Monday, July 7, 2014

The non-problem of Citizens’ executives and their questionable ethics


Citizens Property Insurance Corporation has built itself a notable history of questionable ethics.  Most recently, South Florida newspapers have brought attention to the revolving door between Citizens’ executives and the private industry. 

A revolving door between public service and private interests is not unique to Citizens.  It is a common concern in nearly all aspects of US politics.  For example, personnel often move between journalism (the job of informing the public) and advocacy (the job of influencing the public). 

Former Vice President Dick Cheney served as Halliburton CEO in between many years of holding high-level public offices.  This revolving door caused great speculation over motivations behind US military action in Iraq. 

Let us not forget Florida’s own Governor, Rick Scott, who seamlessly moved between the private insurance industry and Florida public office.  Last year, his tie to Heritage Insurance Company was a much-discussed public controversy.

Citizens manages the largest hurricane risk in the world.  The job of running Citizens is demanding and its executives are powerfully influential in the global insurance and risk transfer industry. 

Public policy makers face very real challenges in finding executives with the skill and expertise required to run Citizens, but little interest in realizing their own full earning potential after working there.  Indeed, it is hard to imagine that such a person exists.

Given no obvious solution to the political revolving door so prevalent in our political system, why does Citizens’ CEO Barry Gilway seek to investigate the career paths of Citizens’ previous executives?

One possibility is that Governor Scott is up for reelection.  The governor is responsible for appointing two members of Citizens’ Board of Governors.  So, if Scott loses the election, the new governor could replace Gilway.   

Investigating Citizens is a timely show of symbolic politics.  While policymakers can do little to solve Citizens’ revolving door problem, Gilway can take credit for making ethical behavior a legacy of his management.  Perhaps this will discourage his potential successor from critically examining Gilway’s own career path after Citizens.   

Another possible explanation is that Scott, Gilway and/or others seek to establish a precedent that questions Citizens’ legitimacy and perhaps, builds a case for its eventual termination. 

Consider a hypothetical scenario where upon thoroughly investigating Citizens’ executives, the corporation’s inspector general, Bruce Meeks, finds that by, its very nature, the corporation cannot function by established conflict of interest regulations.  Such a finding sets the stage for political attack on the establishment of Citizens in the first place.

Whatever the reason, a spectacle about specific Citizens’ executives and their career history draws the energy and attentiveness of the public away from two far more fruitful underlying issues in Florida.

First, Florida’s democratic governing process is fragile.  Many South Florida residents will recall the election of 2012: the poorly managed waiting lines, unreasonably long ballot and shameful efforts to restrict voting rights, which received international attention.  There was the 2000 election debacle where Florida demonstrated all sorts of trouble counting ballots.  Also, last year, several Florida mayor arrests boosted the state’s reputation as a “hothouse for corruption.”

A struggling democratic process has impacts on managing public programs like Citizens.  When the process ensuring democratic accountability of elected officials is challenged, the public has difficulty managing the responsible behavior of the executives that elected officials appoint.   

Second, Florida’s economic goal of real estate development conflicts with the public goal of affordable property insurance.  This conflict underlies all debate regarding Citizens, its pricing, its management and its existence.  

These two problems are far more amendable to policy solution than attempts to socialize decision making about the career paths of insurance executives.  Paramount to resolving these problems is a renewed focus on the democratic accountability of elected officials and debate involving the public’s moral values regarding Florida’s economic policies. 


Political efforts that focus public energies on difficulties having no solution rather than underlying policy problems performs a disservice to society and further underscore Florida’s shaky democratic process.  This is where the unethical behavior lies.

Thursday, July 3, 2014

Florida Sea Level Rise Politics


While North Carolina seeks to manage the perception of sea level risk placed upon itself, Florida is all about their sea level rise.  Undoubtably, economic and political dynamics influence the different approaches the two states have taken to this particular coastal risk.

The image above shows a prediction of sea level rise for South Florida taken from a recently released report by the Miami-Dade Sea Level Rise Task Force.  

Notice the difference between the predicted sea level rise based on historic measurements and that based on all sorts of other stuff.  The difference in planning for 4 inches of sea level rise is likely different from planning on 2 feet of rise.  

Watching how North Carolina and Florida manage the debate about flood risk will certainly be interesting.  How they proceed will offer lessons of good ideas and bad ideas for other states and nations.  

Wednesday, June 25, 2014

North Carolina Sea Level Rise legislation


A couple of year's ago, North Carolina passed the HB 819 discussing the topic of sea level rise in the state.  However, note that North Carolina refers to the phenomena as "sea level change."

My understanding is the controversial bill amended somewhat the controversial existing legislation.  This caused quite the stir amongst climate change policy advocates and scientists involved in studying sea level rise.

Some excerpts of the legislation:
SECTION 2.(a)
§ 113A-107.1. Sea-level policy. 
(e) The Commission shall be the only State agency authorized to define rates of sea-level change for regulatory purposes. If the Commission defines rates of sea-level change for regulatory purposes, it shall do so in conjunction with the Division of Coastal Management of the Department. The Commission and Division may collaborate with other State agencies, boards, and commissions; other public entities; and other institutions when defining rates of sea-level change.
SECTION 2.(c) 
...The Commission shall direct the Science Panel to include in its five-year updated assessment a comprehensive review and summary of peer-reviewed scientific literature that address the full range of global, regional, and North Carolina-specific sea-level change data and hypotheses, including sea-level fall, no movement in sea level, deceleration of sea-level rise, and acceleration of sea-level rise. When summarizing research dealing with sea level, the Commission and the Science Panel shall define the assumptions and limitations of predictive modeling used to predict future sea-level scenarios. ... The Commission shall also compare the determination of sea level based on historical calculations versus predictive models. The Commission shall also address the consideration of oceanfront and estuarine shorelines for dealing with sea-level assessment and not use one single sea-level rate for the entire coast. ...
The legislation directs the Coastal Resources Commission to direct its science panel to write up an update to the  2010 report, "North Carolina Sea Level Rise Assessment Report." The science panel is made up of North Carolina scientists- mostly from government and universities.  The Coastal Resources Commission is made up mainly of business owners in the coastal region (and I think there are a couple of mayors).

The graph below is from the original 2010 report and provides estimates of future sea level rise in North Carolina based on historical measures.

     
The controversy comes from disagreement about what role North Carolina political interests should play in determining measurements of sea level risk.

Of particularly dispute, the Science Panel was instructed to use historic measurements of sea level rise to estimate future rise (though, it is unclear to me who exactly instructed them to do so).  Therefore, many estimates of sea level rise based on various assumptions about climate change, future earth and social conditions, etc. cannot be used.  

North Carolina's management of risk measurements is by no means unique.  

Florida does something similar regarding hurricane risk.  Standards set by the FCHLPM require that models approved for use base hurricane risk predictions on the historic HURDAT record and so, "near term" sorts of predictions cannot be used (despite their use on the international risk transfer market).  

Nor should we forget outright rejections of flood risk estimates by Florida, Alabama and Mississippi and hurricane risk estimates by Massachusetts.

What is most intriguing about North Carolina's method for controlling the idea of risk imposed upon itself is the political arrangement of doing so.

The expert science panel does not appear to have authority or autonomy to determine the best means of going about measuring risk.  It appears as somewhat of a capture of local business interests through its oversight by the Coastal Resources Commission.

Specifically, the legislation requires that the Commission and the Science Panel must work together and negotiate acceptable scientific reasoning and conclusions (See section 2c above).

Certainly, this ruffles feathers in the scientific community and those in society that value autonomy of the scientific process... or at least a guise of autonomy since is never truly "unfettered."

A better idea may be to have elected officials appoint an independent research panel of scientists with relevant expertise.   The reports this independent panel produces can then be used to help guide public debate about how much risk we wish to plan for given other public policy objectives.  

Pros/Cons, Costs/Benefits, and moral values to be maximized (e.g. public safety) are good tools for this debate.  

Tuesday, May 27, 2014

What Florida's SB 542 teaches us about catastrophe insurance in the US...


Recently, Florida passed SB 542 setting up the regulation of a private flood insurance market.  I think the wisdom of this can be debated.  Regardless, the wording of the bill highlights the the dynamics at play in determining the cost of catastrophic property insurance for flood and hurricane.  (The earthquake insurance market may be a little more like a traveling circus than like the more patterned dynamics of flood and hurricane).

Let's start with the introductory wording of the bill.  I have highlighted a few things.  Then, I'll say a few words about why the wording is interesting and what it demonstrates.

627.715 Flood Insurance.—An insurer may issue an insurance
199  policy, contract, or endorsement providing coverage for the
200  peril of flood on any structure or the contents of personal
201  property contained therein, subject to this section.
202         (1) The Legislature finds that:
203         (a) The National Flood Insurance Program (NFIP) is a
204  federal program that enables property owners in participating
205  communities to purchase flood insurance. A community
206  participates in the federal program by adopting and enforcing
207  floodplain management regulations that meet or exceed federal
208  floodplain management criteria designed to reduce future flood
209  risk to new construction in floodplains. The program was created
210  by Congress in 1968 because insurance covering the peril of
211  flood was often unavailable in the private insurance market and
212  was intended to reduce the amount of financial aid paid by the
213  Federal Government in the aftermath of flood-related disasters.
214  Since the creation of the NFIP, generally flood insurance
215  coverage has been unavailable for purchase from private market
216  insurance companies.
217         (b) The Biggert-Waters Flood Insurance Reform Act of 2012
218  reauthorized and revised the NFIP. The act increases flood
219  insurance premiums purchased through the program for second 
220  homes, business properties, severe repetitive loss properties,
221  and substantially improved damaged properties by requiring
222  premium increases of 25 percent per year until premiums meet the
223  full actuarial cost. Primary residences lose their subsidized
224  rates if the property is sold, the policy lapses, repeated and
225  severe flood losses occur, or a new policy is purchased.
226  Policyholders whose communities adopt a new, updated Flood
227  Insurance Rate Map (FIRM) that results in higher rates will
228  experience a 5-year phase-in of rate increases to achieve
229  required rate levels.
230         (c) The Biggert-Waters Flood Insurance Reform Act of 2012
231  also encourages the use and acceptance of private-market flood
232  insurance. The Legislature finds, however, that there has been a
233  long-term inadequacy of private-market flood insurance available
234  in this state. Such inadequacy suggests that the private market
235  in this state is unlikely to expand unless the Legislature
236  provides multiple options for the regulation of flood insurance.
237  In addition, the consumers of this state will be protected from
238  excessive premiums by the continued oversight of insurance rates
239  by the Office of Insurance Regulation and the continued
240  availability of flood insurance from the NFIP.
241         (d) The NFIP, as amended by the Biggert-Waters Flood
242  Insurance Reform Act of 2012, will prevent many property owners
243  from obtaining affordable flood insurance coverage in this
244  state. The absence of affordable flood insurance threatens the
245  public health, safety, and welfare and the economic health of
246  this state. Therefore, the state has a compelling public purpose
247  and interest in providing alternatives to coverage from NFIP by
248  promoting the availability of flood insurance from private
249  market insurers at potentially lower premium rates so as to
250  facilitate the remediation, reconstruction, and replacement of
251  damaged or destroyed property in order to reduce or avoid harm
252  to the public health, safety, and welfare, to the economy of
253  this state, and to the revenues of state and local governments
254  which are needed to provide for the public welfare.

Flood (and hurricane) insurance is not really about the flood and hurricane risk
What risk does this legislation seek to manage?  A gut reaction to this question is likely, "Flood risk, obviously".  But this is not really so.

The strong emphasis of this bill is on NFIP and what Biggert-Waters did to NFIP rates.  So strong is this emphasis that the bill begins with an entire paragraph on the history of the federally run NFIP.  The risk being managed by this bill is uncertainty surrounding federal decisions about NFIP rates and the potential effect these decisions may have on Florida's real estate heavy economy.

Certainly, much of Biggert-Waters was recently repealed by Obama and the passing of the Homeowner Flood Insurance Affordability Act.  But what about the next flood event that has Congress scrambling to appease the public by again scheduling to increase rates on flood properties?

To the extent that Florida can successfully encourage the private market to pick up flood risk while also controlling the rates charged then the state can buffer against Congressional fiddling with flood risk.
Thanks to ramseur78 on Flickr
By creating the goal of "affordable property insurance" for flood, Florida establishes a means to enable the public to participate in decision making about the size of flood risk they wish to insure against.  The public's perception of flood risk may be different from Congressional or market determinants of flood risk, but, then, that is precisely why this legislation was created.    

The state's residual market for hurricane risk (primarily), Citizens Property Insurance Corporation, shares the same wording of "affordable property insurance."  Legislators worded it this way for similar reasons- market judgements of hurricane risk were far greater than the public cared to manage with insurance.

Solutions to US catastrophe insurance woes do not necessarily relate to causes
Paragraph c, lines 232-236 establish a weird cause and effect conclusion.  True, private market insurance has traditionally been unavailable because, traditionally, insurers found flood insurance difficult to measure.  But, that this "suggests" the need for state rate regulation is a straw man.

Some would have argued that it "suggests" the need for a federal backstop.  It could also "suggest" the warrant of having a federal flood insurance program.  It could suggest power politics between the federal government and the insurance industry (sort of a "Yeah?! well make us provide flood coverage" mentality).   It could also "suggest" a need to revise land management and real estate policies.

That is, a lack of private flood insurance could suggest many things and the legislature's leap is not intuitive.  Leaps in logic, when imbedded into public policy, can result in policy that is unhelpful and possibly harmful.

Perhaps more interesting than why private market insurers have not historically provided flood insurance in the US is why they are suddenly excited to do so now.  In recent years, modeling methodology has warmed insurers up to the idea of covering flood risk.  With a growing comfort around flood modeling and a high demand for big risks by the capital market the insurance industry has been chopping at the bit for the US to release some of its flood risk to the private market.  Florida, lead by (unsettling) insurance savvy, Rick Scott, has done just that.  

Threats to the state and national economy are bipartisan.
After regulatory changes to Citizens rates in 2007 and the introduction of "affordable property insurance," the then governor, Charlie Crist, became notorious in the insurance industry.  He was, along with his orange glow, symbolic of all that was wrong with "political" ratemaking in Florida. In general, it was felt that the democrats had it out the for insurance industry.

(05/30/14: Well, it was and still is but with my reversal of Crist's party affiliations it may not really have much to do with Crist's actions...)

Yet, Rick Scott, heralded as an insurance industry mascot, has demanded affordable property insurance, as well.  This is made complete with legislative fiddling with regulatory requirements to get there.

The difference between the two governors is that Citizens is a public insurance facility whereas this state flood insurance legislation seeks to encourage private insurers to write flood.

However, I wonder how material the difference actually is.  Insolvent insurers, whether a public residual market or private market companies, are still a public problem and money to resolve the problem comes from the same public.

The point is that when the cost of insurance threatens the economy, whoever is in charge and whatever their partisan flavor, they give in to economic concerns.  Likely, rightfully so.

But it also demonstrates that ratemaking is a political process: from choosing science to go into a model, to choosing how to implement models, to choosing what rates to charge regardless of models and negotiating those decisions with the public, insurers, reinsurers and capital markets.

Charlie Crist: The (ex) Democrat that enabled
affordable property insurance for hurricane
5/30/14: Sorry!
The (ex) Republican, then Independent now Democrat
Rick Scott: The Republican that enabled
affordable property insurance for flood
















Insurance is intended to provide for the general welfare 
Finally, line 254 states what nearly all insurance legislation that I have ever read states: "...provide for the general welfare."


In many ways, insurance is a form of privatized government and provides for the economic stability and safety nets that we put government in charge of.  Jobs, the creation of capital, spreading risk over larger populations, etc are all benefits of using insurance instead of relying wholly on government.    

The successful implementation of an insurance regime is judged largely on how well general welfare goals are being met- detected mostly in the mood of the public.  If those goals are not being met (e.g. people can't hold onto their mortgages because insurance costs are too high and they are upset) then government steps in to provide an alternative.  

Therefore, the insurance industry as a whole has a responsibility to  and interest in meeting the needs of the public.  When it doesn't it faces great challenges in access to policyholders and limits on freedom to judge the characterization of risk for itself.   

Thursday, May 22, 2014

The politics of catastrophe models

The above infographic is taken from here- a article providing an interview with Karen Clark, a foremother of catastrophe modeling.

The image gives a general schematic of decision points for creating a catastrophe model.  At each point the model builder must make a choice of input or how to construct an input (such as how to construct a catalog of hypothetical events).  These choices can and do produce different outputs or rather, different estimates of risk.

Is one choice of an input better than another?  Well, it depends on what you are trying to accomplish.

The goodness of model input is justified by the desirability of its output.  Economist and Philosopher Marcel Boumans has likened the model building process to "baking a cake without a recipe,"
The ingredients are theoretical ideas, policy views, mathematisations of the cycle, metaphors and empirical facts… However, a recipe is not unique in the sense that it is the one and only way to integrate a certain set of ingredients.  Thus a new recipe is a manual for a successful integration of a new set of ingredients [emphasis in original].  
The recipe creation process ends when the baker (modeler) creates a cake (output) to his liking.

Ultimately, the risk we choose to model, accept and insure against are fully malleable.  This provides ample political opportunity to influence choice in the risk estimation and risk acceptability process.

Think about risk estimates as highly technical propaganda.  They represent specific political positions about what the future could look like given a certain set of assumptions.

This does not mean they are not useful for planning.  Certainly they are.   Which is where they derive power to influence decision making.

However, their specificity should be taken with a grain of salt.  While the model may foretell what the future may look like by a given perspective and his/her values and expert judgement, it certainly cannot tell you what to do about it.

Thursday, May 15, 2014

The rise of risk


I created the graph above (which you can also get here) using Google and its seemingly endless capabilities.

Risk is a specific type of uncertainty.  Generally, risk is the possibility of something that represents a threat.  For the purposes of insurance, risk is a measurable uncertainty.

The graph suggests that society has long thought and written about risk and uncertainty.  Seems reasonable as these two concepts were central to early statistical and probability theory.  While we have remained consistently uncertain we have grown remarkably concerned about risk since about 1970.

So, if we are equally as uncertain today as yesterday how could we be more risky?

I'll leave this open ended for now, but I have my theories =)

Sunday, April 13, 2014

Universities prepare students for society, not necessarily jobs


This morning, I have an oped in the Boulder newspaper, The Daily Camera.  

In the article I argue that recent criticisms that universities ill prepare students for employment and many can't find jobs despite substantial loan debt are misplaced.  Ensuring students are better positioned for employment is in general, not a goal of universities or the federal student loan program.

Instead of criticizing universities for poor performance against inappropriate criteria, government and universities need to better manage expectations for the role of higher education in society.

You can read the full article here.