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.

Non OFC Federal Regulation

I heard rumors of this last week.  Details so far:

• Big insurers are regulated by feds
• “Deregulation” (whatever that means) will not occur.
• The Fed will be the systemic risk regulator
• There will be a financial consumer protection agency
• FDIC will resolve big insurance company failures.

 

via National Underwriter

Florida Chamber of Commerce Poll Results

via IJ

• 62 percent believe consumers should be allowed to choose their property insurance provider "even if the prices are not fully regulated by the state" rather than to be limited to purchasing insurance from a provider whose prices are fully regulated.

• 60 percent of Florida voters are either "very" or "somewhat" worried that their insurance company may not be able to pay their claim if the state is hit with more hurricanes this summer, like in 2004 and 2005.

Quote of the day....

"We're one large hurricane away from a major threat to the economy of this state [Florida]," said Proctor, R-St. Augustine.

via www2.tbo.com.

My Congressional Testimony Part I (The Back Story)

I have been teaching a special three week term.  Each class meets about 3 hours per day and I am teaching two. (I just finished yesterday.)  At the beginning of the term I was asked to testify before Congress regarding my opinion about the future of insurance regulation.  I was teaching intensively six hours a day and I was getting a little brain fried, so I said yes.  That is when the trouble started.

I received the official invitation from the subcommittee at 5:00pm on Friday. I didn’t read the fine print until Sunday.  I had to have 100 copies of my testimony to the subcommittee 48 hours prior to the hearing on Wednesday.  That was not a big deal—it just meant I had to finish writing up my testimony by Sunday night and then I would overnight a package to DC.  Well, thanks to the anthrax scare of late 2001 --

New book

Last week I had the privilege of testifying before Congress on the future of insurance regulation (more on that later).  Today, I received a copy of a book edited by Bob Klein and me with the same title.

It does not appear to be on Amazon -- which just seems strange to me.  It is also missing from the front page of Brookings Press, but  you can order a copy here.  I am not impressed with their website as there is missing information on the book site. 

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.

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.