Our Uninsurable Future?

The Global Casino and the role of the insurance industry

After 21 days and of January 26, 2025, four fires remain active in Los Angeles. They include the Palisades Fire, Eaton Fire, Hughes Fire, and Border 2 Fire. The American president is asserting his impotence by issuing an ‘executive order’ that seeks to “change California’s hydrology” said Karrigan Bork, a law professor at the University of California, Davis, and the interim director of its Center for Watershed Sciences. Trump can do little “because nature imposes the most significant limits on the amount of water that can flow to the Central Valley and Southern California.”

Trump is the least of Los Angeles’s problems. As Matt Stoller explains, the Los Angeles Fire Department has more than half its fire trucks out of service. That is in large part because of Private Equity’s role in buying up (‘rolling up’) or ‘consolidating’ the fire truck industry into one company, American Industrial Partners, which is now in a monopoly position to “force up prices across the board”.

The cost of fire trucks has skyrocketed in recent years––going from around $300 -500,000 for a pumper truck and $750-900,000 for a ladder truck in the mid-2010s, to around $1 million for a pumper truck and $2 million for a ladder truck in the last couple years. Meanwhile, the time it takes to get a fire truck delivered has grown dramatically, from less than a year before the pandemic to anywhere between 2 and 4.5 years today. (It’s not just trucks, all fire equipment is increasing quickly in price, from air supply packs to maintenance contracts.)

State budgets have been cut, and Lina Khan, Biden’s anti-trust tsar who led many probes into oligopolists, has, in light of the Trump victory, just resigned her post at the Federal Trade Commission.

California and the Insurance industry

California recorded the hottest summer on record in 2024 as climate change dried out the vegetation surrounding Los Angeles. Forests and grasslands were turned into tinder “fueling faster, more intense burns” according to Yale Climate Connections. ^[i] The fires — expected to be amongst the costliest disasters in U.S. history — deepened a crisis in the state’s home insurance market.^[ii] Thousands of homes in the city had not had their insurance policies renewed and the rising costs of insurance and cancellations left many without adequate fire insurance cover.

“We’re marching toward an uninsurable future in this country and across the globe,” wrote Dave Jones in July 2023. ^[iii] Jones served as California’s insurance commissioner from 2011 to 2018 and now directs the Climate Risk Initiative at the University of California, Berkeley.

It was clear that California’s insurance industry was in trouble. The bigger question was this: would that catastrophe increase wider financial stability risks in the Global Casino?

Insurance corporations that ‘manage’ $40 trillion of the world’s insurance premia - 9% of global financial assets, according to the IMF – operate within the Non Bank Financial Intermediary (NBFI) sector.^[iv] To understand why their activities in the Global Casino pose risks not just for individuals, households and firms but also the whole global, financial system requires a brief explainer of the types of gambling, speculation and leveraging that take place at the heart of the ‘shadow banking’ system.

In 2023 the IMF investigated potential risks in the NBFI sector.^[v] They noted that relatively tight regulations for insurance companies, particularly strict capital requirements, limited the degree to which these companies could invest in riskier assets. “However,” they explained “as insurance companies make extensive use of third-party investment managers, a detailed and timely examination of the actual underlying risk exposures may not always be feasible”.

Insurance companies are playing a kind of ‘let’s hide’ while we play ‘pass-the-parcel’ with risky investments.

The risks that are obscured according to the IMF, are those known as ‘synthetic leverage’ used by investment managers in the insurance sector, to enhance returns.

The European Central Bank explained synthetic leverage as exposure embedded in a third party’s derivative contracts. ^[vi] (Derivatives are complex financial contracts based on the value of an underlying asset, group of assets or a benchmark. Much as the value of an insurance contract depends on the value of an underlying asset, for example a property in Los Angeles’s Palisades).

Derivatives managed by others, the IMF argues, could enable an insurance company to take on synthetic (third-party) market exposure (the amount an investor stands to lose should an investment fail) - sometimes at little cost to the insurance company. A risk which allows the company to amplify gains if the gamble works, at the risk of magnifying losses if it doesn’t.

As the Californian wildfires raged, economist Gary W. Yohe, Huffington Foundation Professor of Economics and Environmental Studies, Wesleyan University, warned that climate change was undermining the insurance systems American homeowners relied on to protect themselves from catastrophes. ^[i] But he argued, another threat remained less recognized: the collapse of American insurance systems could pose a threat to the stability of financial markets well beyond the scope of the fires. A dysfunctional property insurance sector could "create widespread financial instability," he wrote, just as the collapse in the value of opaque bundles of real estate derivatives in 2007-9 - which first appeared as “seemingly localized problems” – led to a Global Financial Crisis.

Heigh Ho. Here we go again. Whereas in 2007 it was Collateralized Debt Obligations (CDOs) today its the ‘synthetic leverage’ in derivatives….

There is just one corrective to this doom-laden story: it’s the Big Green State - subordinating the ungovernable Casino to what Prof. Trevor Jackson calls our “communities of obligation.”

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^[i] Gary W. Yohe, The Conversation, 21 January 2025. I’m an economist. Here’s why I’m worried the California insurance crisis could trigger broader financial instability. https://theconversation.com/im-an-economist-heres-why-im-worried-the-california-insurance-crisis-could-trigger-broader-financial-instability-247620

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^[i] Jeff Masters and Bob Henson, Yale Climate Connections, 9 January 2025. The Role of Climate Change in the Catastrophic 2025 Los Angeles Fires. https://yaleclimateconnections.org/2025/01/the-role-of-

^[ii] Laurence Darmiento and Summer Lin, Los Angeles Times, 12 January, 2025. First, they lost their home insurance. Then, L.A. Fires consumed their homes. https://www.latimes.com/business/story/2025-01-12/california-homeowners-are-getting-cancelled-by-their-insurers-and-the-reasons-are-dubious

^[iii] Dave Jones, Barrons, 20 July 2023. We’re Marching Steadily Toward an Uninsurable Future. https://www.barrons.com/articles/insurance-climate-wildfires-farmers-florida-california-4e3d5d27

^[iv] IMF, Global Financial Stability Report, April 2023, p. 65. Chapter Two, Non-Bank Financial Intermediaries: Vulnerabilities and Tighter Financial Conditions. https://www.imf.org/en/Publications/GFSR/Issues/2023/04/11/global-financial-stability-report-april-2023

^[v] As above.

^[vi] Annalaura Ianiro, Christian Weistroffer and Sebastiano Michele Zema, ECB, May 2022. Synthetic leverage and margining in non-bank financial institutions. https://www.ecb.europa.eu/press/financial-stability-publications/fsr/focus/2022/html/ecb.fsrbox202205_07~cac87e0101.en.html