk-pool premiums necessary to make insuring those parts of Los Angeles profitable. Neither the former, nor the latter, are a crime. There is no penal code for math and commonsense. Without a change in State and municipal leadership, there will not ever be an appropriate reward for that level of tinderbox risk.
Insurance is an investment, it is not a handout, nor is it welfare. Conspiracy aside, and excluding multi-family residential, a “SmartLA 2028” is likely the only viable future where gross costs are absorbed by the State, and the developers. Just do not choke on the virtue (3., 4.), and test your tap water regularly.
Who wins? The developers and the grifters.
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Enter, SmartLA 2028:
“We live in a world full of urban challenges: from racial injustice that impacts our minority populations to natural disasters that threaten safety and property to environmental changes that affect the very water we drink and the air we breathe. To address these challenges, cities seek tools that can positively transform the urban environment. The most promising of these tools is technology. Technology enables the City of Los Angeles to efficiently and ethically improve the quality of life for our residents, businesses, and visitors. In other words, when done right, technology makes us ‘smarter’. This is why the City of Los Angeles strives to be a ‘smart’ city.
“In 2019, the City of Los Angeles Information Technology Agency (ITA) convened its Smart City Committee, composed of 24 departments and elected officials. While Los Angeles had become a civic technology leader (winning #1 U.S. Digital City award for three straight years), the exponential growth of new technologies and increasing public expectations requires new levels of coordination to realize our smart city vision” (5.).
The irony?
Take a look at the picture on Page 3 of Reference (6.), Page 6 of the .pdf., and note the content reference to, “aerospace.”
The content reads, “Businesses will find Los Angeles as the economic epicenter of multiple industries. As the digital media capital of the world, LA will be home to the best talent and startup ecosystem whether in Silicon Beach or the Downtown L.A. Cleantech Incubator. In addition to Hollywood, Los Angeles will continue to pioneer in fashion, aerospace, cuisine, and other industries” (6.).
It is a picture in the December 2020 reference of the former headquarters of SpaceX in Hawthorne, California, a city in the Los Angeles metropolitan area, but the headquarters has since moved.
“Dec 12 (Reuters) - Elon Musk said on social media platform X on Thursday that the SpaceX headquarters will now officially be in the city of Starbase, Texas.
“In July, Musk said he was moving the headquarters of two of his companies - social media platform X and rocket company SpaceX - to Texas from California, citing a new gender identity law there as the ‘last straw’” (7.).
I guess that when you run the wealthiest man on Earth out of your future SmartLA 2028 plans, you might need a better plan for your now toxic waste dump. Oh, the irony, and please, for Pete's sake, update your brochure.
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Insurance; not a blank check.
- Matfucius
1.) https://www.investopedia.com/articles/08/history-of-insurance.asp
2.) https://www.investopedia.com/articles/financial-theory/08/american-insurance.asp
4.) https://www.cfr.org/expert-brief/after-fires-how-rebuild-los-angeles
5.) https://ita.lacity.gov/smartla2028
7.) https://www.reuters.com/technology/space/musk-says-spacex-headquarters-be-starbase-texas-2024-12-13/
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