A rate nobody can adjust

In every line, an insurer judging a risk bad holds an instrument short of declining: price. It rises, the insured weighs it, and the market does its work. On natural catastrophe cover, that instrument does not exist. The cover is compulsory in every property policy, and it is funded by a surcharge whose rate is set by regulation, uniform across the territory, identical for a house on a plateau and for a plant on a valley floor. An underwriter therefore does not rate this risk: he accepts or declines the whole policy.

That choice is deliberate and must be understood in order to work well inside it. Risk-based rating on these perils would make cover unaffordable precisely where it is needed, and would leave without insurance the most exposed areas, that is, the ones that produce the losses. The uniformity of the rate is the very mechanism of the solidarity sought: the less exposed pay for the more exposed, and in exchange everyone is covered. It is not a design flaw in the regime, it is its purpose.

A first consequence follows for an insurer, and it is structural rather than moral. Its income under this cover is proportional to the underlying property premium, therefore to the price level of its market, and not to the exposure it carries. A portfolio written at low rates in a highly exposed region collects little and carries much; an expensive portfolio in a sheltered region collects more for less exposure. The regime's balance holds at national scale and does not necessarily hold at the scale of one house.

The second consequence is that selection, since it cannot pass through the price of the cover, passes elsewhere, and one must know where. It passes through acceptance of the whole policy, a blunt and visible decision. It passes through the rate of the covers that are negotiable, fire, water damage, machinery breakdown, business interruption. It passes through non-price conditions, prevention requirements, protections demanded, the perimeter of extensions. An underwriter unaware of this believes nothing can be done; one who knows it works on the only levers left.

The third consequence bears on portfolio distribution, which becomes the main management instrument. Since the rate does not vary, what varies is the number and value of exposed risks one chooses to write, and their distribution across peril zones. That makes growth policy a technical rather than a commercial decision: growing fast in a region, on a peril that cannot be rated, means increasing an exposure whose revenue counterpart is set elsewhere and by somebody else.

The resulting trap must be named, because it is silent and presents itself as a success. A house gaining market share in a region where property rates are low, in an exposed zone, sees its growth, its written premium and its expense ratio improve together. Nothing in those indicators shows that its natural catastrophe income is rising more slowly than its exposure, because the first follows a market rate and the second a geography. The gap shows only if somebody measures it, and it never shows in an income statement before the event.

The conduct to adopt is therefore to measure what price does not say. Relating the surcharge collected by peril zone to the exposure carried in that zone gives a simple quantity, with no equivalent in the usual dashboards, and it answers the one useful question: is our presence in this zone funded in the same proportions as everywhere else. A negative answer forbids nothing, it informs: it says that the growth contemplated there is paid for on the other covers, or is not paid for.