Friday, December 9, 2011

A Tired Tale



For several years now, the EU has been battling with a simple decision, "Should sex be used as a predictive factor for pricing insurance products?"  The decision is a yes/no situation.  On the yes side is the insurance industry, claiming that the use of the sex parameter allows for more accurate pricing of contracts with lower risk groups paying less and higher risk groups paying more.  On the no, is those that argue that such a practice is against the EU's value of social equality.  

Financial interests have sought to make the debate about science, indicating that the quantitative difference in risk between men and women demands that the sex parameter must be used. Some, like the Mark Hoban, British Financial Secretary to the Treasury, have gone so far as to argue that because of this, the financial sector should be exempt from adhering to widespread social values and laws,
While nobody should ever be treated unfairly because of their gender, financial services providers should be allowed to make sensible decisions based on sound analysis of risk.
This particular framing of the debate is inaccurate, as the issue is not about whether or not their is a difference between the sexes but whether or not that calculated difference is just in decision making about insurance product prices.

Earlier this year the European Court of Justice decided that the answer is NO, due to values of equality.  The outcome of this, is thought to be a redistribution of costs and benefits among the two genders.  In typical insurer fashion, industry representatives have retorted with their standard myth
The core principles of risk assessment is that people in comparable situations are treated equally and those in different situations are treated differently.  If this risk-based, factual principle is not maintained, premiums will increase, coverage will decrease and some products will be withdrawn from the market.  
Many seem to allude that the result of this decision will be an aggregate increase in premiums.  That is, the total premiums collected (men +women) will increase.  Althought overall losses have not increased nor should they increase, at least not by much.  If losses are not increasing, than any increase in aggregate premium is based only on insurer's perceived risk or maybe perceived uncertainty.  The decision as to whether or not to accept insurers' perceived risk assessment can and should be open to political and moral debate.

Thursday, December 8, 2011

"Catastrophe"


In literature and drama, a catastrophe marks the death or destruction of the story's protagonist.  This is key in understanding the symbolism of 'catastrophe'  in political and popular rhetoric.  Evoking the term frames a person or entity that is champion of a cause, a struggle to pursue a moral good, and an adversary impinging upon the ability the moral good to be satisfied.  Those who are placed in these roles change depending on who is using the term 'catastrophe' and to what end.       


Insurance
There is claimed to be a unique concern in natural disasters because a single event can damage multiple properties causing a substantially large aggregate loss.  Such losses, some believe“have had a more devastating impact on insurers since 1990 than in the entire history of insurance.”  Events causing losses of $25 million or more are termed ‘catastrophic’ and an especially large aggregate loss may be deemed ‘mega-catastrophic.’ While the concept is not new, as losses have grown catastrophes have emerged as a new type of risk for which the insurance industry has a heightened sensitivity. Catastrophic risk has the potential for systemic market effects because of the many financial contracts that exist to cover the losses.    


What is significant about this is that ‘catastrophe,’ used in this way, is not a risk of the private property owner or of humanitarian concerns, but one of insurance industry finances.


Social Science
The term catastrophe is used in political rhetoric to appeal to varying notions of risk about the term.  Above, it is shown that insurers have a very specific quantitative meaning of the term.  Social science uses the term regarding noneconomic risks of disasters.  For instance, during their annual conference in 2009 the sociologically focused Natural Hazards Center ran a panel discussion titled, “Catastrophic Events: More than Just Big Disasters” with the following description,
The magnitude of damage, the destruction of vital resources, and the massive number of displaced victims after a catastrophic event pose extraordinary challenges for disaster response and long-term recovery.  
Catastrophic events place tremendous burdens on all agencies—local, state, and federal—and require a different approach to planning and preparedness than run-of-the-mill disasters. This session will discuss the differences and similarities in planning for large-scale catastrophes versus day-to-day (or year-to-year) disasters.


Public Decision Makers
The many concerns associated with catastrophe are compounded under the auspices of the ‘homeowners insurance crisis’ and used to gain political support for particular policy.  For example, Florida Congressional Representative Tim Mahoney in support of H.R. 3355, the Homeowners Defense Act, framed the problem as a “national catastrophe insurance crisis” (Subcommittee on Oversight and Investigations 2008).

Thursday, December 1, 2011

Uncorrelated with Disasters?


There seems to be a common claim that natural disaster events are uncorrelated with other market events.  I did some poking around and it seems that some have also been skeptical about this.

Here are my initial thoughts as to why I am wary of the claim...
  • Miami Hurricane of 1926
    • Is thought to have ended the waning Florida land boom of the 1920s.  
  • Hurricane Andrew in 1992
    • A bunch of insurance insolvencies and reinsurance took a significant hit
    • Difficulty in expanding subprime mortgage lending in Florida 
    • Some research indicates that even where Andrew did not cause damage, property values fell
  • Hurricane Katrina and Wilma of 2005
    • There was a gas shortage in the southeastern states and the price of that gas shot up.  
    • Industry and jobs were trampled in LA and MS
    • Inability to make mortgage payments resulting in a moratorium on foreclosures of FHA backed mortgages
  • Japan Earthquake 2011
    • I remember watching the market do all sorts of things after the earthquake, if I remember correctly the yen lost a lot of value quickly
  • In any predicted event, there seems to be a lot that goes on in the financial markets prior to the actual event and then again after some assessment. 
So, I think to claim that there isn't a correlation is bizarre.  But, the reactions seem different depending on the event's place, type and magnitude.

(12/9/11)
Here is a nice correlation reported by the FT.
The flooding in Thailand is expected to inflate insurance claims already made against the earthquake in Japan this year because of the disruption to carmakers and other producers that were taking the impact of lost Japanese production.