RiskProf

Isn't this a good thing?

HILO, Hawaii -- Living on the slope of one of the most active volcanos in the world can be expensive when it comes to homeowners insurance.

via www.dailyherald.com.

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

.

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

Atlanta Tornado

I have been so busy with the day job, I forgot to mention that my office had been missed by last weekend's tornados by about a block and a half.  Other faculty around here were not so lucky.  Some dorms had their roofs damaged and there was glass everywhere.  The Robinson College of Business is about 4 blocks from the CNN Center which suffered a great deal of damage (mostly blown out windows).

One of my correlations (siblings) lives in the greater Atlanta area and he sent me this picture from his front yard on his cell phone last Saturday.

This is from his house in the boonies.

 

He also got this one from a local TV station.  It is a really interesting picture of the city looking south.

I am lawsuit abuse

"When I heard $67 million, I said to myself, 'Nonsense'... How could he claim this much over a pair of pants?"

From www.iamlawsuitabuse.org quoting the Chungs on their recent unpleasantness.

Also a short video from fellow GSU Professor Olga Jarrett on the influence of the nanny state and fear of lawsuits on play grounds and school play.

via Overlawyered.com .

Mr. Hunter Tries a New Tactic

Consumer advocates have generally suffered losses in the war against the use of credit scores and other rating methods that they deem unfair.  Fairness in the risk-rating business is generally defined to be having a legitimate link between risk and the rating category.  Smokers, for example, have higher risk of lung cancer and so they get a higher life insurance premium.  No one really disputes this rating classification because everyone knows smoking is bad for one's health.  However, the consumer advocates believe that insurers should not charge poor people more for their insurance just because they are poor. I concur.  However, I do not think that is the case at all and most states have agreed with this position.

Now, the consumer dis-advocate argument is becoming slightly different.  Mr. Hunter and his associates are claiming that an ethical consumer should not deal with a company which gives them a price discount if they are going to raise the poor person's insurance as a result.

Hunter cautions that some companies seem to harbor biases against minorities and low-income people. He objects, for instance, to auto insurance giant GEICO's use of education and occupation as factors to determine a driver's risk. Through a formula, he says, domestic workers and high school dropouts pay higher premiums to GEICO than do their better-educated counterparts who have identical driving records. His tip for ethical consumers: Beware when an insurer starts asking about your schooling and your job. Even though you might get a good rate, your less-educated neighbor may be paying an exorbitant fee due to an unfair process.

"A lot of people don't think about how this classification system works," Hunter says. "I think most people say, 'Oh, the rate is $50 less, I'll take it.' They don't [realize], 'The reason I'm paying $50 less is because some poor people over there have to pay $100 more.'  (Christian Science Monitor)

So now the consumer with a good record (or low- risk) becomes complicit with the evil insurer for the risk classification system.  So, non-smokers should not take the lower life insurance premium as the lower educated poor person will have to pay more as a result.  The low-risk consumer is now as evil as the invidious insurer.

The wacky thing here is that there is no causation and every actuary should know this.  Risk rating classes are designed not to subsidize or tax others. The price for the risk class of non-smokers (or good credit risk) has nothing to do with the price for the other risks the insurer provides protection.  If there were subsidization, then we'd have too many high risks taking a low risk policy.  This causes a loss to the company.  If we tax a policy we end up selling too few of that type of policy and the company would not make as much money as possible.

Risk Factors

While Massachusetts is dithering over how much risk classification can be employed in setting auto insurance rates, the Canadians have a problem.  Some believe that age should not be considered in setting auto rates.  Lost of talk about fairness and equity.

Ron Brown (a recent visiting professor at GSU ) and some of his colleagues have come to the defense of risk based pricing and they use the same words.  It isn't fair and it it is equitable to subsidize high risk drivers.

Discrimination is the primary foundational concept upon which people challenge differentiation based on age. The language relating to discrimination is so value laden that society is quick—perhaps too quick—to assume that discrimination is automatically unjustified. But using age as a rating variable in automobile insurance is justified because of the principle of actuarial equity and the related concept of risk classification. Actuarial equity is based on fairness, and in order to be fair to the entire pool of insureds, those presenting statistically higher risk ought to pay their fair share of the burden.

This is such a simple idea but everyone seems to miss it.  I suppose the only way one can see it if it is included on an auto insurance bill.  This is what South Carolina insurers did in the 1990s to make people understand how much their subsidy system was costing the low risk drivers.  Perhaps insurers should routinely calculate subsidy benefits and costs and put them on consumer's bills to make the true cost of insurance transparent.

Between a Rock and a Hard Place

… That’s where State Farm is according to me.  So says the New York Times ($ required). ( I couldn't see what I was quoted as saying until today as I don’t subscribe!), but Waler Olson at Point of Law gets the gist of the article right.

It seems to be common knowledge that Senator Lott has threatened the insurance industry over Katrina.  I have commented on this boorish behavior here and here as has David Rossmiller and the the WSJ has a recent editorial on his “ferocious campaign” against the industry. 

The insurance industry has been stuck between those two places for quite some time.  What I find particularly troublesome is that the first approach was the attempt to destroy the insurance contract by voiding the flood exclusion through the claim that it was against Mississippi law.  Luckily, that didn't get far, but it did cause  insurers to consider whether they can continue to operate in Mississippi. Now we see a concerted effort by legislators at the Federal level to try to punish the industry for their perceived misbehavior.  This is likely to have a greater effect, but not the way the legislators believe. 

A number of companies with significant premium volume already wary of writing catastrophic risk, in part, because how they are treated after a large loss occurs.  Prices are not permitted to rise to adequate levels and the industry is vilified for asserting its contract rights.  No wonder Allstate wants out just about everywhere it faces a wind risk.  There is a long run cost to the coastal states for their misunderstanding of how insurance and contracts work.

Let’s fast forward two or three years….  Mississippi can not redevelop along the coasts.  Gadflys are going to suggest that it is the robber-baron insurers who wouldn’t insure the coastal properties.   However, in actuality, it was Mr. Hood and Sen. Lott who will destroy Mississippi’s future opportunities by their short-sighted populism and antagonism towards the one private industry with the greatest incentive to supply capital of its own free will to the coasts.  How many people will recognize this fact?  Mr. Dale, the current insurance commissioner, understands this and is distancing himself from the federal fray as well as the “Let’s do What Florida did Approach”.  The Mississippi market is already fragile and is not getting better.

update:  Mike the Actuary and QandO make the same point -- and much better too.

Big Project

An interim report is available on the GSU-Wharton-I.I.I. Disaster Project tantalizingly entitled Report on Phase I of the Study.  It can be found here.

Its a pretty long report—mostly data and no conclusions yet.  But one can see what we are working on and what we still have to do.

Please note the link to the report is now fixed

ERP on Cat Risk Insurance

An entire Chapter of the Economic Report of the President on Cats…. 

Here are the conclusions from Chapter 5.

• In insurance markets, as in other markets, prices affect the way people weigh costs and benefits. Insurance prices that are artificially low can discourage people from adequately protecting against future losses. For example, subsidized property insurance prices may stimulate excessive building in high-risk areas, potentially driving up future government disaster relief spending.
• Government intervention in insurance markets can have unintended consequences such as limiting the availability of insurance offered by private firms.
• Private insurers manage catastrophe losses by being selective about which risks to insure, by designing insurance contracts to provide incentives for risk-reducing behavior, and by charging prices that are high enough to enable them to diversify risk over time or transfer risk to third parties. By adopting private sector risk management and pricing practices, government insurance programs could reduce the burden they impose on taxpayers and minimize negative effects on private insurance markets.