A missing insurance market

By Eric Crampton 31/07/2015

I wonder if I’d be the only customer for this one.

Imagine a bolt-on to your existing home-owners’ insurance. It specifies that, in the event of a substantial earthquake,* the insurance company immediately buys your house from you for a pre-specified price. No inspections, no claims adjustment, nothing. Big enough quake, they own your house as-is where-is. Maybe you could set it as an option for the policy holder, maybe you could set it as an automatic thing. Take the option, and you have a big deposit in your account to let you start over somewhere else. The insurance company then has, say, six months after the roads to your house are passable by truck and the port or roads out of town are open to get the contents packed into shipping containers and delivered to the nearest functioning port facility.

Advantages for the insurer:

  • No messing around with finicky owners. The insurer runs the repairs that they think are necessary to on-sell the house afterwards with no hassles. The timing of repairs is entirely up to them. They can contract with larger scale firms to run rebuilds over larger parcels if they want too. Owners are often picky about who they want as builders (we were!). The insurer owning the house has no worries about whether an owner is trying to fix things to as-new or whether he’s trying to correct pre-existing damage.
  • The insurance on-sold home would be a sure-thing for future policies: everyone would know that it was fixed to insurer standards, so there would be no issues about the house’s future insurability. 
  • Instead of a bunch of fragmented owners arguing over things like red-zoning, with flow-on consequence for the insurer, the insurer gets to have those conversations with the government. 
Advantages for the insured:
  • A certain fast payout for anybody who wants to flee. No hassles, no arguments, no waiting, no living in limbo. 
This seems an easy product to provide. I bet there’d be a lot of takers – or at least anyone who’s experienced Christchurch would give it a good look.

I would want a clause in there that this part of the insurance contract – either terms or premiums – cannot be changed by the insurer except with two-years’ notice: you wouldn’t want foreshocks leading to policy cancellation.

* This would have to be legally defined, but anything Christchurch 2011 scale upwards: substantial parts of downtown ruined, town a nightmare, services shut down for weeks… you know the drill.