RiskProf

Consumer Advocates on Florida 2007 v. 2009

Does anyone see a relationship?

2007

Q: [Lakeland (Fla) Ledger Jan 14, 2007] Industry lobbyists say if Florida gets too tough with insurance companies, it will drive the insurers from the state. Can Florida afford to do that given that private insurance is already less available and more costly in many areas?

A: [Robert Hunter, Consumer Federation of America] This is the same threat we heard when California was considering its tough law, Proposition 103. It did not happen, so competition remains strong in California, even with powerful consumer protections in place.

This threat has been heard in many states over the years and, for a state as large and important as Florida, is quite hollow. The legislature cannot continue to give away the store to the insurers in a vain attempt to please them into treating consumers well.

The insurers promised, after Hurricane Andrew, to bring stability in prices and availability if states (including Florida and Texas, where I was commissioner) gave them the three things they demanded: much higher rates based on models, sharp cuts in coverage, such as deductibles, and pools (like Citizens) where they could dump high risks and keep profitable risks for themselves.

We gave them those things and they reneged on their promises, obviously. The legislature should not be fooled again by remembering the old and true adage, "Fool me once, shame on you. Fool me twice, shame on me."

If insurers had the audacity to leave, the state has several options to make sure affordable insurance is in place, including requiring the super-profitable auto insurers to offer home insurance, removing wind from the homeowners insurance policy and putting it into a state pool, competitively bid ding large blocks of houses to insurers from around the world and other options.

2009

From Jacksonville (Fla) Times Union (Aug 10, 2009)

Politicians and regulators pushed back, authoring a complex set of government interventions that critics now say bought lower insurance rates at a steep cost - endangering the state's financial future.

If a major hurricane hit a large metropolitan area today, the state could be forced to boost taxes on insurance policies and take out billions in debt to cover shortfalls in taxpayer-backed insurance plans. Some doomsday scenarios include bankruptcy.

"They get a big hit, like Andrew or bigger, they're going to have to go to the bond markets at a time that it's not good to go to a bond market," said Walter Dartland, executive director of the Consumer Federation of the Southeast, a consumer watchdog group.

Funding that debt will be difficult, Dartland said. "They'll have to go across the board and raise taxes almost on everything."

Eventually, many believe, the danger will lift, with lawmakers passing a sweeping overhaul of state-backed insurance plans that should help keep the state solvent - if luck is on Florida's side while the changes take effect.

It could take six years to entirely wipe away billions of dollars of state obligations to back up insurance companies in the event of a catastrophe. And with premium increases in the state-backed property insurance program for consumers capped by law, it's unclear how long the state will have to increase rates before premiums can cover the program's responsibilities.

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.

Anti-Life Insurance

A Buckinghamshire man diagnosed with terminal cancer is to collect a second winning payout of £5,000 after betting he would stay alive.

Jon Matthews, 59, from Milton Keynes, was diagnosed with mesothelioma, a cancer linked to asbestos, in 2006 and told he had months to live.

He placed two bets, each with a £100 stake at odds of 50/1, that he would be alive in June 2008 and in June 2009.

A third wager will earn him a further £10,000 if he lives until 1 June 2010.

The widower will collect his second lot of £5,000 winnings on Monday.

via marginal revolution

Perhaps an actuary could comment on the pricing of this contract. 

Note that traditional life insurance is really death insurance (i.e. one insures one’s self against a premature death).  So this contract is true life insurance?

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. 

MFA (Again)

I am in favor of eliminating the McCarran-Ferguson Act's antitrust exemption of the insurance industry.  In theory, there is no real reason to have it anymore.   Bob Klein and I wrote a paper last year for the Searle Center on Law, Regulation, and Growth that essentially made that argument.  We also said that due to interpretations of the exemption over the last fifty-years, there really is nothing the insurance industry does in a collaborative way that wouldn't pass muster (e.g. data sharing) under a rule of reason analysis.

So what's the big deal?  Why the push to eliminate the exemption?  I think people think that there is so much corruption in insurance that we need to punish them and removing the antitrust exemption is the first step.  Or perhaps, somebody believes there may be "go-away" money in putative Sherman Act suits against the industry.  I know that this is what the opponents of MFA repeal are thinking.  While they believe that they would prevail under a rule of reason analysis, the costs of successfully litigating their polices is high.

Should Insurance Be Free?

See the parallels from "Should Water Be Free?".

 

Gosh, darn it...why do we have to pay for necessities?

 

Also, the U.S. Treasury doesn't want to make Florida insurance free (or cheaper) by exporting the cost to the federal taxpayer.  Actually, given what they [I mean WE] are spending money on now it seems like the Treasury and Congress could be saying, "Why not--it's only $10-$50 billion and that is no longer in the category of real money.  Heck, AIG cost more than that." [I definitely do not agree with the attitude, but....]

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.

 

 

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.