RiskProf

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.

Optional Federal Regulation

Last week we had a great conference at the AEI hosted by Peter Wallison.  The program and papers are here.  Video is here.  I sound so much better on fast forward!  Bob Klein and I also were interviewed by Ray Lehmann and Sean Carr at AM Best for a podcast (we show up about 5 mins into the podcast).  The Brookings Institution will be publishing a book edited by Bob Klein and myself that will be out in about 9 months.

Also see:

Autoparts.Com

USinsurancenews.com

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. 

Fascinating What if Question.....

What if cars with bumper stickers were more likely to be involved in accidents involving road-rage?.  Here is the Washington Post's summary.

Watch out for cars with bumper stickers.

That's the surprising conclusion of a recent study by Colorado State University social psychologist William Szlemko. Drivers of cars with bumper stickers, window decals, personalized license plates and other "territorial markers" not only get mad when someone cuts in their lane or is slow to respond to a changed traffic light, but they are far more likely than those who do not personalize their cars to use their vehicles to express rage -- by honking, tailgating and other aggressive behavior.

Suppose this is true.  Would it be permissible to increase auto insurance premiums?I would say yes (again, assuming it is true and verifiable using traditional methods).

This would lead to people being puzzled about how their viewpoint can be associated with risk.  In fact, this is the same type of argument that is made about insurance credit scores and auto insurance premiums.  How can my bumper sticker which says Visualize Whirled Peas cause me to behave riskier?

Here is the gated version.  I could not find a working paper.  The paper actually has a nice literature review of things which affect driver aggression (own personal music choice (rather than teenage daughter's), congestion, provocation, vehicle characteristics (tinted windows), initial endowments of anger, time constraints, and heat among others.) 

What if part of the underwriting process one had to go through a personality inventory.  Less agressive people would get lower rates.  That would make them better off and I wonder how long it will take Progressive to start marketing its Peaceful Driver Program.

Also see Hit & Run (a great name for an auto accident blog) and Tyler Cowan at Marginal Revolution.

AEI/Brookings Georgia State Conference

.... On the future of Insurance regulation will be held at the AEI on July 9.

Be there or be square.  Here is the link to the program.

The conference is sponsored by the Risk Foundation.

If Florida Has One, We Want One Too

California wants to get into the insurance business to compete against Warren Buffet.

I was going to have a April Fool's Day Post about the dual surprise announcements that Florida Governor Crist stepping down to take over the Insurance Information Institute and that Florida Insurance Commissioner McCarty was going to head up the Independent Institute .... but California taking on Warren buffet was so much more unbelievable.

And you know, Mr. Hugo Chavez is a Libertarian

What is wrong with this picture?  Florida Insurance Commissioner McCarty claims he is a conservative Republican.  He must be the kind that believed in Smoot-Hawley and worsened the Great Depression. I am not a conservative Republican, so it is hard for me to say who is and who isn't, but I am pretty sure that there are not too many that would recognize Mr. McCarty as a card carrying member.

Interesting items

Riskprof in the news (on Credit Scoring)
Client No. 9 in the news (on Scoring)*

* apologies for my tacky attempt at humor

More on non-renews!

More policy owners are getting notices of non-renews.  The focus of this Orlando Sentinel article is that the insurance companies are doing something wrong.  However, no mention is made of the State of Florida's responsibility.  It bears responsiblity for  driving away the insurers.  Everyone repeat after me:  Insurance is a voluntary business.

Check out the map of self reported non-renewals.