Author: Jay Jiyuan

The best way to know is to read my thoughts on the blog site: Ideabins.blog. I have been a managerial consultant for 10 years and then college teaching for 12 years. Entrepreneur in heart, interested in financial leteracy

Categories
Did You Know?

Ways to Lower Insurance Premium During Inflation

The Takeaways:

  1. Inflation will always have an impact on insurance cost or premium because the labor and parts cost of repairment and replacement for damaged properties will be higher.
  2. Inflation increases the value of insured assets like homes, cars and personal property. As the value of these assets increases, the cost of insuring them also increases.
  3. Inflation also pushes up medical costs, which in turn increases health insurance as insurers must pay more to cover medical treatments, prescription drugs and other related costs.
  4. Inflation has another type: Social inflation that may directly push up insurance cost due to the legal fees and attorney activities encouraging lawsuits and compensation or indemnification of financial losses, leading to protracted litigation and higher claims costs.
  5. Homeowners and renters should review policies to avoid underinsured during inflation.
  6. Shopping around, bundling policies, increasing deductibles, reviewing your insurance policy periodically and maintaining good credit scores and keeping your mileages low, these can all help decrease insurance costs even during inflation.

Bad News on the Insurance Front

Are you feeling the pinch of rising insurance premiums? You’re not alone. Inflation has a significant impact on the cost of insurance, and unfortunately not everyone is well prepared when it comes to planning or budgeting their policies ahead of the time.

In this blog post, I’ll explore how inflation affects insurance, why it can make your coverage more expensive, and what you can do to mitigate its impact.

Let’s begin from auto insurance. This report tells us that a recent study by Bankrate found annual auto insurance premiums will go up by $101 in California, to an average of $2,291, roughly 2.81 percent of their income. Say an average Californian is making $3,500 a month, then since 2.81% of $3,500 is roughly $98 a month, an average Californian will pay $98 for auto insurance.

Insurance business is regulated by state; thus insurance rate also differs across states. However, we can always compare the spending of auto insurance as percentage of income. In this regard, California is ranked 32nd in the nation, where the lowest (rank 1st) is Maine and the highest (rank 50th) is New York.

Why Insurance Rate Is Higher During Inflation: Demand Side

Knowing insurance cost is higher does not tell us why it is so. The best way to know the reasons, like knowing most everything in the market, is to look at the demand side and the supply side, as together they jointly determine the price of auto insurance.

Normally the demand for auto insurance is measured by how many people will buy auto insurance. However, since auto insurance is required by the law, at least for the liability auto insurance, meaning when you hit someone and it’s your fault, you will have the money to pay for the medical bills for the victim, and money for fixing the car. In that sense, the number of auto insurance buyers stays the same as everyone is supposed to buy it — unless when we look at the number of people buying auto insurance above and beyond the basic liability insurance but also policies with collision and comprehensive coverage. We will talk about that in another time.  

There is another way to measure demand for auto insurance: How many people are filling insurance claim. Other things equal, more insurance claims mean more traffic accidents. In case you don’t know, an insurance claim is a formal request from the policyholder (i.e., anyone bought an auto insurance policy) to their insurance company asking for payment after a covered incident.

Turns out that this is a more interesting measure for demand, which varies from time to time rather than being fixed. If more drivers do not follow traffic rules, there will be more accidents, which in turn lead to more claims.

One important factor driving up insurance cost is the riskier driver behaviors after the pandemic. Auto premium rates are affected by frequency and severity of claims. After decades of decline, traffic deaths have increased in the past several years due to riskier driving behaviors — more speeding, driving under the influence, not wearing seat belts, distracted driving — during the pandemic.

It’s like we have waited long enough at home during the lockdown period that when we finally get a chance to hit the road, we all trying to release ourselves by driving faster.

Let’s look at the numbers from the highways: In 2021, U.S. traffic fatalities reached a 16-year high, with nearly 43,000 deaths. In the first quarter of 2022, the National Highway Traffic Safety Administration (NHTSA) estimates, 9,560 people died in motor vehicle crashes, up 7 percent from the same period in 2021, making it the deadliest first quarter since 2002.

It is a safe bet that reckless driving leads to more accidents, followed by more insurance claims, which drive up insurance cost. After all, insurers do not have the magic power to keep the insurance premium the same regardless of how many claims they received. Remember several insurers became insolvent after Hurricane Ian in Florida? The truth is that when many insured file claims at the same time, insurers will have insufficient amount of fund to cover all the claims. They can do two things: raising premium and going to reinsurance for coverage.

Similar considerations come into play for homeowners insurance. Global economic losses from tornadoes, hurricanes, severe storms, wildfires, floods, and other natural disasters reached $270 billion in 2021, according to Swiss Re. Of those losses $111 billion were insured, Swiss Re says.

Much of this loss trend is due to people moving into risk-prone areas. More people, homes, businesses, and infrastructure means more costly damage when extreme events occur. More damage to insured properties means more and larger claims. An Aon analysis of U.S. Census Bureau data shows the number of housing units in the United States has increased most dramatically since 1940 in areas that are most vulnerable to weather and climate-related damage.

Why Insurance Rate Is Higher During Inflation: Supply Side

Now we must consider the supply side factors that also drive up insurance cost: the people and businesses whose jobs are to fix cars involved in accidents, care for drivers injured, and repair and recover properties lost or damaged.

Unless your car is “totaled” or deemed worthless for repairment, insurers will pay for your vehicle to be fixed. From the following Triple-I issue briefing on inflation and higher insurance premium:

As material and labor costs rise, the cost to repair and replace damaged homes and vehicles increases. If the original premium rates are too low to cover these increased costs, insurers would quickly exhaust the funds they set aside for the rainy days to ensure they can keep their promises to pay all claims. If their losses and expenses exceed their revenues by too much for too long, they risk insolvency — unless they have reinsurance or insurance for insurers.

Social Inflation: Definition and Cost

The other side of story is social inflation, which is the amount of insurance claims that above economic inflation. One narrow definition is “legislative and litigation developments which impact insurers’ legal liabilities and claims costs.”

ChatGPT offers a more detailed definition: “Social inflation is a term used to describe a phenomenon where the cost of insurance claims rises due to societal factors such as changing attitudes towards personal responsibility, increasing jury awards, and the growing willingness of juries to award large sums of money to plaintiffs. In other words, social inflation refers to the trend of increasing costs of insurance claims due to broader social, cultural, and economic factors rather than traditional factors such as inflation, interest rates, or market fluctuations. This trend has been observed in a variety of industries, including personal injury, product liability, and medical malpractice claims. Social inflation can have significant impacts on insurance companies and their policyholders, leading to higher premiums and reduced coverage options.”

Two things to be remembered about social inflation. First, it is social rather than economic, which means the cause of it is not economical but social, especially the legal part of society. Two, its impact is not to be underestimated.

In a recent report by Triple-I, it is found that “U.S. commercial auto insurance liability claim payouts increased $30 billion more than would otherwise have been expected between 2012 and 2021 due in part to social inflation.”

Inflation and Underinsured Homeowners

Inflation means lower purchasing power of the same amount of money. For example, $1 before inflation could buy you 4 eggs but only 3 after inflation. But the same logic can apply to buying insurance. The best example is from homeowner insurance. Before inflation your $1,500 premium homeowner policy could be enough to cover the cost needed for repairing a partly damaged house. However, after inflation everything (parts, labor) has a higher price, meaning your insurer will have a hard time to cover the cost of repairing the house to the original state.  

According to a report by policygenius.com in 2022, construction costs have risen sharply because of inflation, which means you may not have enough home insurance to rebuild your house after a disaster, which in turn means many homeowners could be left underinsured. 

During periods of rapid inflation, the cost to rebuild may suddenly spike to account for higher lumber prices or a shortage of contractors. If homeowners don’t update their policy to reflect these fluctuations, they may not have enough insurance to fully rebuild their home after a disaster.

The price of materials used in home construction has increased 36% since the start of the pandemic. As we settle into what forecasters predict will be another active hurricane and wildfire season, it’s more important than ever for homeowners to review their policy and make sure they have enough coverage should disaster strike.

From a recent survey of insured homeowners by policygenius.com:

  • More than half of homeowners (56%) did not review their home insurance policy in the last year to see how much coverage they had. 
  • Homeowners who reviewed their policy’s coverage limits in the last year (44%) were more likely than those who didn’t to:
    • Increase their home’s coverage limits.
    • Take action to lower their insurance premiums.
    • Have at least one coverage feature in their policy that accounts for high rebuild costs.
    • Be “very sure” their house is fully insured.
  • Just 9% of homeowners have increased their home’s coverage limit in the last year to account for rising construction costs and inflation.
  • Only 33% of homeowners are “very sure” their home’s coverage limit is high enough to cover their home’s entire rebuild cost.  
  • 83% of homeowners either don’t have or aren’t sure if they have inflation guard coverage, which is a crucial coverage feature that automatically increases your home’s coverage limit each year to keep pace with inflation. Notice this is an endorsement so it will cost you money to keep it. For example, say your home is insured for $100,000 and your inflation guard coverage is set at 8%. Now say you suffer a total loss of your home 90 days into your year-long policy term. Your dwelling coverage limit will be upped to reflect an 8% daily inflation rate, so your coverage limit would now be around $101,973, instead of $100,000. 
  • More than two in three homeowners (68%) may not have guaranteed replacement cost coverage, and 80% of homeowners may be without extended replacement cost coverage — two important coverage add-ons that buffer the impacts of demand surge and higher rebuild costs after a disaster. Note replacement cost is a basic type of insurance policy that pays for the cost of replacing or repairing a damaged property up to its current market value of materials and labor. This type of coverage does not take into account any increase in the cost of materials or labor that may occur in the future. Guaranteed replacement cost provides coverage for the full cost of replacing or repairing a damaged property, regardless of the current market value. This means that even if the cost of materials or labor increases in the future, the insurance company will still pay for the full cost of repairing or replacing the property.

Things to Do for Lowering Insurance Cost During Inflation

There are things you can do to lower or control your cost of insurance even with inflation being high.

The first thing is to shop around for the best value. Note the need to avoid the trap of comparing apples to oranges: You don’t want to just look at the premium and decide on the policy or insurer that offers the lowest premium. You must take the insurance coverage payout into consideration and also ensure that you have the right coverage for you and your family. Many low premium policies come with coverage limits. One easy example is that your house is valued at $1.2 million but the policy only covers $1 million replacement cost. That defeats the purpose of buying insurance in the first place, as you will not have peace of mind when something bad happened to your house.

The second thing is to keep a decent amount of deductible, which is the amount you will have to pay — out of your own pocket — before your insurance coverage kicks in. It is always the case that a higher deductible means lower insurance premium because insurer knows they don’t have to cover all the cost in a claim, you will pay a part of it by yourself. This applies to those with enough savings to pay the deductible. The other reason insurer prefers high deductible is that people willing to pay a higher deductible tend to be more careful in avoiding risks.

The third thing, perhaps the most important and least risky, is to bundle your policies together. See my other post on details.

The fourth thing is to maintain a good credit scores, which insurers use to determine the premium rate.

The fifth thing is to ask for discounts from your insurer. There are numerous discounts, and many insurance agents will actively search for you in order to attract you and to get your business.

Note the flip side of seeking discounts is to avoid “premium boosting” factors. The best example is having a teenager driver on your auto insurance policy. For example, this report by Bankrate tells us that for a married couple the national average premium without a teen driver is $1,898, but after adding a teen driver it jumps to $4,392! The final thing is to always review your insurance policy to ensure that you have enough insurance coverage even during inflation. See above discussion on homeowner insurance for details.

Categories
Did You Know?

Why Bundled Insurance Policies Are Good for You

The Takeaways:

  1. Bundled Insurance policies are often promoted by insurers, but many insurance consumers see them as gimmicks and quickly say “No” to them.
  2. Unlike bundled packages from most car dealers, bundled insurance policies are transparent and should not be seen as gimmicks. They can bring real savings to consumers, in addition to the extra convenience, additional coverage and improved customer service experiences.
  3. There is a solid statistical reason for insurers to offer discounts to bundled policies: The joint probability of two or more independent events is always smaller than that of individual event.
  4. The most common bundles are home and auto policies for homeowners or renters and auto policies for renters.
  5. Many insurance consumers do not know that Business Owners’ Policy or BOP is a bundled policy by itself. Umbrella policies are also bundled policies.

What Are Bundled Insurance Policies?

The best short and concise answer is provided by this article of Forbes: “Bundling insurance is when you buy two or more insurance policies from the same company and get a discount.”

Most insurance consumers (i.e., people like you and me) own multiple insurance policies, such as health insurance, auto insurance, home insurance or life insurance. Given that you are the only owner to them all, are they “bundled policies” around you?

Not really. As long as these policies are written by different insurers, they are not bundled. You may have a life policy from New York Life, an auto policy from Progressive, a home policy from Farmers, and a health policy from Kaiser Permanente. Each insurer cares little or wants nothing to do with another insurer. Why would New York Life care about whether you use Progressive or Allstate or Geico to insure your autos? Either way does not make any difference for their life insurance business.

The only case you have a bundled insurance policy is when you buy at least two policies from the same insurer.

Is Bundled Insurance Good for Insurers Only?

This article from Harvard Business Review offers a seemingly simple and straightforward rule of thumb for bundled pricing or bundled packaging: “Should you prefer to purchase it as a breakdown of the base car plus handpicked options or are you better off buying it as one all-inclusive bundle? There is a simple and pretty consistent rule of thumb on the question. Here it is: Unbundling or a la carte pricing benefits the buyer and packaged or bundled deals give the advantage to the seller.”

The reason according to the article is that if you are the customer, “unbundled pricing creates transparency and allows you to pick exactly the options you want. Most bundles make margin in giving you some of the things you want, but also some of the things that you will rarely use.”

This is true in car shopping but obviously not true for everything. In insurance, for example, auto insurance and home insurance are most likely required by the law or by lenders. When two things are both required, buying them together from the same seller makes sense, because it creates a win-win case for both sellers and buyers.

Why Insurers Want to Offer You Bundled Policies

Insurance companies or insurers all want you to buy bundled policies from them because, as this article points out, “it’s cheaper for them to service one customer who has multiple policies than it is to service multiple customers who each have only one policy. In that case, insurers are not any different from any retailers who always want you to buy more from them, and they will be happy to offer you discounts for doing that.”

There is another realistic advantage that I want to call “consumer stickiness,” which means, as the aforementioned article says, “bundling makes it less likely that you’ll switch to another company, which saves the insurance company both the cost of acquiring a new customer and the risk of losing money if that customer files a claim.”

In other words, bundled customers tend to be loyal customers.

Risk Management Advantage for Bundled Polices

In my view the biggest advantage for insurer is in risk management. Believe it or not, offering both auto and home insurance policies helps reduce insurers’ overall risk exposure, which can result in cost savings for both the insurer and the customer. Here is how it works.

Say you have both auto and home insurance with Farmers, it is less likely for you to file claims for both policies at the same time. This is because the risks that could result in a claim for one policy (such as an accident or theft of a vehicle) are less likely to also impact the other policy (such as damage to a home from a natural disaster).

Simply put, Farmers is betting that the chance for them to pay you on both auto and home damages at the same time is smaller than just paying you on one policy. This is how they save the cost of doing business with you.

The Law of Probabilities Favors Bundled Policies

Is it smart for insurers to bet that way? Yes. The multiplication rule for independent events, one of the basic rules of probability, says that the probability of two or more independent events occurring together is equal to the product of their individual probabilities.

I know the above sounds complicated but let me make it simple. Say you like to drink every Friday afternoon after work and sometimes you drive under influence or DUI. Seeing one ticket from your DMV record, all auto insurers will see you as a bigger than normal risk, and almost nobody wants to write you a policy unless you pay extra dollars for a higher premium.

On the other hand, drinking at home Friday afternoon presents little risk there, and your home insurers are unlikely to raise your premium just because you drink once a week in Friday afternoons.

What I am saying is that the risks from drinking behind wheel and drinking at home are almost independent — in terms of causing accidents or property damages — even though the two events are not entirely independent from each other. For one thing, they involve the same person (you).

Now, as long as two events are independent (for insurance purposes), the chance for them to happen at the same time is equal to the product of their individual probabilities. Since a probability cannot be smaller than 0 and larger than 1, the product of two probabilities is always smaller than the probability of one event.

You are probably confused by now so let’s continue with the Friday drinking example. Say the chance for you to get a DUI ticket is 1/180 days or roughly every six months, while the chance for you to set your house in fire after being drunk is 1/1,095 days or once every three years. The chance for you to get a DUI ticket and to set the house in fire is then 1/180 x 1/1095 = 1/197,100 days or roughly one out of 200,000 days (i.e., roughly 540 years). Apparently the result is much smaller than 1/180 or 1/1095.

This is why insurers are betting it right and they have nothing to hide from you when they say they want to give you a discount if you buy auto and home policies together from them.

Bear in mind however that when there are catastrophic events like hurricanes or earthquakes, the events that both your home and you cars will be damaged are no longer independent. This is why insurers need to buy reinsurance to cover themselves as they often must to make payments to many claims at the same time.

Why Bundled Packages in Car Dealership Are Often Not to Your Advantage

The story is different with a car dealership. You see each year car manufacturers always try to introduce some new features to their cars. It goes without saying that it costs money to introduce new features. Say for the 2024 model year, Toyota wants to introduce a new feature called “Auto on Cartoons” that the backseat screen will automatically detect when a child is seated and starts playing the Cartoon Network programs for them during the entire trip.

Apparently such a feature only makes sense if there will be children around in the house, but not for the “Empty netters” whose children all left out of the household. However, Toyota decides to make this feature available to all cars in the 2024 models in order to quick cover the cost from doing research and development. Meanwhile all Toyota dealers will get an extra bonus of $20 every time they successfully sold this feature to a new car buyer — whether they need it or not.

In other words, car dealers do have something to hide from you and the bundled package only benefit sellers but not necessarily buyers.

Underwriting Advantage in Bundled Policies

Working with packaged policies has another (subtle) advantage for insurers for underwriting purposes.

What is underwriting? It is the process of evaluating and assessing the risks associated with insuring a particular individual or entity, and determining the appropriate premiums to charge based on that assessment.

In other words, it is all about knowing customers or potential customers. The more insurer knows potential customers, the better they can come up with the right price for premium.

By bundling policies, insurers can gain a more complete view of the customer’s overall risk profile, which enables them to price the policies more accurately.

For example, if an insurer offers both home and auto insurance, they can analyze the customer’s driving record and credit history in addition to information about their home, such as its location and age. This information allows the insurer to assess the customer’s overall risk and set premiums accordingly more accurately. The insurer can also better predict the likelihood of claims related to both policies, which helps them manage their risk exposure.

Bundled Policies Are More Common Than We Think

You don’t have to wait for your insurance agent to offer you a bundled policy, some policies were born to be bundled. The best example is Business Owners’ Policy or commonly called BOPs, which is a type of commercial insurance policy that bundles together several different types of coverage into one package.

Typically, a BOP will include property insurance, liability insurance, and business interruption insurance. By bundling these coverages together, insurance companies are able to offer a comprehensive insurance solution for small and medium-sized businesses at a lower cost than if the policies were purchased separately.

Additionally, purchasing a BOP can be a more convenient and streamlined process for business owners, as they only need to manage one policy instead of several. The policy can be customized to meet the specific needs of the business, and the coverage can be adjusted as the business grows and evolves.

A BOP is customizable, because BOPs are designed to be tailored to the specific needs of a business. Businesses can choose the coverages they need and adjust their policies as their needs change.

It is designed primarily for small and medium-sized businesses. However, it can also be a good insurance option for larger businesses that do not have complex insurance needs.

Another common type of bundled policies is umbrella policies. All umbrella policies are bundled policies. An umbrella policy is a type of insurance policy that provides additional liability coverage beyond the limits of the primary insurance policies. It is called an umbrella policy because it provides coverage that “sits on top” of the primary policies, like an umbrella. An umbrella policy is considered a bundled policy because it covers multiple underlying policies, such as homeowners insurance, auto insurance, and other liability policies. It provides an additional layer of protection for businesses or individuals who may face significant liabilities that exceed the limits of their underlying insurance policies.

Categories
Property Insurance

How to Fight and Win Wildfire Crisis

The Takeaways

  1. Wildfire risk costs many condos and townhouses under homeowner association or HOA the accessibility to property insurance, or they must pay a significantly higher price to be covered.
  2. Pushing insurance to state sponsored insurers like Fair Plan is not a sustainable solution.
  3. Wildfire mitigation (clearing vegetations near house) is one way to increase insurability but we need high tech solutions as well.
  4. It’s good that California Department of Insurance asks insurers to give discounts to home hardening and wildfire resilient communities.
  5. New solar cells printed on fabrics offer light weight, flexibility and high efficiency on generating solar energy.
  6. We can hit three birds with one stone by coating solar fabrics with fire retardant so they can generate solar energy, protect roofs, houses, porches, yards and detached buildings and significantly reduce insurance cost. The point is to make fire safety to pay for itself by generating and selling solar power to the grid.

Shocking News in California on the Insurance Side

I’ve just written a post on fighting flood a few days ago and now the news from the Triple-I newsletter shocked me from somewhere closer to home, with a title that seems harmless: “California senate pushes to stabilize the homeowners insurance market.”

When you click it and read it, however, the contents are really nothing less than being shocking. The report started with the sentence that “Homeowners insurance prices in California are skyrocketing with the increased threat of wildfires.”

But to hear the word “skyrocketing” is not enough, you need to see the prices to fully appreciate the change and impact.

This report in early 2022 tells us that “there were an average of 62,805 wildfires and an average of 7.5 million acres impacted annually,” in the years from 2011 to 2020.

There is someone living in a condo in San Diego County, who owns a townhome in an HOA (Home-Owner Association) with 186 others. “During our HOAs last insurance renewal we were notified that we would not be renewed due to proximity to high fire risk areas.”

The policy they started with was $54,000 a year (apparently this is for the so called “master” insurance policy for the entire complex, which HOAs often buy for the common areas like swimming pool, gym, parking lots, gates, landscape, parks and playground, clubhouse, trails, common building and lighting), but now the annual premium for this year is $293,000, a more than five time increase, which led to an emergency assessment to each unit owner to cover the cost of that new premium amount.

From another planned community in Anaheim Hills: 

“In 2020, Horizons paid $39,000 for property and fire insurance,” Hayes said. “This year, we are going to pay out $417,000 plus interest,” which is more than 10 times higher. 

In another report published on February 16, 2023, Farmers Insurance dropped coverage on more than 1,000 condo owners in San Diego due to wildfire risk.

Limited Fire Insurance Options

When someone lost private fire insurance, they can temporarily use the state’s Fair Plan, a non-profit insurance plan, which is meant to be the insurance of last resort. Fair Plan offers plans that are however not large enough to cover HOAs.

The insurance industry is not too keen on solutions that include state-run insurance programs, like Florida’s Citizens Property Insurance, or California’s Fair Plan that provides fire insurance as a policy of last resort.

One correspondent named Ruiz from Insurance Information Institute (or Triple-I) is quick to point out why insurance companies are not renewing policies on large condo complexes.

“Inflation has really driven up the cost of building,” she said. “Since 2017, we’ve seen a huge increase in the numbers of wildfires and the losses from wildfires.”

When it comes to solving the condo insurance crisis in California, Ruiz mainly talks about wildfire mitigation, like clearing brush and hardening homes.

Policy Incentive for Fire Safety

But future solutions are coming, Ruiz said. Beginning in April, the state will start looking at lower insurance rates as a reward for fire mitigation.

“So the California Department of Insurance has asked all the admitted insurance companies to file new rating structures that would include discounts for home hardening, and community wildfire resilience,” said Ruiz.

“After the changes go through with the Department of Insurance, there will be more insurance available to condo associations, condo owners, and the insurance market will be in a much better place,” Ruiz predicted.

Help at the Federal Level

Within the past year, the Biden Administration has increased efforts to make the job of firefighters safer and better. They’ve done this by signing reform laws into place that drastically increase the compensation for firefighters, change their status to full time employees in many circumstances, and make it easier for them to access mental health services.

In the Biden Administration’s proposed FY2022 budget, there was a significant amount of discretionary dollars earmarked to make new technologies available to firefighters. These technologies could go a long way to making every firefighter more connected, more informed, and better prepared for when disaster strikes, and they’re called into action. Some of these technologies could also make it easier for firefighters that are isolated or injured to be found and rescued.

New Tech Fire Solutions

Here are some of the technologies that the Biden Administration could make available to firefighters, and how they could make a difference in wildfire situations:

Internet of Things (IoT) technologies and sensors

Testing of wildfire detection sensors is currently being spearheaded by the Department of Homeland Security (DHS) Science and Technology Directorate (S&T). According to Jeff Booth, Director of S&T’s Sensors and Platforms Technology Center, “These sensors will provide early alerting capabilities in high-risk areas where detection and alerting aren’t currently available.”

By identifying wildfires in geographically remote, high-risk areas more rapidly, firefighters can begin fighting and managing fires before they grow incredibly large and increasingly dangerous. They can also engage fires before they spread to areas where personal property and lives could be put in danger.

Mobile Mesh Networking

Mobile mesh networking can enable the use of communications and situational awareness tools off the grid in places where other terrestrial networks don’t exist.

This means that firefighters will be able to share information and see each other’s locations even in isolated, remote locations. They can also be used to spread connectivity over a wide geographic area and to each individual without a single, centralized piece of equipment that can be compromised and fail. This means they can deliver resilient and redundant communications that is always available to the firefighter.

Finally, mobile mesh networking can be a low-cost alternative to connecting IoT (Internet of Things) devices. Instead of each individual sensor requiring its own expensive cellular connection – or incredibly pricey satellite connection – mobile mesh can be used to connect IoT devices over a wide geographic area with no recurring cost. This can help accelerate fire focused IoT programs, and enable the government to extend them to more areas at a lower cost to the taxpayer.

Household Self Protection

We have all seen big airplanes dropping red fire retardant powder off the sky over the fired areas. This video shows a preventive alternative before fire starts — without using an airplane. It allows households to spray fire retardant through home or garden hoses on vegetation and yard before fire season.

You do need to spray it every year and it costs $20,000+ a mile for a 20 ft wide zone along power lines or roads. The other potential side effects is environmental or human risk, as fire retardant may have health hazards over human bodies as this video shows.

An Innovation in Solar Panel

Speaking of the home based solutions, one seemingly unrelated development from the MIT One Lab is the creation of solar films that is very thin, flexible, light and yet 18 times more powerful per kilogram than the rigid solar panel that is supposedly capable of turning any surface into a power source. The solar cells are entirely printable, using ink-based materials and scalable fabrication techniques.

While the solar cells are thin and printable, they do have problems. Standing by themselves the solar modules are not easy to handle and can easily tear. The MIT team needs to find a lightweight, flexible, and high-strength substrate to attach their solar cells to.

An ideal material—a composite fabric that weighs only 13 grams per square meter, commercially known as Dyneema, fits the purpose perfectly. By adding a layer of UV-curable glue, they adhere the solar modules to sheets of this fabric. This forms an ultra-light and mechanically robust solar structure.

Hitting Three Birds with One Stone

At this point the idea hits me: If we coat Dyneema with fire retardant chemicals before the MIT solar cells are attached to it, we will produce flame safe and solar capable structure and then install it on rooftops, we will hit three birds with one stone: Home based energy generation, home fire safety and homeowner policies at lowering cost.  

ChatGPT, when asked, gives the following answer on the feasibility of fire retardant coating:

“Yes, Dyneema can be coated with a fire retardant coating. Dyneema is a high-strength synthetic fiber that is often used in applications where flame resistance is important, such as protective clothing and equipment for firefighters, military personnel, and industrial workers.

“There are various types of fire retardant coatings available in the market, including intumescent coatings and ablative coatings, which can be applied to Dyneema fibers to enhance their fire resistance properties. These coatings work by either expanding and forming a protective barrier when exposed to heat or charring to insulate the fibers from further heat exposure.”

In terms of the cost, ChatGPT has the following to say:

“Dyneema is a high-performance fiber that is known for its exceptional strength, light weight, and resistance to abrasion and tearing. The cost of Dyneema can vary depending on the specific application, the manufacturer, and the quantity purchased.

“As a general guide, Dyneema is typically more expensive than traditional materials like nylon and polyester. The price of Dyneema can range from several dollars per yard for small quantities to several hundred dollars per yard for industrial-grade products.

“However, it is important to note that the high cost of Dyneema is often offset by its superior performance, durability, and lifespan. Dyneema is often used in applications where strength and reliability are critical, such as high-performance sails, body armor, and climbing equipment, where the high cost is justified by its benefits.”

I would say for high cost neighborhoods and upper scale houses, Dyneema will have a market demand there. For affordable housing and student housing on campus, on the other hand, other fabrics would work better as long as it is transparent (to allow sunlight to penetrate to the solar cells) and flexible (for easy deployments on rooftops, corners, porches, front yard, detached buildings and backyard. Bear in mind that in the long run the cost for Dyneema will be paid off by the energy it generated, so even affordable housing projects can sometimes choose the longer lasting fabrics.

Again, the beauty of this solution is to potentially make fire safety to pay itself, through generating and selling home generated solar energy, and significantly reduces insurance cost.

The good thing is that many roofs in California already have solar panels installed. All we need to do now is to add another very strong home safety reason to install more. Doing so will make an immediate difference in home finance, because insurance companies will be much more willing to cover your house with fire retardant roofs and front yard and backyard. This would apply especially well to all condos and townhouses or anywhere with an HOA, who will no longer be rejected for master insurance policy by a private insurer.

Maybe in the future all solar panels will be fire retardant by default!

Categories
Life insurance

Why Do I Need Life Insurance?

The Takeaways:

  1. You don’t have to buy life insurance, but the first reason to consider it is when you have a big and long term financial responsibilities for you or your loved ones, it is to your great advantage to own life insurance.
  2. Everyone talks about “death benefits” from life insurance because that is often the largest payment from your life insurer, who paid $100 billion to the beneficiaries of policyholders who died in 2021, the highest amount in a single year.
  3. You don’t have to have a child to buy a life insurance. Living benefits of a life policy give anyone reasons to have a life policy for unpredictable future events for oneself, like accelerated death benefits & secured mortgage payments when one lost job.
  4. Life insurance involves very personal choices, where a long term oriented mindset matters more than demographics and liabilities. Cultures play a big role especially between American parents and Chinese parents.
  5. Next to the long term mindset is the long term financial responsibilities one faces, like raising children, saving money for college education of the youth, leaving a legacy in personal cause, mortgage payments, owning a business, and senior long term cares.

Do I must Have Life insurance?

I have heard that question many times in my life. I myself also wondered about that. But the short answer is “No” because, let’s face it, life insurance is not for everyone, or in a flip side, not everyone needs a life policy.

To avoid sounding negative, the safe and sound answer should be “It depends.”

Unlike auto liability insurance that is required by the law, no one will force you to buy life insurance. The urge to own life insurance may come from inside more than outside.

That said, let’s change the question to this: “Why would anyone want to buy a life insurance policy?”

Reasons for Owning a Life Insurance

With the new question we will have a more constructive, more positive answer. We are not talking about why anyone must have life insurance. Instead, we ask for reasons why someone would choose to have it.

Let’s begin from ChatGPT and see what the chatbot would have to say (with my edit).

Here are some reasons why you might need a life insurance policy:

  1. Demographic Reasons to Protect Your Loved Ones: If you have anyone financially depending on you (spouse, children, or aging parents), life insurance can ensure that they are financially protected in the future when your pass away, allowing your loved ones to maintain their standard of living.
  2. Business Continuity Reasons to Protect Your Brand or Endeavor: If you are a business owner, life insurance can ensure that your business continues and that your family is protected in case of an untimely passing. Both whole life and term life insurance options should be considered for the reason of protecting your business.
  3. Funding for Future Expenses: Life insurance can be seen as an investment for future expenses, such as college tuition for your children.
  4. Peace of Mind: Having life insurance can give you peace of mind, knowing that your loved ones will be financially protected in the event of your passing. It can also provide a sense of security and stability during uncertain times.

The above is just a start, and I’d say it missed at least two things: It does not cover the particulars or specifics of why you should have life insurance and it essentially skips the “living benefits” for policyholders. Let’s get into details below.

Life Insurance Is Very Personal

The first thing ChatGPT missed is your personal choice for life insurance. To be sure, all insurance decisions are based on personal choices, even for auto insurance. The law says every driver must have a liability auto insurance to protect other drivers involved in an accident that is your fault. At the minimum, all California drivers must have:

  • $15,000 for injury/death to one person.
  • $30,000 for injury/death to more than one person.
  • $5,000 for damage to property.

However, you don’t have to have a comprehensive and/or collision coverages that are designed to protect yourself and your autos. Whether you choose to buy those coverages is totally up to you or is your personal choice.  

Personal choice matters especially for life insurance because no law says one must buy life insurance. Just because you have a demographic need (a wife, children and/or grandchildren) does not necessarily mean you will buy life insurance. Let me illustrate with real life examples.

Americans Do Not Always Pass Wealth to Heirs

According to an article published in New York Times, “Two-thirds of Americans who have at least $3 million in investable assets have not talked to their children about their wealth or never will.”

Another article by the Atlantic discusses how many grandparents offer some sort of financial support to their grandchildren. Some may choose to keep their wealth private from their own children. This could be due to a variety of reasons, such as not wanting to create conflicts among siblings or not wanting their children to become complacent with the idea of inheriting wealth.

Let me use a hypothetical example. Sam owns a small business with a net worth of $6 million. Sam was divorced with one son, Simon, and three daughters, Ashley, Dawn and Kelley. Sam has decided to pass his wealth not to the offspring but to an estate, which starts from a will, an executor who is in charge of the estate after Sam dies, a guardian for Kelley who is currently only 14 year old, an inventory or an account for distribution of heirs, among other things.

ChatGPT offers several reasons why a life insurance policyholder, like Sam, might name their estate as the beneficiary of their policy (with my edit):

  • Simplicity: If you name your estate as the beneficiary, the distribution of the death benefit is determined by the terms of your will. This can simplify the process of distributing the funds to your heirs, as it’s all managed through the probate process, which is the legal process of administering a deceased person’s estate, including identifying, valuing, and distributing the assets, settling debts and taxes, and transferring the remaining assets to the beneficiaries.
  • Flexibility: By naming your estate as the beneficiary, you retain control over how the death benefit is distributed. If your circumstances change, you (or the court in California) can update your will to reflect your wishes.
  • Protection: If you have debts or liabilities that may not be covered by your assets, naming your estate as the beneficiary of your life insurance policy can provide additional protection for your loved ones. One way is to establish a trust, a legal arrangement where you transfer ownership of your assets to a trustee who manages them for the benefit of your beneficiaries. When you establish a trust, your assets are no longer considered your property, so they cannot be seized by your creditors or debtors.

However, naming your estate as the beneficiary may also delay the distribution of funds to your heirs. Additionally, if you have a large estate, naming your estate as the beneficiary could increase the overall size of your estate, potentially triggering estate taxes.

That said, Sam and his heirs do not need to worry about that because the IRS will charge estate tax only for estates with a value above certain tax exemption threshold. For individuals passed away in 2021, the exemption amount is $11.7 million, meaning any estates valued at or below $11.7 million are not subject to estate tax. Sam’s net worth was only $6 million, way below the tax threshold.

Chinese Want to Pass Every Penny to Heirs Top of Form

On the other end of the spectrum and unlike many American parents, many (mainlander) Chinese parents will treat their children as the most important people in the world, literally more so than their spouse. They will do everything in their power to make sure the children get all the wealth they created, which has been their life goal to begin with. For these parents, one of the favorite way to pass wealth to the next generation is to open an irrevocable life insurance trust (ILIT) account.

This is obviously the topic for another day but briefly, an irrevocable life insurance trust (ILIT) is a type of trust that is commonly used to manage life insurance proceeds. It is called “irrevocable” because, once the trust is established, the grantor (the person who creates the trust) cannot change or revoke it without the consent of the beneficiaries.

In other words, an ILIT is permanent and not meant to be changeable. You really must have made up your mind to pass the wealth down to the trust, otherwise you may get into a lengthy process to reverse it — if possible at all. Some states allow for modifications if all of the beneficiaries consent to the changes. In other cases, the court may have the authority to modify or terminate the trust based on certain circumstances, such as a change in circumstances that makes the trust’s purposes impractical or impossible to achieve.

But Chinese parents are unlikely to change their mind on their children, so this is not really a risk factor for them at all.

There are several benefits to using an ILIT, including:

  • Estate tax savings: Since the life insurance policy is owned by the trust, it is not considered part of the grantor’s estate for tax purposes, which can reduce the amount of estate tax that must be paid. Say a Chinese businessman named Mr. Lin owns a net worth of $50 million. He can put $11 million into an ILIT for his 15 year old son, Ben, which is just below the lifetime gift tax exemption that allows individuals to make gifts up to $12.06 million as of 2023 over their lifetime without incurring a gift tax for Ben to pay.  
  • Asset protection: Because the ILIT is irrevocable, the assets in the trust are protected from the grantor’s (e.g., Mr. Lin) creditors and from any legal claims against the grantor. In other words, even if Mr. Lin owed $2 million debt to the bank, bankers cannot take money from the $11 million in ILIT, which is off limit to all creditors.
  • Control: The grantor like Mr. Lin can specify how the life insurance proceeds will be distributed, which can provide greater control over how their assets are used after their passing.

The American example of naming an estate as the beneficiary versus the Chinese example of using an ILIT to pass the wealth down help illustrate how different people choose to work with life insurance differently, which in turn is affected by different cultures and preferences.  

Why Death Benefits Matter

Like I pointed out earlier, the ChatGPT answer listed above also missed the living benefits of a life insurance policy. This is understandable as when it comes to life insurance, the thing called “death benefits” quickly come to our mind. This makes total sense as they are typically the biggest chunk of money from the insurer, and will only be sent out after the policyholder is no longer alive.

Not only are death benefits the primary payment from a life insurer but they are not generally taxable income for the beneficiaries.

For example, you have a daughter named Chloe who is the beneficiary of your life insurance policy and when you passed away, leaving a death benefit of $100,000, Chloe gets to keep that lump sum without paying income tax. In fact, Chloe does not even need to report that $100,000 on her income tax form for the year she received the money.

Only under unusual circumstances would Chloe have to pay taxes. One scenario is when she decides to let the life insurance company keep the money to generate interest, Chloe then needs to pay tax on the interest part. For example, say Chloe keeps the $100,000 on the account with the insurer and one year later it generates $500 interest, Chloe would have to report that $500 as income and pay tax on that.

Another scenario is when Chloe’s father bought the life insurance policy through a group life plan, which is typically paid by pre-tax dollars, then Chloe would have to pay taxes and her death benefits will not be $100,000 after paying taxes. Another (unusual) scenario is when Chloe decided to sell the policy (with $100,000 death benefits) to someone else.

Why Living Benefits Also Matter

When prompted, ChatGPT offers the following answer:

Life insurance provides financial protection through death benefits for your loved ones, but it can also offer living benefits while you’re still alive. Here are some listed by ChatGPT (with my edit):

  • Cash value accumulation: Many whole life insurance and universal life insurance build cash value over time, which policyholders can use the money anyway they see fit, with the following uses or advantages:
  • Tax-deferred growth: The cash value of certain life insurance policies grows tax-deferred, meaning you don’t have to pay taxes on the growth until you withdraw the money. Being able to pay taxes later rather than now saves you money because money has more value today than tomorrow.
  • Supplemental retirement income: You can use the cash value of certain life insurance policies to supplement your retirement income. This can be especially useful if you’ve maxed out other retirement savings options, such as 401(k)s or IRAs. This means in addition to the money saved though 401(k) and IRA, plus social security, you have an extra source of income when you retire.
  • Collateral for loans: The cash value of a life insurance policy can be used as collateral for loans, such as a home equity loan or business loan. When you need money today, banks can look at your cash value from the life insurance policy and say “Okay, we see you have $100,000 cash value from your life policy and we can loan you $150,000 using that $100,000 as the backup.” Banks won’t say that to someone with no life policy, or with a term life policy that carries no cash value.
  • Estate planning: Life insurance can be used as part of an estate planning strategy to transfer wealth to your heirs. Life insurance proceeds are generally tax-free to your beneficiaries. We say “generally” but more specifically the death benefits will be tax free, while the beneficiaries do pay taxes on the cash value that is more than the paid premium. Say Sam has paid a total of $250,000 in premium and the cash value comes out at $400,000 at Sam’s death, due to insurance company investing the $250,000 in the financial market, that extra $150,000 (=$400,000 – $250,000) will be taxable income for any beneficiaries of Sam’s life policy.
  • Long-term care benefits: Some life insurance policies offer long-term care benefits, which can help cover the costs of long-term care if you become unable to care for yourself due to an illness or disability.

The above list misses one thing: accelerated death benefits, which allow policyholders to receive a portion of their life insurance payout in advance if they are diagnosed with a terminal illness or critical condition.

Say John has a life policy with a death benefit of $250,000. At the age of 55 John was diagnosed with Lewkemia and will be treated by chemotherapy, radiation therapy, and/or bone marrow transplantation. John is never married and has no kid, but he can talk to his life insurer about getting a portion of the $250,000 death benefits out for his terminal illness.

Accelerated death benefits are typically included as a standard feature in many (whole) life insurance policies so you don’t need any special rider or add-on terms. That said, you do need to meet a few requirements, such as medical documentation of your condition, and other requirements such as minimum age and time since the policy was issued.

Only whole or permanent life but not term life insurance, which covers typically from 10 to 30 years, will offer accelerated death benefit. That said, some term life insurance policies may offer other riders, such as accidental death and dismemberment riders or waiver of premium riders.

Life Policies Are for People with a Long Term Orientation

In my view, life insurance is ultimately for people with a long time orientation. It is one of those things where mindset matters more than demography, liabilities or specific life circumstances.

What do I mean by long time orientation? It means one must think in longer terms like decades rather than years, months or days. The longest term we can think of is cross- or inter-generations like many if not most Chinese parents do.

Sometimes long time orientation comes to us or forces itself upon us. Mortgage protection insurance is a perfect example. It is a type of insurance that pays off your mortgage in the event of your death, disability, or job loss. The most typical term of mortgage is 30 years, which means even if you don’t want to think long term, mortgage payment will force you to act in a long term manner.

Here are some reasons why someone might consider getting mortgage protection insurance:

  • Peace of mind: Knowing that your mortgage will be paid off in the event of your death or disability can provide peace of mind for you and your loved ones.
  • Protection for your family: If you pass away, mortgage protection insurance can help ensure that your family is not left with the burden of paying off the mortgage on their own.
  • Job loss protection: Some mortgage protection policies also include coverage for job loss, which can help cover mortgage payments if you lose your job.
  • Simplified underwriting: Compared to traditional life insurance policies, mortgage protection insurance typically has a simplified underwriting process, which means you may be able to get coverage without undergoing a medical exam or providing extensive medical information.
  • Affordable premiums: Mortgage protection insurance premiums are often more affordable than traditional life insurance policies, which can make it a good option for people who want protection but may not be able to afford higher premiums.

Final expense insurance is another long-term consideration, where life insurance payment can provide funds to cover your own funeral and burial expenses, which can be quite costly.

Leaving a legacy is another long term concern, where you can leave a charitable donation or other legacy to a cause or organization that is important to you.

Locking in insurability and low insurance cost, this requires a long term mindset to look into the future. If you are young and healthy, purchasing life insurance now can help you lock in a lower premium rate while you are still insurable.

The final scenario that a long term mindset provides motive for life insurance is a business owner, who can pass the business to their heir or heirs through a variety of methods, such as a will or a trust. This is known as succession planning and is an important consideration for any business owner, especially those who want to ensure that their business continues to thrive after their death.

The question is if business owners can pass the businesses to heirs, why would they have life insurance? ChatGPT offers the following answers (with my edit):

  • To cover estate taxes: When a business owner passes away, their estate may be subject to federal or state estate taxes, which can be significant, up to 40%. Life insurance can help cover these taxes, so that the heirs don’t have to sell the business or other assets to pay them.
  • To provide liquidity: Even if the business owner plans to pass the business to their heirs, there may still be expenses that need to be paid upon their death, such as funeral expenses or outstanding debts. Life insurance can provide the necessary cash flow to cover these expenses without requiring the heirs to liquidate assets.
  • To equalize inheritances: If a business owner has multiple children who will inherit the business, life insurance can be used to provide an equal inheritance to children who are not involved in the business. For example, if one child is going to take over the business, the business owner may choose to purchase life insurance to provide an inheritance of equal value to their other children.
  • To provide a buy-sell agreement: If a business has multiple owners, life insurance can be used to fund a buy-sell agreement. This agreement ensures that if one owner passes away, their share of the business will be sold to the remaining owners at a predetermined price. The life insurance provides the necessary funds for the remaining owners to buy out the deceased owner’s share.
Categories
Property Insurance

Flood Insurance, What Do You Need to Know?

The Takeaways:

  1. Water causes far more human injuries and property damage than file.
  2. Only 1 in 6 homes in the United States is insured against flood. Yet 90 percent of natural catastrophes in the country involve flooding.
  3. The private flood insurance market is slowly but surely growing.
  4. More people and families moved to hurricane- and flood-prone areas in Florida and Texas, as well as parts of California, Nevada, and Washington.
  5. Many people incorrectly assume homeowners insurance covers flood damage or believe they only need flood insurance if their mortgage lender requires it.
  6. The biggest advantage of private flood insurance is extended coverage for flexible policies,

Bad News Related to Water Damages

We humans have more troubles with water than with fire in the past, and will be more so in the future.

Don’t take my words for it. According to this article, “Floods caused an estimated $76 billion in global damages in 2020 and constitute nearly two-thirds of all presidential declared disasters in the United States. It is anticipated that by 2050, national scale high tide flooding will occur an average of 45-70 days per year. These long-term forecasts are expected due to an average sea level rise of around a foot in the U.S, according to the  National Oceanic and Atmospheric Administration (NOAA).”

“While it may be unclear if the physics of flooding is changing from climate change,” the paper says, “there is a clear case that the economic costs of flooding are trending up.”

This article of Triple-I lists the major catastrophes in 2022 of the US, it clearly shows that catastrophes involving water outnumber fire related catastrophes. In other words, we have seen far more “wet” disasters than “dry” ones.

For example, we have 3 tropical cyclones, 62 severe convective storms, 13 winter storms, 15 floodings, adding to a total of 93. Meanwhile, there were 26 wildfires, drought & heatwaves, only about 25% of the water related incidences. In terms of fatalities, the total human toll of water related catastrophes (401) was more than 6 times than that caused by wildfires (65). In terms of economic losses, water related catastrophes ($146+ billion) are more than 8 times higher than wildfires ($18 billion). Finally, water related insured loss in 2022 was $89.9 billion), more than 10 times higher than wildfire related insured loss ($8.9 billion).

Natural Disasters & Social Changes

The first thing to be noticed is that until not long ago, governmental program is the only option for flood insurance, as few private flood insurance is available. Flood was long considered an untouchable risk for private insurers. For decades, FEMA’s (Federal Emergency Management Agency) National Flood Insurance Program (NFIP) was practically the only available option. Before NFIP, “mitigation” meant building more dams and providing post-event recovery assistance.

From this issue briefing by the Triple-I, “The human and economic tolls associated with flooding can be massive. It can take families, businesses, and communities years to recover from a single event. And – until recently – insuring these risks and the cost of helping communities recover fell almost entirely on government programs.”

The second social change is related to where people want to live.

“Losses are on the rise, due to weather and demographic trends: More people are moving into areas most vulnerable to weather and climate-related risks. Since 1940, the number of housing units in the United States has increased most dramatically in hurricane- and flood-prone areas in Florida and Texas, as well as parts of California, Nevada, and Washington that are at an elevated risk of wildfire or drought — and, consequently, mudslides and flash floods.”

The third fact is the low awareness about flood insurance. Many people incorrectly assume homeowners insurance covers flood damage or believe they only need flood insurance if their mortgage lender requires it.

Also low insurance coverage: Only 1 in 6 homes in the United States is insured against flood. Yet 90 percent of natural catastrophes in the country involve flooding.

Meanwhile, financial loss associated with flood is huge. One inch of flood water can cause as much as $25,000 in damage to a home. Between 2010 and 2 018 the annual cost of flood damage was about $17 billion in the United States. This is four times the approximately $4 billion per year recorded in the 1980s.

The financial consequences are real. According to this report on February 27, “Dozens of families displaced by Hurricane Ida now have until Tuesday to move out of a Lower Manhattan hotel.”

A FEMA program paid for the temporary housing until federal aid ended in December.

“I get up to get something to drink and stepped into water up to my knees,” Wilson said recalling the night of the storm.

Wilson isn’t alone, roughly 380 families needed emergency shelter after the storm.

FEMA and the city paid a $1.4 million contract that allowed displaced families to stay at the hotel, but that contract expired at the end of February.

Changes on the way

Improved data, analysis, and modeling have helped drive increased private-sector interest in flood-risk transfer and mitigation. Since 2016 NFIP has been using reinsurance protection. NFIP purchased $1.15 billion in coverage from 32 private reinsurers in 2021, up from 27 in 2020.

Having more reinsurers can provide greater capacity and diversification for the primary insurer, which can reduce their exposure to risk and potential losses. More reinsurers can also provide access to a wider range of products and services, and create more competition in the market, which can drive down prices and improve terms for the primary insurer.

Opening Up Private Flood Insurance Market

On the demand side, in 2019, federal regulators allowed mortgage lenders to accept private homeowners flood insurance if the policies abide by regulatory definitions. Even if private insurance policies do not meet regulations, if insurers provide adequate protection according to general safety and soundness requirements. This is likely to impact homeowners in states where most of the nation’s flood insurance policies are held.

The increase in private coverage helps spread the economic risk related to flooding. In terms of coverage: Private flood insurance policies may offer more extensive coverage options than the NFIP policies. Furthermore, private insurers also may offer coverage for basements, detached structures , and additional living expenses, which are not typically covered by the NFIP. Private insurers may also offer higher coverage limits than the NFIP.

In terms of cost: Private flood insurance may cost less or more than the NFIP, depending on various factors such as location, flood risk, and coverage options. Private insurers may offer discounts for mitigation measures like elevated home or installing flood-resistant materials. The NFIP premiums are set by the federal government and are based on the property’s flood risk zone, year of construction, and occupancy type.

In terms of availability: Private flood insurance policies may not be available in all areas, and some areas may have limited options. The NFIP is available in most communities that participate in the program, although some high-risk areas may have limited coverage options.

The NFIP may offer some advantages such as lower rates in certain areas and guaranteed coverage for eligible properties, while private insurers may offer more flexible coverage options and potentially better customer service.

Private flood includes both commercial and private residential coverage, primarily first-dollar standalone policies (i.e., providing coverage from the first dollar of loss, without requiring the policyholder to pay a deductible or self-insured retention before the insurance coverage begins) that cover the flood peril and excess flood. Excludes sewer/water backup and the crop flood peril. Does not include FM Global, which is a mutual insurance company that specializes in property insurance, loss prevention engineering, and risk management services. It was founded in 1835 as the “Factory Mutual Fire Insurance Company” and has since become one of the largest commercial and industrial property insurers in the world.

In 2021, FEMA unveiled details of Risk Rating 2.0 – its plan to modernize NFIP to make it fairer and more sustainable. The changes measure flood danger differently – gauging properties’ specific risks and replacement costs, rather than simply whether they sit in a FEMA-designated “flood zone.” FEMA officials said this would end a system in which low-value homes effectively subsidize insurance for high-value homes. FEMA also launched its National Risk Index for natural hazards. The online mapping application identifies communities most at risk for 18 types of events. It visualizes the risk metrics and includes data about expected annual losses, social vulnerabilities, and community resilience.

Categories
Did You Know? Life insurance

Insurance for Properties & Protecting Life

The Takeaways:

  1. Property insurance and life insurance are two major categories with different purposes, for different people, and covering different things.
  2. A trend of late is to see property insurance rate moving up, while real life insurance rate going down.
  3. One important but little known way of predicting insurance cost is to look at reinsurance cost insurance firms pay to reinsurance company.
  4. More competition, advanced technology for underwriting, increased life expectancy, better risk management and more informed consumers, these all contribute to a lower cost of life policies.

Property Insurance vs. Life Insurance: An Overview

Did you know one way to divide insurance business is to separate them into property insurance and life insurance? Yes that’s true and property and life insurances make up the biggest categories, in addition to a few other “biggies” like commercial insurance, liability insurance and health insurance.

Property insurance is about protecting physical assets (e.g., personal homes and personal belongings, businesses building and business properties, vehicles) against financial losses from covered perils (i.e., direct causes of loss that your insurer will pay you for) like fire, theft, weather damage and natural disasters. They differ from life insurance in two ways: What they cover and for whom. Simply put, (1) property insurance is always protecting properties while life insurance is always protecting loss of human lives; and (2) property insurance is always designed for property owners, while life insurance is mostly designed for the loved ones of the policyholder, occasionally for the policyholder themselves.

Note property and property insurance are not always the same. It is easy to think of property insurance as for autos and homes. After all, for most families the biggest asset is the house. But insurance terminology does not always work that way. Strictly speaking property insurance does not cover everything related to your house or autos. Remember property insurance only protects property owners? That means whenever your insurance pays money to someone else, that part of coverage belongs to liability insurance, not property insurance.

Consider an easy example: Say you were driving under influence, and you hit Joe’s car, your auto insurance will pay Joe for his bodily injury and his car damage. That money received by Joe is not strictly from your property insurance but rather your liability insurance, even though the same (comprehensive) auto policy of yours will cover both.

Life insurance, on the other hand, protects financial loss caused by the loss of human lives, not physical properties. While property insurance protects property owner(s), life insurance mostly protects others — your loved ones — although it can protect oneself (i.e., the policyholder, see more details below).

Because life insurance mostly protect your loved ones, “death benefits” is a big term that appears in all life insurance policies. This is for a good reason: Death benefits often are the biggest chunk of insurance payment. It is called death benefits because they must be paid after the policyholder is dead, only to beneficiaries (i.e., recipients of insurance payment).

But death benefits are not the only benefits in a life insurance policy. Sometimes we can receive “living benefits” that are unique in two ways: They are paid to policyholders themselves rather than to their loved ones, and they are paid when policyholders are still alive.

This is a topic for another day, and I will not get into details in this post. What I will say is a quick fact that term life insurance can have living benefit as well, contrary to a misconception some may have. For example, a terminal illness rider is typically included automatically on term life policies, providing a lump sum payment if the policyholder is diagnosed with a terminal illness and has a life expectancy of 12 months or less.

Insurance vs Reinsurance

One of the reliable ways for predicting how much premium you and I will pay for our insurance policies is to look at reinsurance cost for the insurance companies like in this report of January 2023.

Many if not most of us have never heard the word “reinsurance” before, or have but did not bother to dig deeper into it. It sounds more complicated than insurance and yet seems to be one of those things that we can afford to ignore in our lives.

In truth, reinsurance has lot to do with how much you and I will pay for our insurance premium. Let me explain. Reinsurance is simply insurance of the insurances, and only insurers or insurance companies can and will buy it, not individuals. That said, the way it works is the same: We pay premiums to the insurers for the right to receive insurance payment in case we have financial loss due to the agreed perils or direct causes of loss. Insurers also pay premium to a reinsurance company so that if during catastrophic events there are more claims than the insurers can pay, they will ask reinsurer to pay it.

Reinsurance is especially important for catastrophes like earthquakes, hurricanes, floods, wildfires, and volcanic eruptions. Human-caused catastrophes can include industrial accidents, terrorist attacks, wars, and pandemics.

Catastrophes could be disasters for any particular individuals, businesses and governments alike. But they are especially bad news for insurance companies as they bring significant financial losses for insurance companies that are unable to cover the costs of claims made by policyholders.

Insurance industry has a quantitative threshold for an event to be designated a catastrophe “when claims are expected to reach a certain dollar threshold, currently set at $25 million, and more than a certain number of policyholders and insurance companies are affected.” According to this article by Triple-I.  

You probably think insurance companies all have a deep pocket that can survive any catastrophes with no problem paying insurance claims. In truth, some insurance companies are pretty vulnerable to disasters, which is why you often hear the news that some insurers got themselves into insolvency, meaning they run out of money to pay the claims from their policyholders or clients.

By buying reinsurance, insurance companies transfer some of the risk they have taken on by insuring their customers to another insurer.

From Reinsurance Cost to Insurance Cost

Here is what ChatGPT has to say about how reinsurance premium is related to our own insurance premium to be paid to our insurer.

“Yes, generally higher reinsurance costs can lead to higher insurance premiums for customers… When reinsurance costs are higher, it means that the insurance company is paying more to transfer its risk to another company. To make up for this added cost, the insurance company may pass on the cost to customers in the form of higher insurance premiums.”

Of course, there are many factors that can affect insurance premiums, like the level of risk being insured, the insurer’s expenses, and competition in the insurance market. But reinsurance cost is one of the major factors because it is the cost for the insurers to do business, which is always significant just like in any other business.

But how does reinsurance firm determine how much it will charge insurers? It is not much different from how an insurer determines our premium. The key factors are risks involved, past frequency and severity of claims made, plus industry trends and the overall cost of risk across insurers, allowing reinsurers to set more accurate prices for their coverage.

ChatGPT tells us the following: “If reinsurance rates are high, it may indicate that reinsurers are pricing their coverage more cautiously, which suggests that the overall cost of risk in the insurance market is high. This can lead insurance companies to increase the premiums they charge customers to compensate for the increased cost of risk.”

“Overall, while reinsurance rates are not the only factor that insurance companies consider when setting premiums, they can be a useful indicator of the overall cost of risk in the insurance market and may play a role in determining the prices that customers ultimately pay for insurance coverage.”

Property Insurance Rate Goes Up, Real Life Insurance Rate Down

ChatGPT tells us the following that “it appears that property insurance rates are indeed on the rise in the US. A report by Gallagher Re shows that property catastrophe reinsurance rates for loss-hit US accounts increased by between 45% and 100% at Jan. 1 renewals, indicating a significant increase in rates for property insurance policies in some areas. This trend of increasing property insurance rates is also supported by a recent analysis by Bankrate.com, which found that the average homeowner spends about 1.91% of their household income on home insurance, a figure that has been rising over time.”

This report in Business Insurance cites a report from Amwins Group Inc as saying: “Property markets will remain hard with no softening in the foreseeable future.” “Due to the challenges in the property market, however, reinsurers are being ‘extremely cautious’ with all their capacity.” The reason for property insurance market getting tough is “the combined effects of a major hurricane making U.S. landfall in five out of the last six years, wildfires engulfing thousands of acres, unprecedented winter storms and Midwest flooding. All ‘have played a major role in hardening the insurance marketplace.’”

What about life insurance premium? ChatGPT tells us that the trend of premiums for life insurance policies has remained relatively stable in recent years. This may not sound exciting but wait for taking inflation into account: Life insurance prices remained relatively the same throughout 2021 despite inflation and an increase in death claims. The average monthly cost of a $250,000 policy only increased by a small amount from January 2021 to December 2021.

Combining the above I’d say the “real” (i.e., inflation adjusted) life insurance premium has gone down.

While there is no specific data provided for California, it is likely that the trend of stable premiums applies to the state as well.

It should be noted that while the cost of premiums may remain relatively stable, they can still vary depending on factors such as age, gender, and health status.

Explaining the Decreasing Real Life Insurance Cost

ChatGPT offers several reasons why life insurance rate may go down (with my edit):

  • Improved Health: One of the primary factors that influence life insurance premiums is the health of the policyholder. If you have made positive lifestyle changes that have led to improved health, such as quitting smoking or losing weight, then you may be eligible for lower premiums. Note this is an individual specific reason, although modern medical technologies can certainly benefit anyone.
  • Increased Competition: As more insurance companies enter the market, there is greater competition to offer more affordable policies. This can lead to lower prices for consumers as companies try to attract more business.
  • Lower Risk: Insurance companies base their premiums on risk factors such as age, health, and lifestyle. If these risk factors decrease over time, then insurance companies may lower their premiums accordingly.
  • Advances in Technology: With advancements in medical technology, it has become easier to diagnose and treat various illnesses. As a result, life insurance companies may be more confident in their ability to predict the life expectancy of policyholders, and this can lead to lower premiums. The other reason is the use of technology in underwriting, such as using Google Maps for homeowner policies and wearable devices for monitoring personal fitness.
  • Economic Conditions: Finally, economic conditions can also impact life insurance costs. If interest rates are low, for example, insurance companies may need to lower their premiums in order to remain competitive and attract new policyholders.
Categories
Property Insurance

Do You Really Know the House You Live in?

The Takeaways:

  1. Thousands of buildings in California share a flaw with many buildings collapsed in Turkey and Syria with the non-ductile concrete that does not have much steel reinforcement and holds up poorly in earthquake conditions.
  2. While the number of non-ductile concrete buildings in California are alarming, they aren’t nearly as common as they are in Turkey, primarily because such buildings stopped being erected in the United States after a 1971 earthquake in San Fernando. 
  3. Estimates of California non-ductile buildings range between 7,000  to as many as 17,000 buildings in the highest-risk counties.
  4. Cities in California are actively working to retrofit non-ductile concrete buildings, although one major obstacle is the cost.
  5. We can learn 7 things from the recent Hurricane Ian in Florida: replacing aged roof covering, a fully sealed roof deck, roof to wall connections, windows rated for high wind pressure and debris, unbraced garage door, elevated structures or foundation and having flood vent.

Two Reports on Building Materials You Should Know

I’ve read two recent pieces that I’d like to share with you. The first is more newsworthy and relevant to California, with a title that says: “Some California buildings share a flaw with the ones that fell like ‘pancakes’ in Turkey quake, but similar devastation is unlikely.”

The second is indirectly relevant, as it talks about ways to protect your home in 2023. It is more directly relevant to Florida, as “experts reveal how hurricane mitigation efforts … have created more resilient homes – and how homeowners can further build upon this in 2023.” You must admit that the title is attractive: Who would not want to learn to make their home stronger?

A NASA article has the following words for California: “There’s an old adage (with several variations) that California has four seasons: earthquake, fire, flood and drought. While Californians happily cede the title of Hurricane Capital of America to U.S. East and Gulf coasters, every once in a while, Mother Nature sends a reminder to Southern Californians that they are not completely immune to the whims of tropical cyclones.”

The commonality behind them however is about how to make your home stronger to resist natural disasters like earthquake or hurricane. Although the latter does not happen frequently, all houses will benefit from the extra strength families can add to their beloved building.

Ways to Make Your House Strong

None of the seven ways of protecting a house is mysterious and perhaps all have been heard of before by most Californian homeowners.

The first way is roof covering or to replace aged roof coverings. It is highly expected that intact roof coverings minimize water intrusion, while aged shingles may become unsealed and more prone to damage by high wind. In Florida the term “aged roof” refers to 7-10 year old, although without hurricane the age of shingles can be longer in California.

The second is roof deck, which refers to the last line of defense for preventing water intrusion if the shingles or roof coverings are displaced in a hurricane of storm. Florida experience says a fully sealed roof deck will help minimize interior damage in future hurricane events.

The third is roof to wall connections, although this one is unlikely to be as important as in Florida, where it shows a roof that does not have a connection that fully wraps around the roof truss and connect to the walls is more likely to be lifted completely off the structure in high winds.

Window is the next item. From Hurricane Ian Floridian found that windows rated for high wind pressure and debris impacts are critical to structure survivability, which limit major interior damage and structural failures in Hurricane Ian.

The fifth is garage doors need to be braced, as unbraced garage door can buckle under high wind pressure allowing the interior of the structure to pressurize, putting the home at risk of a major structural failure.

The sixth is foundation. This time with Ian more than 10 feet of storm was recorded. Elevated structures built to current building codes suffered limited damage while structures built directly on the ground were severely damaged.

The last one is flood vent that can be found in many newer homes on the Southwest Florida coast, which helps mitigate foundation failures due to storm surge. The flood vents allow storm surge to move in and out of the structure without creating excessive pressure on the walls.

Categories
Did You Know?

How to Protect Myself During a Trip? What Insurance Will Cover Me?

The Takeaways:

  1. There are numerous ways for your trip to go wrong. Most Americans however are likely not interested in buying trip insurance.
  2. Common reasons for saying “no” to travel insurance include safe trip before, low cost trips and saving money. Safe trip before does not mean safe trip today or tomorrow, as insurance is mostly about covering unexpected events.
  3. Travel insurance mostly protects oneself — during the trip, with coverages ranging from trip cancellation, travel medical insurance, lost or damaged baggage, emergency evacuation and travel accidents.
  4. The most unique feature of travel insurance is not necessarily low coverage payment but short duration: It ends when the trip ends, although sometimes they offer short extension. For this reason, having travel insurance is not enough for most people, as we need longer lasting and more comprehensive insurance like auto insurance, homeowner insurance and life insurance.

The Scaring News from the US Airports

Did you know that roughly 18 guns were seized every day at US airports last year? It is true according to the Transportation Security Administration (TSA) that intercepted 6,542 guns last year, which translated to roughly 18 guns per day, at airport checkpoints across the country. 

Guns are not the only thing to be worried. Today on February 23, 2023, the news says a brutal winter storm is walloping the entire country coast to coast. Flights are cancelled, highways closed, “trapped drivers in cars, knocked out power to hundreds of thousands of people and prompted the first blizzard warning in Southern California in decades — and the worst won’t be over for several days.”

The Low Prevalence of Travel Insurance

Travel insurance is not the most popular choice for most American travelers. In a survey of more than 1,200 Americans planning on traveling (during the pandemic), only 23% would definitely buy insurance and 21% might do so. 56%, the majority, had no plan to buy any travel insurance.

Insurers were still happy to see these figures because the thought was that in this particular study “most imminent travel looks to be family- and friends-oriented — and perhaps less expensive and closer to home — may account for the lack of interest in trip insurance.” 

A more recent study published by Business Insider in 2023 of 971 US adults however shows that explanation is not strong. “About 62% of travelers surveyed did not purchase travel insurance; of those travelers, 35% said their primary reason to forgo insurance was because they’d traveled before and never needed it. About 19% said they didn’t think their trip was expensive enough for insurance, and about 14% said they were trying to save money. About 13% said travel insurance never occurred to them.”

These reasons revealed the typical mindset not just on travel insurance but insurance in general.

Should We Forego Travel Insurance Because We Had Safe Trip Before?

I asked the above question to ChatGPT, and it comes back with the following:

“No, you should not forego travel insurance simply because you have had safe trips before. Even if you have been lucky in the past, unexpected events such as natural disasters, medical emergencies, and cancellations can still occur and ruin your trip. As a rule of thumb, if you are spending more than $5,000 on a trip, it is considered a big-ticket purchase, and travel insurance is recommended to protect your investment.”

I agree that “big ticket” travel plans (those above $5,000) should be covered by travel insurance, although smaller ones should as well. Remember in the earlier report about 19% said they didn’t think their trip was expensive enough for insurance? That is a myth. Short trips are associated with smaller airplanes and there can be cancellation and unexpected events just like big trips.

Considering that the travel insurance cost on average of 6% of the total travel cost, for a trip that costs $200, the travel insurance part only takes $12 from you. This differs significantly from the $300 you would have to pay for a $5,000 trip.

A Deeper Question about Insurance

There is a deeper reason for buying insurance, including travel insurance: Insurance is about unexpected events or accidents, designed to protect us from financial losses resulting from accidents, illnesses, natural disasters, and other unforeseen circumstances.

This is why you still need to buy travel insurance even though your previous trips were all safe.

Ask yourself if you can expect all future trips to be safe just because the previous trips were safe. If the answer is yes, then you don’t need to buy insurance from now on. But of course the answer has to be no, like what they say for investment: Past successes does not guarantee future success.

What about expected events? Well, most of them will NOT be covered by insurance. You know your car needs maintenance in the future, so your car insurance will not cover that. Similarly, you know you will need to replace your roof due to normal wear and tear, so your homeowner policy will not cover that.

This is not saying insurance excludes all expected events. For example, some health insurance policies may cover routine medical care or preventative services, even though these events are expected to occur. This is risk management of your insurer because routine medical checkups help reduce the loss for them — and for you.

What Do You Get from Travel Insurance

Once again from ChatGPT we have the following list:

  • Travel Medical Insurance: This type of insurance provides coverage for medical emergencies and expenses that may arise while you are traveling. It can cover things like doctor visits, hospitalization, and emergency medical transportation that’s not covered by your regular health insurance plan.
  • Trip Cancellation Insurance: This type of insurance provides coverage if you need to cancel your trip due to an unforeseen circumstance, such as a medical emergency or a natural disaster. Sometimes “cancel for any reason” is provided as well.
  • Personal Accident Insurance: This type of insurance provides coverage for accidental injury or death that occurs during your trip. This is a first-party coverage, meaning for yourself rather than for anyone else.
  • Emergency Evacuation Insurance: This type of insurance provides coverage for emergency medical evacuation if you are injured or become seriously ill while traveling and need to be transported to a medical facility. You could be taken to the nearest hospital or flown home if necessary when you’re injured, or you get sick on a trip.
  • Travel Insurance with Medical Coverage: This is a comprehensive insurance policy that combines several types of coverage, including medical coverage, trip cancellation coverage, and other travel-related coverage. It provides more extensive protection than a single policy and can be customized to fit your specific needs.

In many ways, travel insurance is like car insurance with a focus on self-protection rather than protecting “third party” or anyone else involved in an accident.

Note in addition to the above list, other coverages are possible like lost, stolen or damaged baggage & personal belongings, rental car damage and even finding a lawyer abroad.

Cancellation Insurance vs Free Hotel Night(s)

Don’t confuse trip cancellation insurance with free hotel night(s) provided by airlines. The former means you can get your booking money back even for non-refundable expenses like airfare, hotel bookings, and tours if for unexpected reasons such as illness, injury, death in the family, natural disaster, or other covered reasons you had to cancel your trip. The coverage may also apply if you have to interrupt your trip and return home early due to covered reasons.

Cancellation insurance can be purchased as a standalone policy or as part of a comprehensive travel insurance plan.

On the other hand, free hotel night(s) provided by airlines when a flight was cancelled has little to do with insurance. instead it is a benefit by some airlines to their customers who experience flight delays or cancellations due to reasons within the airline’s control, such as mechanical issues, crew scheduling, or weather. In reality, airlines do that even for reasons beyond their control, like bad weather conditions.

Travel Insurance for Foreign Trips

What about your plan for a foreign trip? I asked ChatGPT and here is what I got:

“If you are planning to travel abroad, it is important to consider purchasing travel insurance to protect yourself in case of injury or illness during your trip. Here are some types of insurance that can provide coverage for injuries sustained during a foreign trip:”

  • Travel Medical Insurance: This type of insurance provides coverage for medical expenses that you might incur while traveling abroad. It typically includes coverage for emergency medical treatment, hospitalization, emergency medical evacuation, and repatriation of remains in case of death.
  • Accidental Death and Dismemberment Insurance: This type of insurance provides coverage for accidental death or permanent disability resulting from an accident that occurs during your trip.
  • Personal Liability Insurance: This type of insurance provides coverage for damages or injuries that you might accidentally cause to others while traveling abroad.
  • Trip Cancellation Insurance: This type of insurance provides coverage for non-refundable expenses if you have to cancel your trip due to a covered reason, such as illness or injury.

As you can see, the coverage are basically the same as domestic coverages, even though the way ChatGPT presented may have created an impression that only foreign travel insurance will cover accidental death and dismemberment insurance as well as personal liability insurance. The truth is both domestic and foreign travel insurance can make those coverage available.

As the news told us earlier, death or dismemberment insurance can be even more important in this country than in foreign trips given the number of guns intercepted at the airports within this country.

Looking at the Big Picture

Do not forget the big picture in which travel insurance is just a small part, and normal and travel insurance can be related to each other.

If your “normal” liability insurance policy includes coverage for personal liability, it may cover you while you are traveling. For example, if you accidentally injured someone while on vacation or damaged someone else’s property, your liability insurance may cover those for you. However, if you are traveling internationally, your liability insurance policy may not provide coverage in certain countries or may have limited coverage.

Life insurance may be related to travel insurance as well. Some travel insurance policies may offer coverage for accidental death or dismemberment, which could be seen as a form of life insurance. Additionally, some life insurance policies may also offer travel benefits, such as emergency medical coverage while traveling abroad.

There will be overlapping between the two. That said, life insurance is a long-term insurance designed to provide financial protection to your loved ones in the event of your death, while travel insurance is designed for the traveler. Life insurance is also intended to cover a broad range of expenses, such as funeral costs, outstanding debts, and the loss of income that your loved ones would experience after your death.

It is not that travel insurance policies only pay small amounts in the event of financial loss. The payment amount for death in travel insurance for example can range from a few thousand dollars to several hundred thousand dollars, depending on the policy and the level of coverage you have chosen.

On the other hand, some small life insurance policies, especially term life insurance (those covering for a fixed number of years up to 30 years), typically have face values (i.e., the amount they will pay your beneficiaries or your loved ones) starting at around $25,000 or $50,000.

So payment amount is not crucial as one can always pick and choose the amount of payment desired for both travel and life insurance. The most important feature for travel insurance is its relatively short coverage duration. Once the trip is over then typically the coverage is over, although some travel insurance policies may have a coverage extension period that provides limited coverage for a specified number of days after the trip has ended. For this reason, we typically need both travel insurance and life insurance.

Categories
Did You Know?

Financial Disclosure Is Crucial for All, Here Is Why

The Takeaways:

  1. Mormon church and affiliated non-profit settled SEC charge with $5 million for hiding its vast investment portfolio, valued at $32 billion in 2018.
  2. The requirement to file timely and accurate information on Forms 13F applies to all institutional investment managers, including non-profit and charitable organizations.
  3. Although securities claims are major coverage under the Directors & Officers (D&O) insurance policies, many insurance contracts have exclusions, limits or deductions that make cases like SEC settlement difficult to receive D&O payment.

The News Involving the Mormon Church

Today on February 21, 2023, news has it that “The Church of Jesus Christ of Latter-day Saints, the leading Mormon denomination, and a nonprofit operating under it will pay $5 million to settle SEC charges that the church failed to disclose its relationship to shell companies.”

Turns out that “Ensign Peak Advisers Inc., the Utah-based nonprofit that manages the church’s investments, hid the size of the church’s equity portfolio under 13 limited liability companies — including 12 “clone LLCs” — from 1997 through 2019.”

“The nonprofit also failed to file Forms 13F, which are required to disclose the value of certain securities overseen by investment managers, according to the SEC. The forms were filed in the name of the shell companies, instead of Ensign Peak Advisers.”

More Interesting Details of the Case

The above CNBC report missed a few interesting details that were told by this report from Forbes. First of all, the whole case was disclosed by a whistleblower, David Nielsen—a member of the church and former Ensign Peak investment manager, who filed a complaint to the IRS in November 2019 and made the church agree to pay $1 million, while Ensign Peak agreed to pay $4 million.

Another interesting detail: The same whistleblower Nielsen “tipped the IRS that the firm had amassed $100 billion in a little-known charitable fund it collected from donations. None of that money had been spent for 20 years.”

Even more interesting is the potential motive behind hiding the huge funds. “Nielsen said the firm’s leader had instead suggested to staff that the church intended to keep the money for the ‘second coming of Christ,’ which, according to Mormon teachings, will be marked by war.”

How interesting is that for the church to prepare for highly unusual time when Chris himself is coming back to the world.

Similar Case Before

Turns out that this is not the first time Mormon church got itself into trouble with SEC. ChatGPT tells us another similar but smaller case:

In September 2021, the Church of Jesus Christ of Latter-day Saints (commonly known as the Mormon church) reached a settlement with the U.S. Securities and Exchange Commission (SEC) regarding allegations that the church had misled its members about a $100 billion investment fund it had established. As part of the settlement, the church agreed to pay $250,000 to the SEC.

The SEC had alleged that the church had created a non-profit entity, Ensign Peak Advisors, to manage its investment funds and had told members that the funds were being used for charitable purposes. However, the SEC claimed that the church had not disclosed that it was also using the funds for other purposes, such as building a shopping mall in Salt Lake City.

The church denied any wrongdoing in the settlement and stated that it was happy to put the matter behind it. The settlement does not include any admission of guilt or liability on the part of the church.

Nobody and No Cause Can Justify Financial Disguise

The question is, can a case of “noble” cause or causes (e.g., reserving a huge fund for the second coming of Jesus Chris) be used to justify for financial in-disclosure?  

The answer must be “No,” otherwise there won’t be SEC action and payment of million dollars for settlement.  

More generally, the same laws and regulations must apply to everyone in the society to make it powerful. If there is to be exceptions, they must be pre-installed and pre-stated. Otherwise the laws will have no “teeth” and people will find all kinds of excuses to be exempted from the laws.

D&O or E&O, Which Is Right for Me?

Most if not all entities (organizations, firms, agencies, even individuals) will buy commercial insurance, which can mean either Directors & Officers (D&O) insurance or Errors and Omissions (E&O) insurance. Both D&O and E&O are liability insurance, which is a type of insurance protecting individuals or businesses from being legally liable for something such as malpractice, injury, or negligence — but not intentional wrongdoings.

How do these two insurances differ from each other?

D&O insurance, which again stands for “Directors and Officers” insurance, is designed to protect the personal assets of company directors and officers in the event that they are sued for a wrongful act in their capacity as a director or officer of the company. It typically covers claims related to alleged breaches of fiduciary duty, neglect, errors or omissions, or misleading statements made by the insured person in their capacity as a director or officer of the company. D&O insurance is meant to protect individuals and organizations from management decisions that result in legal actions against them.

On the other hand, E&O insurance, also known as “Errors and Omissions” insurance, is designed to protect businesses from financial losses due to claims of inadequate or negligent work. It covers claims related to professional services, such as errors or omissions made by a professional, breach of duty, or failure to perform professional services. E&O insurance is typically purchased by businesses that provide services to clients, such as lawyers, doctors, or financial advisors.

Simply put, D&O is covering decision makers of an entity, while E&O is covering the entire entity.

Notice that some professionals just have oneself plus one or two staff members, like an attorney’s office or a financial service agency, protecting the entire entity therefore is like protecting the one principal.

Is Mormon Church Likely to Be Covered?

The Mormon church case fits D&O insurance better because it is the decision makers of the church that is directly responsible for the financial disguise. Now that the Church paid its money to SEC, could it file a claim with the insurer to ask payment for its loss of multi-million dollars? More importantly, will the insurer agree to pay for the Church?

This is a good case to ask ChatGPT for, which gives the following answer:

“It depends on the specific terms and conditions of the insurance policy in question.

“Some insurance policies may provide coverage for SEC settlements or fines, while others may not. Typically, insurance policies will have exclusions for intentional or criminal acts, which may include securities fraud or other violations of securities laws that could lead to SEC settlements.

“Additionally, even if an insurance policy does provide coverage for SEC settlements, the coverage may have limits or deductibles that could affect the amount of reimbursement the insured entity ultimately receives.

“If an entity is concerned about whether its insurance policy would cover SEC settlements, it should review the policy’s terms and conditions, and consult with its insurance broker or legal counsel.”

Basically the answer says the church may have a hard time to ask for D&O payment from its insurer. ChatGPT is right that we really need to take a look at the original policy to decide.

Difficulties with Securities Claims

Assuming the Church bought D&O insurance, then “securities claims” are a common type that can be covered under D&O insurance.

Securities claims generally arise when shareholders or investors allege that a company or its directors and officers have made misrepresentations or omissions in the company’s financial statements, public disclosures, or other communications related to the company’s securities. These claims can also arise from alleged violations of securities laws or regulations, such as insider trading or market manipulation.

The above statement fits well with the Mormon case: The Church did misrepresent the financial statements, did not follow the public disclosure rules and regulations and potentially violated securities laws or regulations, which explain the SEC involvement.

Under a D&O insurance policy, coverage for securities claims typically includes legal defense costs and damages that may be awarded to claimants in lawsuits or settlements. Of course, as pointed out by ChatGPT earlier, coverage may be subject to certain exclusions and limitations, depending on the specific terms of the policy.

Now let’s say the D&O policy the Mormon church bought did not exclude legal defense costs, meaning the insurance company must pay to cover the legal cost for the church. The only complication is that the case never went to court but settled outside the court. Should the insurer pay the $5 million to cover the church?

We don’t know the answer for sure because we have no access to the original insurance contract or policy. However, by looking at similar cases it does not seem good that the D&O insurer will pay that $5 million. Here is a historical case similar to the case we are talking about.

This legal article discusses a case involving the auto rental firm Hertz Global Holdings in 2013 that was settled in 2021.

A plaintiff (i.e., the one who filed lawsuit) shareholder filed a securities class action lawsuit against Hertz and certain of its directors and officers in the District of New Jersey. In September 2014, the SEC issues a formal order of investigation that specifically stated that the SEC had “information that tends to show” violations of the securities laws and authorized SEC officials to issue subpoenas for witnesses and documents. In December 2018, Hertz entered a settlement agreement with the SEC, which provided for a $16 million penalty. Hertz claimed to have incurred $27 million in connection with the investigation. Hertz sought to have its D&O insurers reimburse the company for its costs incurred in connection with the investigation.

Unsurprisingly, Hertz’s insurers denied coverage for the company’s investigative costs. The defendant insurers filed a motion to dismiss the coverage lawsuit on the grounds that the company had failed to state a claim for breach of contract.

Guess what made the insurer so sure and won in the end? Turned out there was a phrase in the insurance policy that defined securities claim specifically as “a Claim, other than an investigation of an Organization … alleging” violation of securities laws or regulations. This is the language that used by the judge to against Hertz and in favor of the insurer. The judge made it clear that if something is specifically excluded in writing, it must be honored in the court of law. Simple like that. The Mormon case does not fit exactly with Hertz’s because this time we have a whistleblower and the SEC investigation never really started before the church decided to settle by paying the money. What the insurer is most likely to argue is that the church intentionally committed something wrongdoing, which is excluded by most, if not all, insurance policies.

Categories
Property Insurance

The Risks in Owning a Tesla You Should Know

The Takeaways:

  1. Tesla has recently recalled 362,758 vehicles for flaws with its “full self-driving” software.
  2. Risks of battery safety, cyber vulnerabilities, and high cost of entry, these are the three commonly listed barriers, to which I would add two more: software immaturity and high maintenance and insurance costs.
  3. This is not discouraging the purchase of EVs, as I have faith in the new technology, just a friendly reminder that EVs are not perfect but will get better and safer as we speak.  

The Good & Bad News for Tesla

All new vehicle sales in California last year dipped 10% (nationwide it dropped by 7.9%). Yet the hybrid market share continues to steadily grow, the report from the California New Car Dealers Association shows. The California hybrid/EV market share was 31.1 % last year, according to the association.

Yet on February 16, 2023, news had it that “Tesla is recalling 362,758 vehicles because a version of its “full self-driving” software may increase the risk of crashes, according to the National Highway Traffic Safety Administration in response to a notice Tesla sent the agency on Wednesday.”

More specifically, the full self-driving software may cause the vehicles to travel “straight through an intersection while in a turn-only lane, [enter] a stop sign-controlled intersection without coming to a complete stop, or [proceed] into an intersection during a steady yellow traffic signal without due caution.” In addition, “the system may not respond sufficiently to changes in posted speed limits, or not adequately account for the driver’s adjustment of the vehicle’s speed to exceed posted speed limits.”

The recall affects 2016-2023 Model S and Model X vehicles; 2017-2023 Model 3 vehicles; and 2020-2023 Model Y vehicles.

General Risks with EV

As with any mode of transportation, there are risks associated with owning an electric vehicle. One risk highlighted by an article in Forbes is battery safety. While electric vehicle batteries are generally safe, there are still potential risks that owners should be aware of, such as thermal runaway and fire hazards. It’s recommended that owners follow smart everyday battery safety practices to mitigate these risks.

As this article of Insurance Journal points out in November 2022, “A key concern with EVs is fire from lithium batteries.” Most of us have had the experience that when you get to the airports, one of the first things at the safety check-in spot was to take out your lithium batteries from your electronic devices. This is because the spontaneous fire exposure risks that first-generation lithium batteries presented.

But what you may not be aware of is risk associated with the growing number of E-bikes.

“The National Law Review recently published a warning of a ‘recent surge in electric bike fire in New York City,’ listing four causes of fires from the lithium batteries in E-bikes: design flaws; battery damage; exposure to heat; and use of the wrong charger. Storing and charging electric bikes and scooters in homes and apartments thus exposes occupants to a potential severe fire risk.”

“In the last 18 months, there were over two dozen lithium fires investigated in New York City public housing buildings. The increased frequency and severity of scooter and E-bike fires has led the New York City Housing Authority to consider a ban of these vehicles in public housing.”

But E-bike fire hazard is no comparison with that of EVs, because “(t)he size of the batteries in EVs, as well as the combustible materials that make up the automobile, provide both a fuel source and source of ignition.” It’s like putting matches next to a heap of explosions — although I’m sure precautious steps and designs have taken that into account by now.

Furthermore, the Insurance Journal article tells us that EV fires “can be very difficult to extinguish, and water can have little firefighting impact. Vehicles have been observed in some cases to reignite after they have been towed away.”

Things that can be done by EV owners include parking EV away from combustible structures or other vehicles, especially when charging. If an EV is in an accident, an immediate inspection of its electrical system and batteries is necessary and highly recommended. Any impact could damage the battery and/or electrical system, leaving the EV more vulnerable to ignition.

A Surprising Risk with EV

Another risk associated with electric vehicles is cyber vulnerabilities. Many owners perhaps do not realize this, but it is true. As electric vehicles become increasingly connected, they become more susceptible to cyber-attacks, system outages, and other issues. There have already been product recalls in the automotive sector as a result of cyber security issues. This could also have implications for insurance claims, as the complexity of these issues could make it difficult to determine liability.

A Financial Risk

Finally, one of the present-day disadvantages of electric cars is their cost. Electric vehicles are generally more expensive than traditional gasoline vehicles, largely due to the cost of the battery. Modern batteries require lithium, which can only be mined in a handful of countries, leading to potential supply chain issues that could drive up the cost of electric vehicles. This high cost could be a risk for some potential owners who may not be able to afford the prohibitive entry price of electric cars.

An Insurance Headache?

This report by Insurance Journal brings another risk to our attention: the cost to repair. A new report “shows sales of electric vehicles in California rose by more than 50% last year from 2021 with an estimated increase in market share of 17.1%.”

Even in California, EVs are still relatively few, which means scarcity of replacement parts. Both push up repair costs.

The most recent data on EV claim frequency and severity from 2020 shows the frequency of crashes tend to be lower because of the advanced driver-assistance features included in most of these new vehicles. However, the figures show collision severity is higher.

A report from Verisk last year shows the cost of insuring electric vehicles tends to be higher than gas-powered vehicles. 

Mercury Insurance, a large California auto insurer, reports EV repair costs can be nearly 20% higher than the average vehicle repair cost on first-party coverages, such as collision.

“EVs are full of technologies that go beyond simple auto maintenance and repair,” said Justin Yoshizawa, Mercury’s director of product management. “So many of these features – like self-driving, safety, entertainment and comfort tech – are unfamiliar ground to many technicians and, even with familiarity, more time is required to evaluate and address potential issues with such features. It makes EVs costly to repair. And that’s not even taking into account the ongoing constraints of supply chain issues and labor.”