RiskProf

At War with the Weather

 

	Four years in the making…. I just received my copy in the mail today from MIT Press.  It is available on Amazon for $ 37.12.  What a bargain. In the fine print on the cover you can see while I am not a primary author I do get the “with” treatment.   Other notables are Neil Doherty, bob Klein and Mark Pauly.
What is nice about the Amazon listing is that there are a ton of blurbs. However, there is no Kindle edition yet.  Nor are there any free peeks. You’ll just have to wait.

The One about "Research"

Florida Insurance Commissioner Kevin McCarty talks about "research" ...

It is always interesting, and frequently amusing, to read various “research” pieces on the Florida property insurance market. While I, like every other insurance regulator, industry professional and observer in the world, agree that the Florida property insurance market provides a challenging, to say the least, economic environment, I must also finally break down and respond to some of the more recent articles.

Here is an abstract and a link to a recent and hopefully amusing article on Florida written by a couple of real comedians (at least our friends think so).  Actually, I am not sure if he is even responding to our riotous prose because Mr. McCarty does not refer to any particular piece of research and does not cite any studies or commentary in his protest regarding the amusing research.  As the "regulator" he should point fingers and cite his sources of amusement for the rest of us aspiring humorists. 

Here is a direct but extremely short rebuttal from the CEI. I didn't notice any belly busters or guffaw worthy bon mots in the CEI's response, but I did note (with a couple of well placed chuckles) that the CEI recently ranked Florida regulators at the bottom of a 50 state list.  I suppose it probably was not for the lack of a sense of humor.

 

ABSTRACT (gated link, but appears to be free for now)

The Perfect Storm: Hurricanes, Insurance, and Regulation

by Martin Grace and Robert Klein

The intense hurricane seasons of 2004 and 2005 caused considerable instability in property insurance markets in coastal states with the greatest problems occurring in Florida and the Southeast. Insurers have substantially raised rates and decreased their exposures. While no severe hurricanes struck the United States in 2006 and 2007, market pressures remain strong given the high risk still facing coastal states. These developments generate considerable concern and controversy among various stakeholder groups. Government responses have varied. In Florida, political pressures prompted a wave of legislation and regulations to expand government underwriting and subsidization of hurricane risk and constrain insurers' rates and market adjustments. Other states' actions seem more moderate. In this context, it is important to understand how property insurance markets have been changing and governments have been responding to increased catastrophe risk. This article examines important market developments and evaluates associated government policies. We comment on how regulation is affecting the equilibration of insurance markets and offer opinions on policies that are helpful and harmful.

Observations on Consumer Advocates II

While putting together the previous post, I noticed a report on the Americans for Insurance Reform Website (which appears defunct, but is part of the Center for Justice and Democracy website).  In a 2006 report, the AIR called for the removal of the private sector from the Florida Hurricane business.

While we haven't see full socialization of hurricane risk, we have seen partial socialization of the homeowners hurricane/wind market in both Louisiana and Florida.  I define socialization for the sake of argument as the government providing a good or service (in this case insurance) with the taxpayers being ultimately responsible for losses.

Note -- while this is not a random sample by any means, let's see how that has worked so far:

• Orleans Parish Civil District Court Judge Kern Reese ruled ...that the settlement brokered in a class action lawsuit against Louisiana Citizens Property Insurance Corp. should stand, finalizing a deal to award $1,000 apiece to policyholders whose 2005 hurricane claims were handled or paid slowly. Times Picayune 3/19/09.
• La. Citizens Citizens board OKs $35M lawsuit settlement 11/13/08 AP.
• The Florida Citizens company had so many problems with claims resolution the state had to set up a special task force to make recommendations which doesn't actually come out and say "pay claims faster."
• "State lawmakers are abandoning long-held promises to lower rates for hurricane policies -- even amid the prospect of stronger storms -- in favor of rapid hikes to rescue public insurance programs that could sink, financially speaking, during the looming cyclone season." The New York Times 5/9. Yowsa!
• (Fla.) Citizens' life expectancy in a storm: 'a few short hours' --The same NYTimes.  Ditto on the yowsa.
  
  "If we have a major hurricane that hits a major metropolitan area, neither one of [the state's programs --Citizens and the state owned reinsurer] would be able to pay their claims," said state Rep. Bill Proctor, a Republican who introduced a bill that would allow private insurers to charge whatever they want. "Frankly, we've just dug the hole deeper since 2005."

To be fair the above mentioned AIR report called for the complete elimination of the private market which has not yet occurred.  The private market companies were alleged to have kept the good risks for themselves and this is why we have to get rid of the private players, so we can spread the risk to everyone in the state.  Unfortunately that just makes the problem worse as the one of the benefits of having private insurers is that they can spread the risk to someone else.  Public insurers with bad credit ratings (like Florida after a really big storm) can't spread the risk much beyond the taxpayers.

The crazy thing is that this isn't economic rocket science and it has been known for some time that this could be a likely scenario.

 

 

The clucking of chickens coming home to roost…

Evidently Florida Gov. “Good riddance” Crist is admitting insurance prices need to rise. Miami Herald 4/4/09

Technorati Tags: hurricane,insurance,regulation

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Ruminations (Part II)

Time Magazine takes a look at Florida ...

Greetings from Florida, where the winters are great!

Otherwise, there's trouble in paradise. We're facing our worst real estate meltdown since the Depression. We've got a water crisis, insurance crisis, environmental crisis and budget crisis to go with our housing crisis. We're first in the nation in mortgage fraud, second in foreclosures, last in high school graduation rates. Our consumer confidence just hit an all-time low, and our icons are in trouble--the citrus industry, battered by freezes and diseases; the Florida panther, displaced by highways and driveways; the space shuttle, approaching its final countdown. New research suggests that the Everglades is collapsing, that our barrier beaches could be under water within decades, that a major hurricane could cost us $150 billion.

I was in London two weeks ago and saw a play called Avenue Q.  The opening song is entitled "It Sucks to be Me" (YouTube version potentially NSFW).  One could easily change this song to it "Sucks to be Florida" and if you watch the video, even Gary Coleman would agree.

What is interesting about the above litany of sucks is that most are the result of choices the State of Florida made.  Water was purposefully under priced to promote development; insurance is under priced and the industry is being driven from the state; pro growth policies are encouraging water use and increasing property risk and inappropriate land use (in the sense that not all costs are being considered in land use decisions); the tax system is designed that non-Floridians pay for general governmental services; and elderly wealthy retirees who were courted by low taxes directed at them do not have interest in paying for schools; and  finally constitutional homestead exemptions make school tax revenues too insufficient for  current needs.  These are all policies made by the people of Florida.  The big problem, as a non-Floridian, is that the rest of the country may be asked to bail the state out from its predicament.  That potential bail-out would be a mistake of epic proportions as then the state will never have an incentive to get its fiscal house in order.

Update:  Lynn Kiesling links to this Forbes article on the under pricing of water by David Zetland.  Under pricing is not just a problem in Florida's insurance market, but in many markets nationwide.

Ruminations on Florida (Part I)

By now everyone is aware of State Farm's recent 47.1 percent rate increase for Florida Homeowners insurance.  I received a number of e-mails about it including one from State Farm which pointed me to two items.  The first is their background information about the rate increase (here).  The second is a link to a Time Magazine article on Florida which I will discuss in a separate post. 

First things first.... Florida requires insurers to offer mitigation discounts.  The idea was provide incentives to make one's home more wind resistant.  These include shutters and roof straps which are supposed to reduce the loss to a home from wind.  One of the rationales for the increase in SF's premiums was because the mitigation rebate program has become too successful in the sense that many people are now qualifying for it.  According to the SF backgrounder..

A vastly larger number of properties are receiving the discount than could have been anticipated when the "My Safe Florida Home" program began. To date, more than 260,000 properties have qualified for the discount and we expect the number to grow to more than 300,000. In some cases, the discount exceeds 90 percent of the windstorm portion of the premium. These developments have triggered a significant and unanticipated decrease in State Farm Florida's projected revenue for 2008, 2009, and beyond. (my emphasis added).

I wonder if anyone is able to accurately price the mitigation credit?  Probably not as the sum of the credits seem to haven eaten into the total wind premium.  This would not be a problem if the remaining wind premium was able to cover the actuarial costs of a storm.  This 90 percent ratio is an amazing fact and I wonder how much of it has to do with the (in)ability of SF to price these mitigation credits properly or whether state regulatory mandates exist which reduce the ability of pricing them effectively.  Are other companies are having the same problem?

People tend to forget that the national State Farm company is a mutual (which means that the policyholders are the owners of the company)*.  So, if SF asks for an ordinary rate increase, it is not "raking profits" off its customers as the owners are the customers.  In addition, when it asks for an extraordinary increase (in terms of percentage), it is still not ripping off its customers as any residual profit is returned as a premium rebate.  No one really seems to understand this as people are saying that the rate request is outrageous.  However, it will be interesting to see how this is played out. 

SF also puts in a nice dig at the state's expense by saying it (SF) has to be the responsible company since it does not have the ability to coerce people to pay later...

Unlike a state-run insurer (Citizens) or re-insurer (Florida Hurricane Catastrophe Fund) that can issue bonds, levy assessments, and impose taxes to fund losses after an event, State Farm Florida cannot charge customers after the fact. It needs adequate capital up front to have the resources necessary to pay claims in a timely manner.

*NB.  I have an insurance policy with SF.

What Florida Really Wants -- Other Peoples' Money

This IJ article points out that Mr. McCain and some governors (two of which are mentioned as possible running mates) are at odds over a national disaster fund.  If we just focus on one principle that is supposedly an important part of the flood insurance program and apply it to the potential federal disaster plan -- that we do not have subsidies between high risk and low risk consumers -- the benefit of a national disaster plan evaporates.

If there is no subsidization from low risk to high risks, then there is no need for a federal backstop. The private market behaves this way currently. So what Florida really wants is to be subsidized.  It is that simple as a subsidy will keep economic development going as it it makes commercial and residential development in the state more attractive. Realistically, there is no way that the relatively low risk states will want to be part of subsidizing Florida's residents.  However, because of Florida's electoral college votes we may end up subsidizing Florida anyway.

Iowa and Katrina Floods

One of the co-bloggers here at RP is confined to his house out (on a hill luckily for him) in Iowa City.  He spent the weekend making sandbags to protect the University.  I asked Ty why there isn't the Katrina-like hue and cry about this flood.  He said maybe it is because they had one in 93 that was pretty bad and people understood the risk.  Ty, being a professor of risk management,  chose to buy his house on the hill for that reason too.

However, at TigerHawk they are talking about differences between the GF08 (Great Flood of aught 8) and Katrina in the comments to this post.  The conversation ranges from Bush did it, to discussions of class and race, to self dependence v. government dependence, and to the differences between a levy burst and a river flood. It is pretty interesting.

N.B. Is is likely that there will be a strong need for private help as well as help for the University of Iowa if one is so inclined. 

Credit crunch hitting state storm insurance fund

Now everyone is questioning Florida's ability to pay claims.

Link: Credit crunch hitting state storm insurance fund -- via  MiamiHerald.com.

Florida is Full of Good Ideas

According to the Miami Herald a law maker is thinking of taking reserves away from Citizens (the state owned insurer of last resort) to capitalize new insurers. 

Two things to note here.  First, Citizens is still under capitalized in a big way. So taking away some of its reserves to put into the private market seems crazy. Essentially, the state would be taking money from an under-capitalized company to subsidize a private market company. This isn't any different than subsidizing Citizen's customers by keeping prices artificially low. Second, Florida is terrible about picking companies to give money to.  A major Florida player, POE, was essentially  started by the state through the institution of Citizen's previous take out program.  POE is, ironically, never more......