Tower is looking at increasing premiums on properties which are earthquake prone or are in high-risk earthquake regions. Some people don't like the idea of risk-pricing, and see it as a 'backward step for society'. Click here to read more.
I believe that risk pricing is one of many ways that the price signal helps to shape behaviour in ways that are helpful to individuals and society as a whole. I find that it is interesting that pricing for risk is condemned when it is conducted by insurers, but is considered a valuable good when applied to, for example, the tax on cigarettes.
Wind back the clock, if you like, to a time before any additional tax on cigarettes. Tax was neutral in the question of whether to buy an apple, or a cream bun, or a cigarette to enjoy at afternoon break. Should we return to such a situation?
Now consider the cost for insuring buildings that are more earthquake prone, or are built in areas that are more earthquake prone. I am not arguing for the relocation of Christchurch away from the fault-lines, but is it fair on someone who has built their property to a high standard to have to subsidise someone who has not? The price signal insurance sends can help to distribute development more sensibly. Earthquakes are just one issue. What about developments along an increasingly flood-prone coastline. Should inland dwellers (most of us) subsidise the increasing cost if insuring coastal mansions against climate change?
Risk-pricing is a privilege the insurance industry enjoys, and it happens to benefit many, indeed society as a whole, including those that have to pay a higher premium, through the signals it sends.
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