RiskProf

What is so different about this year?

Gov. Crist came in last year guns ablazing at the evil black hat insures. The new sheriff kicked out those nasty insurers, took over the reinsurance business in Florida, and allowed the local social insurance company, Citizens, the price freedom to undercut those evil profiteers.

The Nattering naybobs of negativism said it would never work.* But what do they know? The insurance commissioner hired the legendary chief consumer advocate (the one whose name isn't Ralph) to tell the world what the prices should be, but for some reason the prices didn't change as expected. The sheriff even appealed to trial lawyers to help him round up them there ornery black hats and get those persnickety prices lower, but they evidently couldn't find anything to sue about (can you believe that?).  The insurance commissioner used his super awesome subpoena powers to get the black hats to obey.  Six months later .... one now hears only the chirping of crickets,the cry of the blue heron, and the occasional Florida bullgator coughing in the distance.

The CFO, who has to manage this mess,  is telling the good ole boys that Florida needs to shed some risk and quick.  Some of the local ranchers are also getting nervous and one of the local marshalls, by the name of Fitch Eastwood,  is saying that a big breeze will turn the Sunshine State into just another Dry Gulch. 

Nothing has changed in this past year --especially the laws of economics, except for the fact that the grown-ups are now having to manage the mess created by the sheriff and his local rancher buddies. These grown-ups are rightly concerned about shedding risk.  It is ironic as this is exactly what the black hats were doing before being vilified the sheriff. I do hope he looks good in a black hat.

 

*NNBs

The Truck Insurance Extremist East Florida Gazette What's an Actuary Point of Law Hit and Run

Florida's Proposed Hurricane Surcharges

• A 2.07 percent charge for one year to cover a portion of the 2007 deficit for Citizens' windstorm policies.

• A 1.4 percent emergency assessment charge to cover Citizens' remaining 2005 deficit; ends in 2017.

• A 1 percent surcharge to cover a 2005 deficit at the Florida Hurricane and Catastrophe Fund, which provides cheaper backup reinsurance for insurers operating in the state; ends in 2013.

• A 2 percent charge for the Florida Insurance Guaranty Association, which was pressed into covering claims left when the three Poe Financial insurance companies failed after the 2005 storms; in force for one year.

A $2500 policy would have a $167 in assessments!

via Miami Herald

All that You wanted to Know About Cat Markets but were Afraid to Ask

Wharton, III and GSU have just released a study of CAT risks.  It is an amazing 400+ pages, so download it if you are a speed reader.  The executive summary is only 23 pages long.   

Another Look at Insurance Profits

Ted links to a CJ&D complaint that insurers are making profits.  It is hard to believe that we are talking about this.  Under our economic system profits are good thing.  Profit attracts capital, firms enter, and competition is enhanced.

What many people seem to think is that profits are an extra and that this extra is an immoral extraction of money from consumers.  Of course, it is possible, that collusion among the providers might lead to extraordinary high profits.  In that case the extraction of “extra” might be immoral. However, this is not the case in the insurance industry.  No one has made the case that there is collusion and many have made quite a bit of noise about it.  Perhaps the Florida insurance commissioner will find some secret memo among the subpoenaed documents that says something like this memo I recently received.

 

To all in the insurance industry and selected bloggers:   Our regularly scheduled secret meeting will not be held tonight because Debbie has a Girl Scout meeting tonight.  She just forgot about it when she originally scheduled the  secret meeting and she is the cookie coordinator.  Debbie suggests that we  postpone the secret meeting until next Tuesday.      Also, Debbie wanted to remind everyone, especially Ed S., that while smoke filled rooms might have been de rigueur in the past, smoking will lead to immediate banishment to the corridor C hallway where a special close circuit video connection will allow smokers to watch the secret proceedings.     Oh, by the way our head number cruncher suggests that we should overcharge every household   by $950 up from $870 this last year. We can talk about this at our next secret meeting.      Finally, Progressive Allied Indemnity of Secaucus also volunteered to bring the donuts.      Thanks guys,         Mickey Secret Insurance Cabal Coordinator

I suppose that if this memo existed, I’d change my mind about collusion, but this is a canard that keeps being repeated without any type of proof.

There are numerous firms competing for our insurance dollar expect in those states that won’t let the industry compete.  In those states we see insurers leaving the state.  All one has to do is look at the automobile insurance markets in New Jersey, South Carolina, and now Massachusetts.  In each case the state regulated prices severely.  This caused companies to leave the market and prices ended up rising because of massive subsidization schemes that rewarded high risk drivers at the expense of the low risk driver.  In each case, deregulation occurred because the state had to throw its hands up in defeat.  It could not manage the market through increasingly hostile regulation.  Insurance is a voluntary business and at some point, companies will just leave.  After de-regulation each market responded with lower prices for many consumers and more insurers were willing to write in the state.

This week we saw a number of things which are consistent with this market based view.  First, State Farm threw up its collective hands in Florida. In addition to deciding to write no new polices it cut 50 thousand policies. 

Alex Sink the CFO of Florida is worried about the effect of upcoming surcharges on the policyholders of Citizens Property Insurance (the state owned insurance company).  There could be serious (double digit) increases for these customers in the company of last resort.  Citizens is the fifth largest insurance company in the US in terms of exposure (which is not a typical way of measuring insurance company size, but because it is owned by the state, its asset base is essentially the borrowing ability of the state.

Florida looks like a tremendously mismanaged risk exposure. Therefore it is going to be more costly for everyone involved including both private and public participants.

In addition, a study came out this week in Natural Hazard Review that said hurricanes were no worse in terms of severity than in the past.  What has changed is the economic harm that they can cause.  This is because people are putting property and other assets into high risk zones.  By itself, this causes an annualized real economic loss from hurricanes of about $10 billion per year. Over the past 7 years (2000-2006) the combined homeowners and commercial property premium volume in 2006 dollars averaged 4.2 billion.  This does not include Citizens’ premiums which are currently about $1.6 billion.  So if we expect to have $10 billion in annual losses we do not take in that much in terms of insurance premiums.  While the $10 billion dollar annualized loss includes both insured and non-insured losses, if we assume that 50 percent of the losses are insured losses then our premium volume is pretty close to the expected annual losses.  This leaves no room for profit, underwriting or claims costs.  It is no wonder that firms are reluctant to operate in Florida.  There is no profit opportunity because the state has chased out the private market, allowed increased concentration of risk on the high risk areas, and subsidized the state’s own rates by using its power to tax all residents of the state to cover losses by Citizens.

Finally, the NAIC, the group of state insurance regulators publishes an annual document called the “NAIC Profitability Report”. In the 2006 edition there is a table on page 36 which compares the insurance industry with a fortune All Industry (Finance and Industrial) average return net worth.  The highest return for the insurance industry was in 2006 with a return on net worth of 12.2 percent.  The highest year for the All Industry net worth was also 2006 and the return was 15.4 percent.  Over the last 10 years (see graph below) the insurance industry averaged 7.2 percent and the All Industry average was 13.5 percent.  Further the return for the insurance industry has a standard deviation of 3.8 compared to the All Industry return standard deviation of 1.86.  Thus, the insurance industry’s returns are volatile compared to the All Industry returns.  Now, one can quibble about the proper definition of profit, but most definitions will give similar results in terms of relative profitability and volatility.  So, profits are good.  Regulatory mismanagement is bad!  Demagoguery is beneath the pale, but par for the course!

(click to see a bigger image)

Being a Good Samaritan is one thing, but ...

The 2005 hurricanes illustrated how many Americans are uninsured and underinsured for natural catastrophes and the federal government’s role in recovery from natural catastrophes. An analysis by HUD found that of the 192,820 owner-occupied homes with major or severe damage from Hurricanes Katrina, Rita, and Wilma, approximately 78,000, or about 41 percent, did not have any insurance or did not have enough insurance to cover the damage incurred. Homeowners do not purchase natural catastrophe insurance for a variety of reasons, including financial reasons. Moreover, buying a natural catastrophe insurance policy does not guarantee complete coverage for a dwelling. For example, if the home’s replacement value is calculated inaccurately, the homeowner will buy too little insurance to cover all of the damage. More and more frequently, responsibility for supporting the needs of individuals who lack adequate insurance against natural catastrophe risk is falling to the federal government. We estimate that the federal government made approximately $26 billion available for homeowners and renters who lacked adequate insurance in response to the 2005 hurricanes.

11/07 GAO Report on Natural Disasters GAO-08-7 (p 25) (citations omitted and emphasis added).

Two points. First, I am not sure how the GAO came up with the estimates of $26 billion for 78,000 underinsured and non-insured homeowners and renters.  However, I am sure that it can withstand some scrutiny. So, based on these numbers the total per person payout was $333K to those with under insurance or no insurance.  To provide some comparison figures, the median home in New Orleans was worth 159.2 K and 130.5 in Mobile, AL in 2005 (from Nat'l Assn of Realtors (R)).  Admittedly, beach houses are more expensive than in-town houses, but they are also likely to be insured. Further, they are also more likely to be flooded by a storm surge, but the max payout from Federal Flood insurance program is $250K.   Finally, insurers will often pay for living expenses and the like if a home is no longer livable.  However, the given these numbers the Feds appear to pay well.

Second, if you, an average homeowner, knew that if there was a big disaster in your neck of the woods, the Feds would pay you $300K, would it have an effect on how you perceived the necessity for purchasing insurance?  Would you be less concerned about keeping your coverage limits consistent with the value of your property?  If you rented would you even buy insurance? It's human nature to behave this way and economists have a term for it: moral hazard. Moral hazard causes people to act less safe or take on more risk when they feel protected. This increased risk puts the costs of payment to either insurers or, in this case, the government. Thus, big payouts today mean bigger payouts tomorrow.

We want to help out people who are victims of disaster.  Its also our nature as Americans.  However, do we want to encourage bigger disaster bills in the future? A little tough love might go along way in reducing the future costs of disasters.

Here's what President Coolidge said after the Great Mississippi River Flood of 1927 (apparently in his State of the Union Address),

The Government is not the insurer of its citizens against the hazards of the elements. We shall always have flood and drought, heat and cold, earthquake and wind, lightning and tidal wave, which are all too constant in their afflictions. The Government does not undertake to reimburse citizens for loss and damage incurred under such circumstances. It is chargeable, however, with the rebuilding of public works and the humanitarian duty of relieving its citizens of distress.”

President Calvin Coolidge, “President’s Annual Message,” as reprinted in 69 Congressional Record 107 (1927) cited in a CRS study on the 1927 flood.

As a society, we no longer act as if we believe old dour Cal's values. If the President isn't there the minute after the winds reside with the debit cards, he (or she) just doesn't care or, in the alternative, he (or she) is incompetent. It is ironic that private insurance markets were not as well developed in '27 and the federal government stayed out of the the reimbursement business, when one might reasonably argue that it may have had had a greater role than today in post-disaster assistance.  Now, with much more developed private insurance markets, we see an even more important role being taken by the Feds.  This seems backwards and, as a result, the government's Good Samaritan specter will have a negative long-run effect on both private insurance markets and the Treasury.

Insurance Regulation

I just finished grading a bunch of exams and Ted Frank sent me a blog post from the Orlando Sentinel.  It made me think of a test question I didn't ask.......

Ok, suppose you are the governor of a big state.  (Yes, it can have palm trees if you want.  Yes, you can have a governor's mansion.) You are the former state attorney general and have at your disposal over 1,000 employees working in the state's Attorney General's office.  In addition, you have a whole state insurance department whose sole job is to make sure the insurance industry is following the law.

You believe that the insurance industry is not playing fair.  You have no proof, but deep down in your bones you know something is going on and you even got the legislature to go along with you and it passed a law to fix all the insurance problems. You still have lingering feelings of unease about the nefarious insurers hitting your state with unconscionable, illegal, immoral, un-American, pigheaded, unreasonable, self serving, profiteering etc. and etc. price increases.  In fact, you still believe they are not abiding by the letter of the law even after all of your legislating and posturing.  The insurers are supposed to lower prices, dang it.  The law says so.

So who are you going' to call? Would you go looking to the yellow pages for a lawyer to sue the insurance industry because it was not following the law?  Or, would you ask the AG or your own insurance department to investigate?

If you thought there was merit to a case against the industry you might ask your own lawyers to look into this because that would help people who vote and it would be a good way to spend scarce state resources.  However, if you thought there was not much merit in the case, you might try to get some private law firms involved because everyone knows trial justice seeking lawyers will do just about anything for money (and it won't cost the state anything), and who knows -- one of them might strike it rich against the insurance industry.  In the mean time the nefarious insurers will have to spend tons of money defending themselves against the inevitable avalanche of lawsuits.

The first strategy makes sense if the state has a case.  The second strategy makes sense if there is no case or, merely, a superficial case.  Just ask Mr. Hood.  He probably knows just the guys who can help out the governor too!

Question:  Which governor is it?
(answer after the break)

We are below Normal (Again)

 

via Weatherstreet.com

How "Bout Them Gators

U. of Fla. Researchers Halt Hurricane with Flick of Switch

Now we just have to hope they can stop Auburn, FSU, LSU, Tennessee, Georgia, Kentucky, Ole Miss and the rest just as easily.

Temper Temper

Florida’s Commissar General of Insurance, Mr. McCarty, is having a field day.  Salvos of subpoenas are shooting from Ft. FLOIR in Tallahassee. (Florida Today)  Last week Governor Crist declared war on the insurance industry. (However, no shoe banging was evident). This week General McCarty is complying.  Good luck with that subpoena thing. 

The interesting problem is that Florida’s Secretary of Defense, Ms. Alex Sink, is having second thoughts about what to do as she is the one responsible for paying Citizen’s bills.  She also suggested  in a Miami Herald interview that Florida repeal the part of the January law that increased reinsurance provided by the state. Ms. Sink also said  that she would like the experts hired by Mr. McCarty's office and the Legislature “to be forced to come back to Florida and defend their initial predictions.”  That would be fun to watch. 

Katrina Claims 2 Years Later

After Katrina the state of Louisiana increased the time to file a legal challenge to a claim from one year to two.  The argument being that there were delays and people, arguably,  weren’t ready to settle after just one year.  I don’t have a problem with that as many states have two year statutes of limitation for many types of litigation.  A group called Katrina Justice is suing the state to get the limitation extended once again.

According to Rebecca Mowbray at the NO Times Picayune (reg. req),

A New Orleans nonprofit group has filed lawsuits urging Gov. Kathleen Blanco and Insurance Commissioner Jim Donelon to extend the deadline for resolving hurricane insurance claims beyond Aug. 29.

Katrina Justice filed the suits last week in Baton Rouge and New Orleans because it says that with the recovery going slowly, contractors in short supply and many people still waiting on Road Home money, most homeowners are not far enough along in rebuilding to know if their insurance checks were adequate.
(emphasis mine).

This type of thinking is a big problem for the insurance industry in the short-run.  Insurance payments are almost never adequate.  Can money ever properly replace a dead loved-one or a lost family home full of fond memories?  No.  The question is whether the claim is paid properly according to the contract.

By now, just short of the two year anniversary, one should know if one has a true legal dispute over a claim.  If one doesn’t, it is easy to sue to preserve rights. 

In the long-run, this type of thinking is a big problem for consumers of insurance.  If insurers are supposed to pay “adequate compensation” in addition to their contractual obligations, then they will just mosey on down the road.  (How’s that for a technical insurance term?)