Thread

The End of a Fair Price: Dynamic Pricing and the Normalization of Gouging

95 points · 128 comments · paimapi

sib · 1790706977 · focus · HN ↗
"Did you know that home insurers use aerial drones to study your rooftop? If the conditions signal neglect, they might cancel your coverage before an accident."
While there are certainly some issues of concern in the article and the reviewed book, the above seems like exactly what insurance companies should be doing: pricing (or making available) coverage based upon risk.
This is not much different from an auto insurance company raising your rates (or cancelling coverage) because you've received a number of speeding tickets, which implies increased future risk of loss.
In fact, I received a letter from my homeowners insurance company a couple years ago stating that they would not renew our coverage due to conditions that they'd observed (clearly from aerial imagery) including overgrown bushes touching the walls of the house and some larger tree branches growing over the house.
I had a landscaping company come and fix the issues, sent my own drone up to take new pictures, sent the company the pictures, and they agreed to continue coverage. And now my house has less future risk of damage. This seems like a win-win for both of us.
1. mindslight · 1790708654 · focus · HN ↗
  The problem is that every facet they add to the analysis increases the complexity, making it harder to price risk - meaning they'll eagerly overprice [0] (based on "what if") with some idea that "the market" (ie nobody) will sort it out. This creates a race to the bottom against anything that might seem "weird", aka regular people just living their lives (while being put under a microscope), similar to how the ever growing housing bubble has painted most houses beige.
  Your bushes only seem like a reasonable example because you are looking at them in isolation - it was only a single issue you had to deal with, and something you seemingly wanted to deal with anyway. If they had instead blasted you with a litany of different issues, or a bush that you wanted to keep for sentimental reasons, or you simply didn't have the time/resources to create your own counter-documentation and operate their heavyweight bureaucracy, you'd be singing a much different tune.
  And while these things can happen anyway with regular in-person home inspections, the point is that increasing surveillance and unaccountable "AI" make it much easier to bury customers in a deluge of complexity making for even-less-competitive markets.
  (I would give a healthy list of examples of my own home being deficient in many ways an insurance inspector would call out yet are in the process of being managed, but I'm sure it would just invite a lot of "well ackshually that's dangerous and weird!" out of touch responses from people whose first instinct is to call someone rather than to fix something themselves)
  [0] Notice how they weren't going to raise your premiums by $30 a year or whatever, but outright cancel your policy - in other words a massive overweighting of the actual risk from some bushes growing into the house.
  1. sib · 1790716774 · focus · HN ↗
    >> Notice how they weren't going to raise your premiums by $30 a year or whatever, but outright cancel your policy - in other words a massive overweighting of the actual risk from some bushes growing into the house.
    Given that the annual premium is like 0.27% of the value of the policy, a change in risk of a few percent because some big tree limbs were hanging over the house or because some brushes might have enabled a fire to spread to the house more easily could clearly swamp the value of the premium to them.
    And, to be clear, I didn't want to spend $2,000 to fix the problems, I would have rather not had to deal with it, but that's part of the joy of being a homeowner.
    ====
    We live in a place (California) where the government has generally prevented homeowners insurance companies from effectively charging for risk (e.g., wildfires) and therefore many companies have stopped writing policies altogether. This doesn't seem like a good outcome. Note that this is the same state that won't let auto insurers charge based on "black boxes" either, so good drivers are subsidizing bad drivers (even more than in other places).
    mindslight · 1790782095 · focus · HN ↗
    > We live in a place (California) where the government has generally prevented homeowners insurance companies from effectively charging for risk (e.g., wildfires) and therefore many companies have stopped writing policies altogether
    I agree with you that this is terrible. The perverse incentive also underlies the rest of your comment - the insurance company is looking for any reason to cancel your policy. Yesterday it was overgrown vegetation, but who knows what it will be tomorrow.
    And while this would appear to be a major impediment to insurance companies accurately pricing risk (ie extra $XX for your trees rather than cancelation), I am not in California and yet still experience the same kind of thing. It really seems like these companies have no idea how to price risk apart from one big cohort of "normal", a few minor deviations (eg woodstoves), and with most everything else being a "we can't write a policy, go elsewhere". Even trying to significantly raise my deductibles to lower premiums nets like $20/year. I'm at the point where I'd drop house insurance completely except for the whole liability coverage thing, which is once again not possible to price out as a separate product in a competitive market (as once again, "different" implies "must be risky" to insurers).
    > a change in risk of a few percent
    You can't just hand wave adding a few percent on top of that 0.27% to swamp it. The base rate of wildfires themselves must be well below that 0.27% (modulo that perverse incentive). Vegetation obviously adds some risk, but how much? Look at the fire referenced in <a href="https://news.ycombinator.com/item?id=49899240">https://news.ycombinator.com/item?id=49899240 . Notice how it's the lone house standing. Not a patchwork of houses where a good chunk with good vegetation management survived. Rather it was proper vegetation management PLUS a lot of luck.
    > that's part of the joy of being a homeowner
    This is a common coping refrain but it proves to much for analysis. You could stomach $2k (which isn't all that much in the context of home ownership), but what if it was $50k from a ten item list with some items being much more costly? What if you had bought the house with a five year plan to gradually fix a bunch of similar deferred maintenance, but then were all of a sudden being put over a barrel by the insurer simply looking for pretexts to cancel? Or what if you didn't have that spare $2k, decided to do that work yourself, and their surveillance-based decisions then canceled your policy anyway because tree work "is risky" ?
    The point is that every detail of real life ends up looking "risky" when you put it under a microscope - "what if?" and all that. And as I said in my original comment, insurance companies don't really seem interested in accurately pricing risk for conditions outside of the "mainstream" cohort - a cohort which additional surveillance then shrinks.
    > Note that this is the same state that won't let auto insurers charge based on "black boxes" either, so good drivers are subsidizing bad drivers (even more than in other places).
    This is the same exact "I've got nothing to hide" argument, but with even more invasive telemetry reporting. What you're calling "subsidizing bad drivers" I would call responsible consumer protection to avoid a race to the bottom into yet another pervasive surveillance regime.
    We can easily think of types of bad driving that will not show up in telemetry, and types of telemetry that will flag as "bad driving" while being perfectly prudent. And that's not even getting into things like "we see you go out most Friday nights" or "we see you visit liquor stores".
    Pricing on crash and moving violation history, as has been the standard for a long while, is good enough. If you feel you're overpaying because rates are constantly going up, the solution certainly isn't to embrace a crab bucket mentality of trying to push it onto some vague "other" people! Rather this is counterproductive - additional discriminators inevitably make rates go up due to increased complexity/stickiness despite any illusion of a temporary reprieve.
2. gpderetta · 1790708902 · focus · HN ↗
  > This is not much different from an auto insurance company raising your rates (or cancelling coverage) because you've received a number of speeding tickets
  This is more like your insurer following you around and evaluating your driving skills.
  And yes black boxes are a thing but a) are opt-in and b) universally reviled.
  1. Muromec · 1790710020 · focus · HN ↗
    In normal places that's what police is for, but the decisions were made.
  2. gbacon · 1790712915 · focus · HN ↗
    Prices carry information and are not arbitrary. Insurance is a paid transfer of risk. Policies that have greater risk of loss require higher premium charges or the insurer goes broke.
    Actuarial science is its own field that prices uncertain future events. As you’re bringing out here, the insurer has additional uncertainty as to the actual driving habits of their policyholders, so some conservatism is likely priced in. Aggressive drivers would like to pay the premiums of careful drivers.
    This is related to the origin of GEICO, Government Employees Insurance Company. Back in the day, you had to be a state or federal employee for them to bind coverage. The investment thesis was that civil servants’ caution in their choice of employment was an accurate indication of their overall risk appetite and risk-taking behavior. GEICO was able price policies lower without going broke because they by design insured a lower-risk population.
  3. sib · 1790716335 · focus · HN ↗
    Presumably since many people opt in, they are not universally reviled. In fact, I'd wager that people who are safer-than-average drivers don't revile them at all and actually appreciate the fact that their premiums are reduced by virtue of the evidence of their safe driving habits.
3. curiouscavalier · 1790709936 · focus · HN ↗
  The issue is that often the data gathered and used with no consideration of other evidence. For example, I had a similar situation of home insurance sending a letter demanding I replace my roof based on drone footage. No issue was immediately obvious from the footage and we had just replaced the roof less than 5 years earlier. We had an inspection done and then sent both proof of replacement and the inspection report. We were told the drone footage alone would be used in their decision, and we still had to replace the roof to keep coverage.
  So it is not necessarily objective, fairly considered observations (and I think pretty different from speeding tickets). At least in our case it was maximally for the benefit of the insurer. I think that is relevant to their claimed premise.
  1. Toynbeeidea · 1790710215 · focus · HN ↗
    I wouldn't accept a five-year old report either. Stuff can change in five months.
    giantg2 · 1790710386 · focus · HN ↗
    Pretty sure they had the inspection done at the time of rejection.
    curiouscavalier · 1790712874 · focus · HN ↗
    The report was done at the time of the dispute. The roof was 5 years old.
    donmcronald · 1790713368 · focus · HN ↗
    If you end up with a roof that doesn’t last 5 years, isn’t that the kind of thing you’re buying insurance for in the first place? It’s an unexpected risk that a lot of people would have trouble predicting.
    quickthrowman · 1790718653 · focus · HN ↗
    Homeowner’s insurance does not cover replacing a roof after 5 years if poor workmanship or substandard materials are the reason that replacement is needed.
  2. cortesoft · 1790711742 · focus · HN ↗
    Were you able to get insurance from another insurer?
    curiouscavalier · 1790712949 · focus · HN ↗
    Yes, that ended up being the solution. Cost aside, I’d find it pretty wasteful to do the replacement.
    scottLobster · 1790713314 · focus · HN ↗
    Honestly I'd report it to the state insurance commission. Did they call out any specific issue with the roof at any point? Some kind of new code they were mandating an upgrade to or anything?
    curiouscavalier · 1790714610 · focus · HN ↗
    Yeah, I probably should have reported it at the time. They didn’t cite anything specific even after we requested what in the on-roof (not drone) inspection indicated an issue or was missing from the inspection.
    Though to be precise, this was over a year ago so I’m not remembering their exact wording. But it likely wasn’t literally “drone footage alone,” but probably something more like “our drone footage and associated analysis” — in any case the effective interpretation being “we don’t care about installation date or your inspection. Replace it or lose coverage.”
    Not that it makes it right, but there’s enough providers in my area it was less effort to get new coverage than continue to fight them.
  3. KennyBlanken · 1790713631 · focus · HN ↗
    > We were told the drone footage alone would be used in their decision, and we still had to replace the roof to keep coverage.
    This is the point where you stop talking to the insurance company and start talking to an attorney as well as your state insurance commission.
    joquarky · 1790716844 · focus · HN ↗
    Not everyone has $20k to retain an attorney.
  4. codedokode · 1790714066 · focus · HN ↗
    The house insurance in this case is a part of a mortgage contract or voluntary insurance? And if it is a part of a mortgage (as an extra payment), how does one predict how much they will have to pay for unexpected things like fixing the roof, and how does one estimate the full cost of a loan?
    Also if it is a part of the mortgage why doesn't the lender pay for it? They need it, not the homeowner.
    Is insurance company affiliated with companies doing the repairs?
  5. wat10000 · 1790714382 · focus · HN ↗
    Insurance is fundamentally lopsided in the risk of a bad decision by the insurer. They have little incentive to keep you as a customer, since the potential profit is just not that big. And thus they have little incentive to do a thorough investigation of potential problems. It's just not worth it. They'd rather dump you, or risk forcing you to replace a perfectly good roof, than put effort into determining whether their report is accurate.
    It's a funny business. Every insurer wants better risk assessment, since it's a competitive advantage. At the same time, the better the risk assessment gets, the less point there is to having insurance in the first place. At the limit, insurers that could accurately predict the future would charge you premiums equal to your actual future costs and you might as well just put the premiums in a savings account instead.
    SoftTalker · 1790726085 · focus · HN ↗
    Just switch to a better insurer. Unlike health insurance, homeowners insurance is available from a huge number of providers that are all in a competitive market, and you can go with a big name like State Farm or go to an independent agent and shop the market.
  6. SoftTalker · 1790714484 · focus · HN ↗
    Never heard of this happening. It's weird anyway because roofs are something you're expected to maintain and are pro-rated. If you have storm damage to a 20 year old roof, your insurance is only going to pay for the estimated remaining life, not the full cost of a new roof.
    If the roof is beyond end-of-life they probably won't pay anything, as it's a predictable cost of owning a home not an unexpected loss which is what insurance is for. Same reason they won't pay to have a tree taken down just because it could fall and cause damage. You're supposed to maintain your property; insurance is for losses beyond normal wear and tear/maintenance expense.
4. jolmg · 1790710685 · focus · HN ↗
  > While there are certainly some issues of concern in the article and the reviewed book, the above seems like exactly what insurance companies should be doing: pricing (or making available) coverage based upon risk.
  I mean, it's good for the insurance company to help it make more profit, but it undermines the arrangement of how insurance works. So, I would argue it's not what they should be doing from a societal perspective, and there should be regulation that stops them doing that.
  If you take it to the extreme of them being able to tell with 100% certainty who's going to need a payout when, they'll just arrange it so they'll never need to pay out. They'll not do or stop doing contracts with those that will need a payout, or they'll raise the premiums such that they still gain. Insurance would become pointless and customers are better off saving for their own expenses.[1]
  I've made this comment before. I'll just quote myself on the basics of how insurance works, to make this point clear:
  <a href="https://news.ycombinator.com/item?id=49820825">https://news.ycombinator.com/item?id=49820825
  > With regards to insurance, that industry depends on ignorance. If an insurance company had perfect information (psychic, precognition level) on who's going to need a payout when and who's never, then the point of the insurance becomes nil. They're not going to enter contracts with individuals that result in a net loss, only with those that result in a net gain. That can look like them just raising prices until it results in a gain. If that's the case, people can just save and use their own money to cover the events that will happen, because insurance would not be of any benefit to anyone at all.
  > The way insurance works on a basic level is they know a percentage of people will have a set of events happen to them, but they don't know who. They have a large amount of clientele and charge everyone such that the revenue can cover the expenses of the unlucky percentage of their clientele and make a profit. To the individual, the insurance expense results in significantly less than what they would pay would they be part of the unlucky percentage without the insurance cover.
  > The arrangement is founded on the ignorance of who belongs to the unlucky percentage. The economics of insurance don't work without the ignorance. So yeah, at some point, algorithmic pricing of insurance likely ought to be banned if we still want insurance to exist on a meaningful level.
  [1] As a parenthesis, it being better to save is in a closed system sort of way. In reality, the fact that a lot of people would still get insurance because "that's responsible" means end providers can raise their prices on the assumption that most of their customers are the insurance companies and insurance companies "are rich", so there would still be a price difference. That's kind of what you see with health insurance where people that are not insured can get lower prices than those that are, such that it may end up even cheaper than the copay. That's for example, kinda what can be seen with styropyro's healthcare story:
  <a href="https://www.youtube.com/watch?v=1162ouPHH3Q" rel="nofollow">https://www.youtube.com/watch?v=1162ouPHH3Q
  > 5:39 so my insurance denies the CAT scan right I mean that's a really really common move for health insurance they just like to blanket deny procedures
  > 6:21: but uh but the stupid part is is then I got billed $3,300 for that scan with insurance and the even dumber part is that I I got a quote from my clinic on what it would cost me without insurance and it was only $1,400 so because I have this insurance it actually cost me more money to get this scan like how is that how is that even possible that is the stupidest thing in the world
  I imagine he can't see it because of the stress and anger, but that's probably exactly why the insurance denied it, because they were being billed way too high by the provider. If the provider billed the company what they billed regular people, they likely wouldn't deny them at the start. There's a limit to what anyone can pay, even insurance companies, and they have to put a stop at some point.
  Back to the original point, imagine what that looks like with end providers that don't provide separate pricing between the insured and the non-insured, and where most people have insurance. The end provider would just give the higher pricing, the one for presumably rich insurance companies, so you would still save money with the insurance despite the fact that you'd save even more if the insurance companies didn't exist.
  Anyway, this is a separate problem from insurance companies investigating too much and undermining how insurance works for their own profit.
  1. hn_acc1 · 1790711847 · focus · HN ↗
    Sure, but insurance companies also routinely pay only part of the cost - I.e. if the hospital has evaluated that a CAT scan costs them $1250 to do, and they need a small profit margin (make up your own numbers), they need to bill the insurance $3300 just to get $1400 paid out. Insurances routinely only cover a certain percentage of the cost (to save $$), so hospitals have to bill more to get the $$ they need.
    And I'm not saying the hospital is innocent here, but this "costs more when billed to insurance" is a long-known issue.
    jolmg · 1790712119 · focus · HN ↗
    It's a vicious positive-feedback cycle where both parts are both cause and effect. You can also say that the insurance company also does that (fight to pay only a part) because the hospital bills too high for them. They're fighting to be billed fairly as the regular people are billed.
    > if the hospital has evaluated that a CAT scan costs them $1250 to do
    Remember that the fact that they can use insurance companies to drive up prices means they can also drive up their own costs.
  2. cortesoft · 1790711892 · focus · HN ↗
    > I mean, it's good for the insurance company to help it make more profit, but it undermines the arrangement of how insurance works, so I would argue it's not what they should be doing from a societal perspective, and there should be regulation that stops them doing that.
    This is why mutual insurance companies exist, where there is no external investor who is trying to extract profits.
5. mihaaly · 1790710702 · focus · HN ↗
  Vegetation as the enemy, that is a sad consequence.
  1. kspacewalk2 · 1790710958 · focus · HN ↗
    Vegetation is the enemy in forest fires, for example. One of the main reasons that lone house survived the Maui wildfire[0] was because they properly managed vegetation, which prevented the embers from setting fire to the property via a bush that's way too close. Nothing prevents you from letting the rest of your backyard go wild if you prefer, but keep it away from your walls.
    [0] <a href="https://www.npr.org/2023/08/24/1195331310/red-roof-house-fires-lahaina-hawaii" rel="nofollow">https://www.npr.org/2023/08/24/1195331310/red-roof-house-fir...
    PaulDavisThe1st · 1790712952 · focus · HN ↗
    Most/many structure fires that are caused by wildland fires start due to "ember cast" - hot embers carried by the wind (for distances, almost unbelievably, of up to a mile). While taking care of building-adjacent vegetation is an excellent step to reduce fire risk, it won't stop fires that start on the roof, or around the soffits, due to embercasting. That requires different approaches (roofing materials, careful roof/wall interface design and more).
    ps. Firefighter II (volunteer), Santa Fe County, NM
6. darth_avocado · 1790712042 · focus · HN ↗
  > pricing (or making available) coverage based upon risk.
  The whole point of insurance is to manage risk by spreading it across all consumers. If my insurance rates go up based on my usage or individual risk factors, it’s just an elaborate money making scheme. It should be like “everyone has to pay x to get insurance to get covered and if the claims start going up, everyone has to pay more”.
  1. PaulDavisThe1st · 1790712728 · focus · HN ↗
    So much this.
    But then again, there's presumably some sort of balance. If someone insists on building and rebuilding in a flood or fire zone, it's not obvious that everyone else should see their premiums go up to cover that. One option is for the insurance company to just cease insuring the property(ies), but I suspect there's more overall negatives to that than if they bump the premiums of clients in specific locales.
    wrs · 1790712916 · focus · HN ↗
    This conundrum (and many others) is why insurance is a highly regulated business. The commission working in the public interest decides how the compromise is drawn, not the insurers.
    darth_avocado · 1790714476 · focus · HN ↗
    > The commission working in the public interest decides how the compromise is drawn, not the insurers
    I haven’t laughed so hard in years.
  2. scottLobster · 1790712797 · focus · HN ↗
    Why should safe drivers pay the same rate as people with multiple DUIs?
    Why should someone who has an unpatched hole in their roof pay the same rate as someone who maintains their roof?
    darth_avocado · 1790714378 · focus · HN ↗
    > Why should someone who has an unpatched hole in their roof pay the same rate as someone who maintains their roof?
    Because otherwise the insurance companies can just look at your completely maintained roof that will last another 20 years and ask for a full replacement because it is 10 years old. And if you don’t comply they will drop you. (Happened to me)
    scottLobster · 1790719004 · focus · HN ↗
    Well yeah, abuse can happen. But the general principle of some people paying higher premiums than others because they're higher risk isn't a bad one.
    If we mandate that insurers keep premiums equal for everyone, get ready for a lot of people to have zero access to insurance as they're deemed too risky to cover.
    darth_avocado · 1790719408 · focus · HN ↗
    > But the general principle of some people paying higher premiums than others because they're higher risk isn't a bad one.
    So someone with cancer should be charged $20k/month then? I am completely healthy and haven’t used my insurance much in the last 10 years. Why are my premiums so high? And why are 65+ year olds not footing most of the bill? I am not advocating for that but just pointing out that were obviously okay with charging for some risk profiles but not others.
    mindslight · 1790783376 · focus · HN ↗
    > Why should someone who has an unpatched hole in their roof pay the same rate as someone who maintains their roof?
    You're right - I really should be paying less due to the unpatched holes in one section of my roof. I obviously need no coverage on this part of the house, as the damage (both already occurred and ongoing) are not covered causes of loss. If you know a way I can express this to my insurance company to receive a discount, without them going "this is weird, we're actually raising your rates", please let me know.
  3. sib · 1790716233 · focus · HN ↗
    >> The whole point of insurance is to manage risk by spreading it across all consumers.
    Yes, but this does not imply that customers with (potentially vastly) different risk profiles should pay the same rates.
    The canonical example is that 18-year-old single males with previous speeding tickets pay more for auto insurance than married 40-year-old women with clean driving records.
    darth_avocado · 1790719173 · focus · HN ↗
    So does that mean the minute you have a cancer diagnosis, the insurance company gets to charge you $20k/month or drop you?
    If the same argument is to be followed why does a person with potentially large medical bills not pay a disproportionately larger premiums than a healthy person?
    sib · 1790732367 · focus · HN ↗
    In general, health insurance is not insurance but (frequently subsidized) prepaid medical coverage, exactly because it is not underwritten with respect to risk.
    It's clearly the case that people who are overweight, smoke, or consume alcohol heavily should pay more for health insurance based on massively increased risk of loss.
    Fortunately, other forms of insurance (e.g., homeowners, automobile) are not regulated in this uneconomical fashion.
    howard941 · 1790801121 · focus · HN ↗
    As a practical matter medical underwriting didn't make decisions based on lifestyle, the decisions were made by way of broadly excluding pre-existing conditions. An an example, pre ACA my insurer (whimsically named "Golden Rule Insurance Co") made everything cardiovascular-related excluded from coverage due to very mild hypercholesterolemia.
  4. [deleted] · 1790718847 · focus · HN ↗
    [deleted]
  5. tzs · 1790785943 · focus · HN ↗
    Isn't the point of insurance to manage the large variation in time between your consecutive covered events?
    Suppose your house would cost $400k to rebuild if it got destroyed, and the average interval between things happening at your location that would destroy it is 1000 years.
    If those events happened regularly every 1000 years starting from the year you built the house then you could deal with this simply by setting aside $400 every year in a house rebuilding fund.
    But if those events occur more randomly, still averaging 1000 years apart but with a large variation, that doesn't work. If you want a 99.9% chance of your fund not going bankrupt and we assume covered events are normally distributed you need a very large fund.
    If you have 10000 houses still each being destroyed on average once every 1000 years, and contributing annually for each house the same amount as under the "everyone handles it themselves" scenario, then thanks to the Central Limit Theorem the size of the fund you need is way way way smaller than the combined sizes of all the funds when each house is handled separately.
    Note there is nothing in here that requires the same annual contribution for all houses. What is required is that the total annual contribution matches the total average annual loses.
    There may be good policy reasons for requiring some kinds of insurance to charge the same amount to everyone, or at least to group people into broad groups where everyone in the group gets charged the same.
7. m463 · 1790714317 · focus · HN ↗
  You should try driving a tesla with tesla insurance.
  Each drive you make will rate you based on hard braking, aggressive turning, unsafe following, excessive speeding, late night driving, forced autosteer/fsd disengagements, unbuckled driving.
  You'd think that driving well would eliminate these, but no.
  But they give you a pass if you use tesla fsd. That is their endgame, but it sometimes gets a pass for driving more dangerously than you do. You speed - ding. fsd speeds 3x what you do? 100% score.
  lol. do you know the world this is creating? who is making the rules?
8. grebc · 1790716079 · focus · HN ↗
  Seems like a rare instance of an insurance company actually doing their job and providing actuarial services rather than just gouging you after a claim.

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