Saturday, October 29, 2011

Florida Seeks to Embrace Risk in More Ways than One

Whether or not to embrace the artistic rendering of the most gaudy building yet proposed to disgrace the Miami coastline (and possibly any coastline ever) is but a minor decision to be made compared to the future of Florida's tourism economy.

Historically, Florida was boasted as a vacation destination for those seeking saltwater adventures, the wonder of the Everglades, and the exoticism offered by life intrinsically tied to the ocean and proximal to the tropics. In roughly the late 60's and early 70's, the state was overcome by Disney and came to be touted as a family destination where every child's fantasy could be satisfied amongst life size cartoon characters and "magic." Today, the NYTimes reports, that with the purchase of the Miami Herald building in downtown Miami and the Genting Corp's push for a 30 acre casino project, Florida decision makers are faced with a the decision to embrace a casino based tourism economy or not, beyond that which already exists.

But there are other ways of looking at it. Florida must decide how to best manage its booming population and limited social and natural resources. Whether it be casinos or another Disney park, continued development at this scale is not sustainable. Further, it is ironic these decisions are centered around growing a gaming economy as it is symbolic of the moral decisions facing the state and its most southern region. Who gets to make and influence policy in Florida? What values are going to take priority? Who wins, who loses, and who has to pay to make up the difference?

(10/31/11) In the NYTimes article linked above, Florida Representative Ellyn Bogdanoff (R-FLL) claims that
Everyone is sticking their heads in the sand... Florida has become the fourth-largest gaming state in the country — and we’re an anti-gaming state.
In 2009(?) she is reported to have introduced HB 1157 to
Do away with the state Catastrophe Fund and Citizens. Insurers in the private market would turn over all hurricane insurance policies to a new, state-operated fund just for hurricane policies. Bogdanoff said that by taking on the "one risk" that is making large private insurers flee the state, those companies will return to Florida to offer other important property owner policies like flood and fire.

Bogandoff has a BA from UF in Insurance and Risk Management and
She spent the first 16 years of her career as a shareholder in Setnor Byer Bogdanoff, Inc., an independent insurance agency, and was invited to share her successes with other industry professionals as a columnist in American Agent Broker, a national insurance industry magazine.

Friday, October 28, 2011

Thailand Flooding

The Thailand prime minister and Thai King have interesting responses to the flooding that has overtaken Bangkok recently...

“What we’re doing today is resisting the force of nature,” the prime minister said. “We cannot resist all of it.”

On Friday, General Prayuth Chan-ocha, the army chief, who is reported to have been in contact with the royal family during the floods, said king was concerned that royal residences not be given special consideration in directing the flow of floodwaters.

“His Majesty is very worried about the Thai people,” the general said “He always has been and always will be. That’s him. He doesn’t want anything special, and he said the water must be allowed to flow naturally.”

To insure... well, anything

I am often astonished by the types of insurance products available for purchase. Many are for life's most mundane risks. Some insurance coverage for risks seem misplaced, that is, there ought to be a different way of dealing with it. For instance, insurance coverage for the risk of default on a credit card or loan payment. And I don't doubt that some of these coverages works for some people.

Here is a personal example,
I am near sighted and therefore, I need glasses. As the glasses wearing public knows, glasses are obscenely expensive. The frame, a small molded plastic product usually made in China, costs roughly $200 and then the lenses about another $200. For me, living off government debt and roughly $1500 month, this is no small (annual!) expense. A large commercial glasses retailer offered a 2 for one deal, enabling me to get prescription sunglasses as well, and insurance coverage against damage. The coverage was cheap, $25/per unit for the year and protected me from damage but not loss. For the $25, I could come in and get a brand new pair of glasses. The deal was a good one, but on principle alone, I opted out. I think damage to my glasses is trivial and offering coverage for such a risk is as offensive as how much glasses cost (and my monthly "stipend"). The whole situation seems reminisce of problems with healthcare generally.

In any case, a new insurance coverage is being offered for roughly the same sort of expenses.
ResortQuest, a condominium and home-rental company with properties throughout Colorado, Utah and Idaho, is offering clients a Snow Guarantee, which allows its guests to relocate accommodations to another resort destination — at another company property — at no extra charge in the event of less-than-favorable snow. Customers contact the original destination 72 hours in advance and request a change, or, if they didn't check conditions ahead of time, ask for a move upon check-in...
"One great feature of ResortQuest's program is that our guests get to decide for themselves whether the ski conditions meet their expectations," Cheryl Spezia, vice president of ResortQuest sales and marketing said. “Our Snow Guarantee remains in effect whenever the ski resorts are open, regardless of how many lifts are running. We trust our guests' judgment on what constitutes a good snow report for them.”

... Skiers and boarders also have the option of purchasing season pass insurance, which has been growing in popularity in recent years, according to an article last month in The Denver Post. The insurance — which costs $20 for all four of Vail's mountains in Colorado, Copper Mountain and Intrawest's Winter Park and Steamboat — protects buyers against sudden injury, illness or job change.

It's All Government Cheese

A new report out by several government agencies suggests that food packaging labels offers too much information and not enough guidance. It sounds like they seek to replace existing nutritional information with a symbolic system of healthfulness, but I'm not sure. It may be in addition to nutrition information.

The study was conducted "In light of the persistent disconnect between dietary recommendations and Americans' actual diets."
The committee concludes that it is time for a fundamental shift in strategy, a move away from systems that mostly provide nutrition information without clear guidance about its healthfulness, and toward one that encourages healthier food choices through simplicity, visual clarity, and the ability to convey meaning without written information.

Who decides what is healthy? Anyone not making the cut and deemed to be acceptably situated on the scale of healthfulness will be a loser, so what is and what is not considered healthy will have to be negotiated amongst the powers that be. Such a process could politicize the labeling system and the science that is used to argue for a particular label.

In effect, this is a new risk communication system.

Wednesday, October 26, 2011

A Correlation Sales Pitch?

In catastrophe models produced for the Florida property insurance market, science need only be published in a peer review journal. Of all the science that is produced regularly, which science gets chosen to support the public's goals? The decision of which science to use might consider some involvement of who such usage will benefit and if it is its usage is warranted. For instance, who does it benefit to include climate change predictions in insurance ratemaking? And, with losses resulting primarily from social factors, is it warranted to include such information?
Recently, I received an announcement about a campus talk. The talk is being given by Dr. Peter J Webster. Webster is noted for his work on tropical cyclones and climate prediction generally. The following announcement leaves one's imagination to wander and wonder, who will benefit from this science? Additionally, who identified and framed this social problem- which seems to be a correlated risk between monsoon loss and microloan default to be solved with climate prediction? In fact, several researchers have document serious social problems associated with climate and weather forecasts being used bu financial institutions in developing areas. See for example here.
Probability, Prediction and Decisions: A Pathway to the alleviation of poverty in the developing world

During the last few years, radical economical ideas have been put forward to allow people to emerge out of poverty. Muhammad Yunis introduced the concept of micro-loans that “lend money to people who need the money (Yunis)” for which he received the 2006 Nobel Prize in Economics. Through this method, thousands of people in the less-developed world have slowly eased themselves from poverty and “now go from door to door selling things and not begging (Yunis)”. But there is a bigger problem that effect 10’s of millions of the poor each year: slow rise monsoon floods. These extremes visit Bangladeshis and Indians multiple times in a generation and are relentlessly impoverishing. After such events, loans still have to be repaid and the treadmill of poverty increases the slope of the treadmill of intergenerational poverty.

We ask a simple question. Is it possible that environmental predictions of natural hazards delivered to communities in the most effected regions can reduce the devastating economic social impacts? In parallel with Yunis, can the introduction of environmental hazard forecasts to those who need them at the village or union scale impart a reduction in poverty? We will discuss the results of a decade long experiment in Bangladesh where a scheme for the probabilistic prediction of floods out to 10-days has been developed and implemented. Since 2007, the system has been operational and attached to a warning system where communities are trained to use forecasts and take remedial actions ahead of flooding to reduce their impacts. Economic analyses show that communities that used the forecasts made savings in units of annual income.

Finally, we consider a warming world where flooding in South Asia is projected to become more frequent and intense. For example, the return time of Ganges and Brahmaputra extended 10-day flooding is expected to half during the next 50 years to every 3 years. We close with the conjecture that societies that learn to deal with current environmental hazards will be best equipped to deal with the greater risk of hazards in the future.
I saw the talk.  It covered a lot of ground, potentially appealing to an array of interests.  It also seemed to make an earnest appeal to helping farmers make better decisions about their crops.  Several research projects were introduced such as SHAZAM and RIMES that sought to aid decision making by producing predictions and forecasts.  In Webster's opinion, sustainability will be imposible without the use of hydrometeorological predictions.  This was in the midst of extended discussion of monsoon predictions with IPCC predictions of future climate. 

Intermittently in the discussion were words like "aggregated risk,"  "catastrophic risk" which is primarily a finance term.  There was also a distinct appeal to the willingness and ability of poor Bangladeshi and Pakistani farmers to use risk concepts and understand risk.  He also mentioned briefly microlending institutions and even when there are floods, "the loans still have to be paid back." 

A (Re)Possessed Culture

Last weekend I was visiting a friend who has cable. Flipping through channels, I became absorbed by a show formatted like a standard reality show with a cast of characters reminisce of Jerry Springer. What I later learn is that the show, Operacion Repo, is one of or the (depending on the website) top rated show on Telemundo... and its been running for 8 years. It has an English counterpart on TRUTV. The show is a "docu-drama," that is, it is based on real events but is not real. In any case, with it left me wandering around LA thinking about our apparent 'culture of (re)possessions.'

  • Well known is the problem with home foreclosures, in effect, when the bank repos the house. Such a widespread trend, it has led to all sorts of global economic strife.
  • Earlier this year, Time magazine reported that people were receiving foreclosure notices, socially, through facebook.
  • The Census keeps track of repo industry statistics. They report that the industry of repossession has over 6,000 employees, an annual payroll of roughly $200 million, and "sales" of about $717 million (in 2007).
  • In 2009, a Syracuse paper reports that vehicle repossessions were way up, with a record 1.67 million autos repossessed in 2008 in the United States, an increase of 12 percent over 2007
  • MSN reports that subprime auto lending is up, too.
Not really main interest, over all, but has definitely piqued my curiosity. Is this what happens to a consumer culture that goes broke? The repo man and his business has long been socially stigmatized, favored about as much as the meter maid, but in today's economy he seems to be doing very well. With society's growing familiarity with default and repossession, it may cease to exist as a risk we concern ourselves with. It exists instead as a risk we incur as a matter of getting through the day. I came across another statistic somewhere that an insurance line offering protection against default is also growing and reducing defaults and repossessions (at least, temporarily as would should read between bar graphed lines).

Wednesday, October 19, 2011

Florida Churches to be on the Lookout for Insurance Against Acts of God

State Farm Florida has recently chosen to discontinue covering churches, claiming a need to reduce exposure in the state. Articles that discuss the issue mention the need for "abuse and molestation" coverage as well. .. yet, I'm not sure what that has to do with property damage coverage? Why not just drop certain liability coverages, why the group as a whole?

And as an aside, how is it not a little disconcerting that insurance coverage can even be purchased covering abuse and molestation?! This seems ripe for a moral hazard jab.

One wonders if State Farm's decision is in regards to only churches or other buildings of religious affiliation. Yet, either way, such a decision seems odd because it should not matter what is done in the building that is insured (aside from hazardous practices) but, only the quality of the structure. The article mentions that many churches tend to be older structures and require special add on coverages for things like stained glass panels and organs. The article leads the reader to believe that churches will be able to pick up coverage elsewhere on the private market. Indeed, there are companies that specialize in coverage for places of worship.

In any case, it is an interesting line to drop considering Florida's mostly Protestant and generally conservative voters and widespread, popular disgruntlement with State Farm.

Also interesting is that the FLOIR, which offers a press release for nearly anytime an insurer sneezes, has not issued one for this story.

Friday, October 14, 2011

Who cares about Floridians?

What was once home to the original shrimpboating shack Jimbos, the land since occupied by The Miami Herald has been sold to Genting Malaysia Berhad for $236 million... cash. The company is expected to further invest between $2 and $5 billion in development. The Miami Herald reported that the the casino company investors that bought the land intend on placing on the land a hotel, shops, convention center, and residences. They also cited a real estate analyst describing Miami as becoming a "city-state." However, such a city-state still relies quite heavily on its state-state and nation-state to foot catastrophe costs. The article comes a month before yet another Miami Herald article citing South Florida residents' difficulty in meeting property insurance costs.

Miami has a recent growing trend in allowing foreign investment into its real estate market. What does this do to local say in local politics? The history of Florida and Miami politics enables the mind to run wild on such a question.

Evidence continuously mounts that Florida and Miami government has little interest in Florida and Miami public interest.
What is more...
Some time ago I noticed a change in the legislative wording of Citizens Property Insurance Corp. I wording used to be
"It is the public purpose of this subsection to ensure the existence of an orderly market for property insurance for Floridians and Florida businesses"

Today, the wording is
The public purpose of this subsection is to ensure that there is an orderly market for property insurance for residents and businesses of this state.
(emphasis mine)

Tuesday, October 11, 2011

Earning Interest

Many instances can be found where insurance interests appeal to the science community to aid in mutually beneficial ventures. Such invitations may seem particularly tempting as government funding dwindles (or is perceived to dwindle) for certain research fields.

For example, in 1997, the prestigious journal Nature published a commentary written by scientists claiming that "Partnerships between insurance companies and climate scientists are a model for how academic science can provide value to business. These partnerships benefit both businesses and scientists, as well as the wider public. In 2005, Science published an article in which the author stated, “Climate change can have adverse impacts on insurance affordability and availability… Insurers are well positioned to participate in public-private initiatives to monitor loss trends, improve catastrophe modeling, address the causes of climate change, and prepare for and adapt to the impacts. In this instance, Mills directly invites scientists to use their skill to advance personal and political ideology. More recently, prestigious insurance experts of The Wharton School published a paper in Science framing a flood “underinsurance problem” and calling on scientists to aid in “pric[ing] the proposed financial products appropriately." The authors thereby invite scientists to advance a particular perspective of the flood insurance problem and overlooks public values that have given reason to lower insurance rates for Federal flood insurance.

Friday, October 7, 2011

What is a good rate? What good is a rate?

Windstorm insurance rates in Florida (well, and other rates in FL and elsewhere) are created through a scientific, economic, and political decision process. This is somewhat exemplified in the prior Goldilocks posting. The end result of this process is a negotiated agreement on the characterization of the hurricane risk for the next year. The hurricane risk, socially constructed, is understood and communicated through a number which, in effect, is a prediction or prediction or forecast or what have you about the upcoming year's windstorm maximum possible loss.

So, how do we know if this numerical prediction is any good?

Well, in weather and climate, predictions goodness is judged in part by its skill and value. Something similar may be done here. I think. Maybe skill can be judged by how well premiums collected one year compares to that year's losses. A problem with this methodology however is that a) premiums include way more then what is paid for the risk itself and b) tracking annual rates is seemingly near impossible because that data is not readily available. Instead, maybe skill of risk characterization can be judged by the ability to maintain insurability of the risk.

As for value (to society), this can be judged by the affordability of the rate. Therefore judging a rate goodness may be assessed by considering a 2x2 matrix (which I have adapted from others' work on climate forecasts). I've filled it in partially by some initial case study guesses. Alas, I am still on the hunt for a rate that is both affordable and insurable. Ha!