What percentage of U.S. GDP is simply moral hazard? The U.S. is one of the world’s most heavily insured countries and Americans are not notable for considering the welfare of their insurers.
Let’s consider health insurance, the purchase of which is now required by law. Would people be discouraged from risky behavior if they thought that they’d have to pay medical costs likely to occur as a result? Can any non-emergency trip to a U.S. hospital be considered moral hazard? If an American didn’t have insurance, presumably he or she would fly to Europe, Mexico, Israel, or India to have a procedure rather than pay 5X the world market rate.
Taxpayer-subsidized flood insurance is another obvious example. A lot of Americans have built and rebuilt fancy houses near the beach or rivers because they don’t have to pay the true cost of cleaning up after floods.
I thought about this other day because of a condo that I own in Cambridge. The trustees are the owners of the four units and also manage the building (rather than contracting with a property management firm to do it professionally). The top of the building is a 125-year-old slate roof that I wrote about in 2013. The trustees with units on lower floors voted against redoing the roof (cost of $25,000 to $30,000) on the grounds that it wasn’t leaking into their units, but only into the top floor unit, and also because the insurance company had always been there to write checks for repeated damage (minus a deductible each time). The winter of 2014-2015 resulted in ice dams on the roof, however, which sent water down the side walls into units on lower floors. The insurance company estimated that it will cost $100,000 to repair and they are getting ready to write a $76,000 check (the full cost minus some depreciation for damage to areas that hadn’t been painted for a while). In a world without insurance the roof probably would have been fixed a long time ago. In a world with an insurance company cheerfully paying out, a large percentage of GDP will be repairing damage caused by moral hazard.
What do readers think? Is this now a significant percentage of U.S. GDP. Given that health care is 18 percent of GDP it seems as though it could be.
“The insurance company estimated that it will cost $100,000 to repair and they are getting ready to write a $76,000 check (the full cost minus some depreciation for damage to areas that hadn’t been painted for a while).”
I think the lower floor owners are idiots.
This $100,000 doesn’t include fixing the roof does it?
Does the insurance company associate the damage they paid for with problems with the roof?
If the idea is to keep getting insurance to cover the damage, that might not work forever (the insurance company might drop coverage or raise rates).
Davep: The $100k does not include the cost to fix the roof.
I would have thought after 10 years of periodic claims the insurance company would have at least sent a letter asking “Is there a reason that you guys don’t want to redo your 125-year-old roof?” But apparently not!
I always thought this kind of damage would be denied coverage by insurance due to the predictable nature of damage from neglect of maintenance. They would cover loss of roof tiles and then water damage from a storm, but not damage from an improperly maintained roof, and definitely not a repeat claim. I would think $100k would make it worth their while to check it in person.
Crap. Today, I bought a top floor Florida condo in a 6-unit building with a flat gravel roof. I already see some small water damage down one wall.
Small sized condos (or in NYC coops) are the worst of all worlds – you don’t have control of your destiny as you would in an individually owned property but they are too small to engage professional management so they end up being run by volunteers. Most sane people don’t want to volunteer for this (usually non-paying) job so the people who end up running things are a little nuts in some way.
Insurers seem a little more activists in California. I have neighbors who have had to trim trees and reroof as a result of their home insurance underwriters googling their houses.
What fix to the roof would have prevented ice dam damage? Unless you are considering the addition of insulation/venting/heaters as repairs.