RiskProf

Q & A with Florida's New CFO on Insurance Indsutry

Florida’s new CFO Alex Sink (the overall insurance regulator) seems to correctly comprehend the problems in Florida.

via a Q& A with the Miami Herald

Here’s how it starts …

Q: How did we get into this mess?

A: After Andrew, the market seemed stabilized.

What went wrong? We had these eight storms in a two-year period, particularly in 2004 when we had four major storms that blanketed our state, causing insurance losses. That immediately was followed by another bad year in 2005.

In retrospect, most people believe our insurance rates in the private market and in the public market, meaning Citizens Property Insurance, were artificially too low in the intervening years.

It was a reality check. The private insurers realized they had gotten their numbers wrong. And we ended up with deficits in Citizens that had to be made up by Floridians.

A lot of the insurance market is psychology. The reinsurers have stepped up and said: ``Wow, look at what can happen in Florida over the course of two years.''

Then, you add on top of that these predictions from the weatherman that we're in for a 20-year cycle of continued multiple hurricanes in Florida.

Nobody wants to risk their capital in a market where we may be having four and five storms year after year. Those are the things that have caused the collapse of the insurance market.

Hopefully, she really gets it.  The only thing she forgets is the Office of Insurance Regulation’s role in keeping prices below actuarial costs.

It wasn't quite like this....

but to the uninitiated the American Economic Association meetings may seem like this.

from http://www.gocomics.com/nonsequitur/2007/01/06/

What Does it Mean to Live in A Riskier Society?

Generally it means, more wealth and well being.

Brink Lindsey from Cato is critiquing a book (The Great Risk Shift) by Yale Poli Sci Professor Jacob Hacker in today’s WSJ.  Professor Hacker says that things were better back in the day when we were all in the same boat.  Lindsey responds:

But if we're talking about security from material deprivation, that's a different story. Let's start with the biggest risk of all: that of premature death. Back in 1970, during Mr. Hacker's golden age of economic stability and risk-sharing, the age-adjusted death rate stood at 12.2 deaths per 1,000 people. By 2002, it had fallen more than 30%, to 8.5 per 1,000. In particular, infant mortality plummeted to 7.0 from 20.0, while the number of Americans killed on the job dropped to three per 100,000 workers from 18.

Next, look at the two main indicators of middle-class status: a home of one's own and a college degree. Between 1970 and 2004, the homeownership rate climbed to 69% from 63%, even as the physical size of the median new home grew by nearly 60%. Back in 1970, 11% of Americans 25 years of age or older had a college or higher degree. By 2004, the figure had risen to 28%.

As to consumer possessions, the following comparison should suffice to make the point. In 1971, 45% of American households had clothes dryers, 19% had dishwashers, 83% had refrigerators, 32% had air conditioning, and 43% had color televisions. By the mid-1990s all of these ownership rates were exceeded even by Americans below the poverty line.

No matter how the doom-and-gloomers torture the data, the fact is that Americans have made huge strides in material welfare over the past generation. And with greater wealth, as well as improved access to consumer credit and home equity loans, they are much better prepared to deal with the downside of increased economic dynamism.

Mr. Hacker leans heavily on his findings that fluctuations in family income are much greater now than in the 1970s. But research by economists Dirk Krueger and Fabrizio Perri has shown that big increases in the dispersion of income have not translated into equivalent increases in consumption inequality. In other words, most Americans are able to use savings and borrowing to maintain stable living standards even in the face of economic ups and downs. And those standards are much higher than those of the all-in-the-same-boat era.

Could increased personal responsibility and greater incentive to manage one’s risk remove the moral hazard aspects of social insurance to create more wealth? 

 

Adverse Selection at Starbucks

A customer orders essentially “just plain coffee” and then goes to the condiment bar to upgrade “the just plain coffee” to a “sorta latte”.  Read all about it at Starbucks Gossip.

I found the above post after perusing comments on a $144 Million class action filed against Starbucks for coupon fraud.  The comments sound like they are all from Ted Frank except I know he is too busy. 

via Overlawyered.

Torts

TortsProf is having a tortopalooza this week as numerous commentators are discussing what they think students should learn in torts.  In a very summary form, there is is an interesting discussion about the practicalities of tort litigation versus an Ivory Tower theory of torts.   Being RiskProf and not TortsProf, I have my own take on it especially after sitting through a very leagalistic class discussion where we examined Boomer v. Atlantic Cement Company (I can’t recall my kids names, but I can remember a case I read in law school 25 years ago!).  Boomer is a trespass case where the cement company was dumping cement particles on its neighbors.  The remedy turned out to be a payment for the continual trespass rather than shutting the company down.  There was a big discussion about why the company wasn’t shut down.  I learned who all the anti-capitalists were and there were large number who wanted to shut the company down.  I raised my hand and said something to the effect that this was a very economical decision in the sense that there was arguably profits generated from the cement company and we shouldn’t shut it down unless the costs of the company outweighed the benefits.  The professor ridiculed that answer and yelled something to the effect of “Is that what are you going to tell your client?”  I was shocked by the vehemence of the response and being a newbie 1L, I just kept my mouth shut.  That one class period made me decide I didn’t want to be a lawyer (and everyone is happier as a result).

I think torts should focus, in part, on the Ivory Tower aspect of the effect of liability law on the economy too.  In fact, I’d like there to be a discussion of liability systems and the objective of liability systems.  No one really talks about the optimal lability system and its role in minimizing the social cost of liability.  If we had such a discussion, we’d see that some things are properly left to the tort system, some to regulation, and some to the insurance system.  I could be wrong (and some of the commentators mention this), but I don’t see lawyers in training being exposed to this Ivory Tower look too often.  These discussions are in the literature but do not seem to be in the professional syllabus.

Big Mac Index

The Economist invented the Big Mac Index in 1986 to check currency valuations. It serves as a humerous way to digest (pun intended) exchange-rate theory.  The index is based on the theory of purchasing-power parity (PPP). In the long run, countries' exchange rates should move towards rates that would equalise the prices of an identical basket of goods and services. The Economist’s basket included one good, the McDonald's Big Mac, produced in 120 countries. The Big Mac purchasing power parity (PPP) is the exchange rate that would leave hamburgers costing the same in America as elsewhere. Comparing these with actual rates signals if a currency is under- or overvalued.

When I first discovered the index as an undergraduate economics major, my first instinct was to participate in burger arbitrage.  More recently I have thought that the Big Mac Index is a bit out of touch with the eating habits of some consumers—namely me. In fact, I cannot remember the last time I had a Big Mac. 

On recent trips to South-east Asia, Europe, and South America, however, I have enjoyed a Starbuck’s latte (or two – they are addicting!!) and I couldn’t help but wonder whether a “Latte-Index” would be a better measure for the Economist.

It appears that I should be reading the Economist a bit closer (my dog ate my most recent addition — seriously, I can show you the scraps).  They have been running a “tall-latte index” since 2004 and it seems that the “latte index” broadly tells the same story as the Big Mac index for most main currencies.

Tim Harford on the “tall-latte index”

Excellent Point

What if there was a good that every year was in short supply.  Prices for this good would double, triple or quadruple for the season.  Would we have the AG for NY involved?  We know those producers are just taking advantage of us in their greedy and pathetic search for ill-gained profits. How about Congressional hearings? Should we demand government regulation?

Click here to find out what this good might be. Are you surprised the free market is allowed to work?

via Coyote Blog.

Queen's Blackout is Related to Florida Hurricane Crisis

Lynne Kiesling at Knowledge Problem points to an article by Nicole Gelinas at City Journal which essentially states that the current Queensboro blackout is, in part, caused by the political institutions in New York City and State controlling electric power generation and other infrastructure investments. Dr. Kiesling’s quote is right on —"political institutions do not have a profit motive for investing in infrastructure.”  Political institutions do not care about capacity (until it is too late) as long as prices are low.  This is exactly the same problem Florida has for insurance and reinsurance capacity.

A Nice Essay on the Law of Demand

Will Wilkinson has a nice essay on the law of demand.  His focus in on the effects of changing the minimum wage on employment.The first three paragraphs focus on the tendency to throw economics out of a discussion because there are exceptions.

 …. Econ 101 principles do not stand to higher-level economics in the way that Newtonian physics stands to relativity and quantum mechanics: as a useful, but literally false, simplification of reality. Economic laws are not strict laws of nature, codifying ineluctable relationships of necessity, and they do not pretend to be. So counterexamples are not ipso facto falsifying, and the law of demand is never replaced with a better, more empirically adequate, law. The law of demand is very, very empirically adequate as it is: It captures a ubiquitous regularity of human behavior that is abundantly confirmed every moment of every day, and without which there would be no science of economics.

via Marginal Revolution

What makes this interesting is that almost the same kind of things can be said about the law of supply.  Prices do matter — no matter what any regulator says.

Love or Money?

A new NBER working paper by Kanika Kapur & Jeannette Rogowski , explores the impact of health insurance on the timing of retirment.  The punch line is that it really seems to matter for couples but no so much for other employment patterns.

Love or Money? Health Insurance and Retirement Among Married Couples

Abstract: This paper examines the role of employer provided health insurance in the retirement decisions of dual working couples. The near elderly have high-expected medical expenditures; therefore, availability of health insurance is an important factor in their retirement decisions. We determine if access to retiree health insurance for early retirement enables couples to time their retirement together -- a behavior called "joint retirement." We find that wives' retiree health insurance more than doubles the propensity to retire jointly, suggesting that health insurance is an important consideration in coordinating retirement decisions among couples. Even though retiree health insurance has a substantial effect on joint retirement, its effect on overall employment patterns is modest, accounting for a 2 percentage point fall in employment.