Monday, August 22, 2011

Modeling a 'more favourable' risk regime

Today's Financial Times has an article about the sale of 600+ branches of the legendary Lloyds of London. I don't really know why the branches need to be sold other then the British government which owns 40% of the Loyds Banking Group said it needed to be done. In any case, Lloyds is running into some difficulties with finding buyers, it is claimed, because of capital regulations. The FT reports:

(bold is mine)
Bidders – NBNK, an investment company launched by Lord Levene; Sun Capital Partners, Hugh Osmond’s investment vehicle; and the Co-operative Group – also have to raise funds to plug the gap between mortgages and deposits.

Under normal circumstances new banks have to comply with rules that require them to hold high levels of capital until they have built up a solid record – a process analysts said could take up to about four years.

By contrast, established lenders can use their own flexible, or “advanced”, models, providing they are approved by the regulator. These are typically less stringent.

People familiar with the situation said including an existing management team in the Lloyds sale could help the new owner build its own risk models more quickly, giving it a headstart in qualifying for the more favourable capital rules.

The Financial Services Authority is unlikely to offer any guarantees about when a buyer could move to the more flexible rules – and would still want proof of the new owners’ capabilities – but it is thought to be open to the idea of an accelerated transition.

People close to the situation said a switch could potentially happen within about 6-12 months after the sale.

Analysts estimate that the more favourable regime roughly halves the capital requirement for banks. On a package of £50bn ($82bn) assets – the expected size of the Lloyds sale – one calculated that a new competitor would need £2.5bn of core tier one capital compared with about £1bn for a bank like Lloyds.

There is disagreement about estimates of future risk because of conflicting interests about capital requirements. Most interesting about this article is that the final paragraph gives the general scenario that these not yet approved nor in theory created models will depict. Estimates of risk then are created by first defining the desired cost.

Friday, August 19, 2011

'Not healthy for the industry'

Citizen's has been undergoing a 'take out.' It was ordered to give up some of its policies to the rest of the market. As would be imagined, several private insurance companies have gained from this move. One such company is Homeowners Choice Inc. Paresh Patel is now president, CEO, and director of the company. In its July 11, 2011 edition of "Best Week" AM Best report of that Homeowners Choice report that,
The company's book of business doesn't change much year over year, and Homeowners Choice doesn't add or drop policies based on factors like modeling changes or sinkhole risks, which Patel said is "not healthy for the industry."
The company has 1.68% of the market share and hopes to one day grow to holding 5% of the market.

Tuesday, August 9, 2011

Don't Do Me Any Favors, DAN

DAN, Divers Alert Network, has been around since the 80's providing emergency assurance and insurance for divers worldwide. It was founded by Dr. Peter B. Bennett, a researcher of the effects of pressure on the cardiovascular system. In 1990, the organization became a bonafied IRS non-profit associated with Duke Medical Center. Over time, DAN's insurance offerings expanded alongside the growth of the organization. Through its growing membership and insurance programs, DAN collected data on divers for research and, I will presume, to better inform risk calculations for insurance rates.

Thanks to DAN's efforts in aiding divers everywhere (and its Senior Research Director Petar Denoble), Munich Re has announced that they are now able to incorporate recreational diving risk into life insurance rates. Munich Re notes that

According to the Denoble study, the main cause of death among divers in the over-50 age group is a cardiac event, while drowning ranks highest in the under-50 group. In its current MIRA revision, Munich Re reflects the significantly elevated cardiac risk among divers aged 50 or more. Given the increasing popularity of diving among the elderly, this risk adjustment has been gaining additional importance.s during the years 2000 to 2006 were analysed. The fatalities were placed in relation to the number of divers, their age and their gender.
Think you are finally old enough to have the time and money to fund your beloved diving habit? You might have to check with your agent.

Deutsch on how Federal disaster reinsurance is just like Frannie and Freddie

Consider the following comment by Congressman Peter Deutsch (D-FL) in 1994 during a Congressional hearing titled "The Availability of Insurance in Areas of Risk of Natural Disasters." Deutsch was discussing his cosponsored bill the National Disaster Protection Act of 1993 (HR 2873) because "it addresses the underlying cause of insurance availability problems- by the lack of reinsurance- by creating a Federal reinsurance program."

(bold is mine)

... Let me focus on what we can do to develop (and Jim brought up the idea and you have and the chairman has mentioned as well, is that there is something on the table in Washington) a national program similar to what you probably and hopefully are going to adopt this week. I think there's a clear consensus that we as Members of Congress do not want the Federal Government to be at risk in this type of program. And, I believe that we would not be. However, we have the burden of proving to the public that this is not going to be another S&L bailout [savings and loan crisis]. Thus, I call everyone's attention to two Federal programs that are not bailouts: Fannie Mae and Freddie Mac. These are incredibly successful Federal programs which increased the opportunity for home ownership to hundreds of thousands of additional Americans by using the private sector, but with the Federal Government playing a role that only the Federal Government can play. And I guess the one question is directed to two companies with extremely large market share; Allstate and State Farm, which together have probably about 50 percent of the market. The numbers of cancellations by the companies are 40 percent of the market. It is my understanding that Allstate and State Farm are essentially without reinsurance, and just have to reduce their sales in Florida. It's not like they don't want to sell in Florida, but they have too much at risk here. If they could just lay off a little bit on reinsurance they would keep selling.
At the practical level, about 2 1/2 million Floridians may not be able to get insurance in several weeks if you don't pass legislation or emergency measures are not adopted. We need to articulate why it wouldn't cost the taxpayers any money, why insurers need and can't get reinsurance, and why a Federal program or a State program of reinsurance would solve this problem and create a win-win situation?
When does reinsurance become a backstop? When does a backstop become a bailout? If they are much the same thing, then who favors one term over the other and why?

Does Federal reinsurance to the private market encourage risky behavior by private insurers?

Monday, August 8, 2011

Ex- Florida Senator Bill Posey

In July of 2007, The Miami Herald reported that,
Seven months after Florida lawmakers expanded the government's role in the state's insurance market, rates should be lower and insurers should be willing to write more policies.
As an aside, I'm not quite sure why expanding an insurer's role was ever thought to decrease rates. As an insurer gets more of the market share, supposedly their rates are supposed to increase by necessity. In any case...

The article also reported that (now past) Sen. Bill Posey was in part responsible for negotiating this insurance reform. At one point Bill Posey was the Director of the Florida Association of Realtors. Likewise, he has or had his own real estate company. The Association of Realtors has often been brought in to Congressional hearings to voice their opinion on the homeowner's insurance crisis. Their position is that increasing rates will threaten affordable housing.

In 2007, the housing bubble collapsed due to the subprime mortgage lending debacle.

Frannie, Freddie, and Family

Jim Malone was brought in to head up Citizens in 2008; he is a specialist in turning flailing companies profitable. In reference to a lack of experience in insurance, he stated that
Because I don't have a strong bias going in, I have no selfish interest one way or another, and I don't have a long history of relationships to protect
But, he is also founding Sr. managing partner of Qorval with the following descriptor found on the company's website:
... He formed Qorval to emphasize saving, improving and rehabilitating companies, as opposed to liquidation. He has been CEO of five Fortune 500 companies in as many different industries, managed or participated in over 65 acquisitions and divestitures, led in and out-of-court reorganizations, and created international and domestic joint ventures and strategic alliances.
As successful as he is and in his late 60s, it is hard to believe that there are no existing relationships to protect.

In any case, in July of 2011, The Miami Herald reported that Malone proposed privatizing Citizens, which Rick Scott, former health insurance defrauder extraordinaire (eg. see here or just google the guy), quickly jumped on board . Malone stated,
My experience would say that any organization that has 1,400,000 customers, that has a premium revenue stream of close to $3 billion a year and a nice chunk of liquidity sitting on its balance sheet potentially has some value to the private world.
I am not an investment banker or one experienced in takeovers, but on the surface this seems reminiscent of the privatizing of Fannie and Freddie and the complicated relationships of financial responsibility that eventually led to economic meltdown (report found here). That Citizens is underfunded is a generally shared belief. If it fails while the state owns it then the Feds are left contemplating trying to save the state. But if it is privately owned, then they must contemplate saving a privately owned company. Why do that? This seems to place any benefits that are to be had by owning the company outside the state and the risk within it.