The trade-off within our economy is a simple one. We know that on average (groups of humans), nothing nasty will happen to us but we don’t know if it will specifically happen to us (the individual). To get around this we all pay into an insurance pot to ensure that in the unlikely event that something catastrophic happens to one of us, the collective pot of cash will financially reinstate the individual. Where insurance does not work (or we have chosen not to use it – NHS), the government has to step in and protect the individual by using the collective tax pot.
So far, so simple.
This system is starting to come under strain.
Storms in Florida are now so severe that insurance companies can’t afford to insure homes against hurricane damage. As a result, the State of Florida is now the single largest home insurer in the state. Longer-term there is some question whether the state can afford to insure 1.5million homes but at least for now they are insured.
Insurance is one thing, but a wider range of financial products are now being affected by the same climate impacts. US Federal Reserve Chair, Jerome Powell was recently testifying before the Senate Banking Committee and said the following about the State of California:
“Those banks and insurance companies are pulling out of areas, coastal
areas and areas where there are loads of fires….fast-forward 10 or 15
years, there are going to be regions of the country
where you can’t get a mortgage.”
Sometimes we seem to be living in a slow-moving disaster movie, and for those that don’t like government intervention and high taxation it is about to get even worse.
If we cannot reverse these effects, we are likely to find ourselves in a world where governments have to take more tax to pay for more public insurance. This is usually a sign of market failure, but insurance companies and banks answer to shareholders, who are never going to agree to insure what look like guaranteed losses. In that sense a portion of our future taxes can be seen as us paying for the sins of our fathers.
With a shrinking tax base (the ratio of workers to retirees has moved from 15:1 to 4:1 in recent decades), retirees might be required to contribute more. As financial planning tends to forecast the future based on the current tax take, this might have to be factored in for future planning.
We are currently using financial planning software to project client finances into the future based on every historic economic scenario since 1915. The theory is that if the future is worse than the worst-case scenario since 1915, well it is all a little academic anyway as we will be digging up our gardens to grow our own food.
All we can do for now is to plan on what we know. Invest in the great companies of the world, minimise tax and reduce costs. Every other external factor in a financial plan is not within our control or yours.
If you already have a financial plan from your adviser and it does not show the full range of potential outcomes, let us know and we will happily build a better one for you. If you don’t have one at all, then let us build one and examine what your future holds.
We are currently advising clients on the financial futures from our office in Hook, Hampshire and throughout the UK using the latest technology.