Tuesday, December 18, 2012

(Mis)Conduct at Citizens... So what?


Recently, there has been a heated debate over the behavior by Citizens Property Insurance Corporation's decision makers.  On one side, the public and the media claim misconduct by Citizens' key personnel.  On the other side, Citizens' key personnel downplay the claims and appear angry at the allegations.  We could argue at length about who is right in the situation.  Instead, a more fruitful discussion is, "So what?"

Florida is subject to a large hurricane risk. Some argue that this is the "largest hurricane risk in the world... by orders of magnitude." This risk is understood by looking at history and to the future. Because there are large variations in climate and different legitimate perspectives on science, judgments of that risk will differ.

Scientific research demonstrates that judgements about risk arise from such things as ideologies, values, and trust.  This is as much true for the public as it is for scientists.  So, when Citizens' decision makers and the public demonstrate outrage with each others' decisions, be it about rates or hotel costs, it is a sign of a growing distrust of each other's ability to judge and manage risk and identify with each other.  This is as much a problem for the public as it is for Citizens itself.  

Citizens recently sold the largest catastrophe bond ever as a means of covering losses from a catastrophic event that exhausts its resources.  The sale demonstrated the importance of public and government trust in establishing a successful risk management scheme.  Standard and Poor's assessed Citizens' credit worthiness as A+, based in part by "support for Citizens from Florida's governor, chief financial officer, and legislature."  Growing descent about the risk and distrust of one another will eat away at this support and may challenge outside interests' faith in Florida's ability to pay for its catastrophes.   

Efforts to "refocus on the facts" and educate the public about its risk will likely be met with resistance.  It will only widen the divide between the public and Citizens' administrators because the information does not have shared value in society.  Indeed, much of the public is not worried about those facts, as they have facts of their own that speak to different concerns about the hurricane risk.

Florida must develop and maintain a version of the hurricane risk that is politically affordable in order to successfully mange it.  The public and Citizens' administrators need to be receptive of each others concerns, establish an insurable hurricane risk for today, and debate the merits of public policies to control the growth of risk into the future.  This will not only serve to establish a successful and stable risk management plan, but will help to reach Citizens' Board Chairman, Carlos Lacasa's new goal to "win back the credibility of the company in the eyes of the public."

Thursday, December 6, 2012

"Reckless" Development

Thanks to Peter Blanchard at Flickr
I've come across several terms recently used to describe a new(ish) social problem.  These terms are reckless development, overdevelopment, irresponsible development, and the like.  

The US economy relies heavily on real estate development.  It has, at least, since the 1930s.  In some sense, then, concentrated building production is a sign of economic success.  Great prosperity has been derived from land development and real estate sales and financing.  It appears however, that in recent years the cost of disasters (and maybe other trends) have led many to take issue with building as a 'good' means of wealth production.  Perhaps this has been further exacerbated in recent years because the public was significantly burned in the real estate market.

Yesterday, the NYTimes ran an op-ed by Andrew W. Kahrl, an assistant professor of history at Marquette, that laid the claim that "increasing the value of shoreline property and encouraging rampant development" has led to a violation of public rights and high disaster costs.  This is a noteworthy cause and effect claim because it is counter to the current prevailing claim that cheap insurance has led to a development problem (and therefore the reasonable solution is to raise rates).   For some time I have taken issue with the current prevailing claim.  I am more inclined to believe that changes in land development policy are needed to address disaster vulnerability problems and/or certain environmental problems.  

Federal development policies and the speculative nature of the real estate market is often overlooked.  Consider that changes to mortgage lending incentives in the early 90's stimulated an enormous building boom into the yearly 2000's.  All the while, insurance rates were increasing.   The FIU Metropolitan Center has reported that during the several years leading up to the economic collapse, housing in Florida was “built without regard for actual demand.”  Even today, Florida has nearly a 20% vacancy rate and is still developing along coasts.

Thus, Dr. Kahrl proposes land development policy changes as a means to resolve current perceived development problems.  An excerpt below,

Reaffirming the public’s right to the beach could be the first step in a more just and sustainable coastal environmental policy. The argument used to defeat the Open Beaches bill — that it would depress real estate values — is precisely the reason we need to reintroduce an updated version of this legislation now. Without the ability of property owners to wall off and claim the beach as their own, coastal real estate values would slowly decline, and the pressure to develop would dissipate (or at least become more ecologically sensitive). 
I’m not calling for a full-scale retreat from the coast. Long before the modern age of coastal development, people lived by the sea. Their homes were routinely battered by storms, and they didn’t try to defy nature by constructing fortifications to preserve each attractive stretch of shore, since they knew that what was there today would most likely be gone tomorrow. We need to return to those sustainable practices, and an open beaches act could help us get there. 
By dedicating beaches to the states for use by the public, Congress would be declaring an end to the destructive — and futile — attempts by private property owners to hold back the sea. It would ensure a better future for America’s coasts and restore one of our founding legal principles. We would not be confiscating private property, but merely recognizing who owned it all along: us.

Tuesday, August 21, 2012

All up in the Kool-Aid...


When I was a kid in South Florida, rockin' out to Rage Against the Machine and suffering the atrocities of authoritarian governance by persons over 30, I learned an expression: "All up in the Kool-Aid and you don't even know what flavor it is."  The expression suggests, that while one has become a participant in a situation or debate he has missed the context and matter being discussed.  Hence, his tongue is stained purple but couldn't tell you if he was slurping up cherry, orange, or grape.

The expression has served me well over the years. In my studies of science policy and politics, it seems to be fitting to many policy issues where interest groups seeks to frame a debate that enables them to put their sticky fingers into a pot that originally had nothing to do with them.  Generally, this serves to complicate matters and slow, if not halt, the democratic process of decision making.

Which brings me to advocacy groups, like ClimateWire, that like to stomp their feet and point fingers at Citizens Property Insurance Corporation on behalf of the private insurance industry and climate change. Let me just say, "You're all up in the Kool-Aid and you don't know what flavor it is."  But perhaps with that stained mouth grin, it need not matter.  The sugary liquid smells like money and like flies at a picnic, they're all over it.

Today, ClimateWire, a purveyor of information on "the debate over climate policy and its effects on business, the environment and society" put out an article commemorating 20 yrs since Hurricane Andrew.  The majority of the article demonstrates the very soul of Florida's hurricane insurance woes, conflicting feelings about the traditional means of creating wealth in Florida- building and land development.  That is, the debate about windstorm rates is actually a debate about Florida's future direction in producing wealth.  Hence, David Hart, the executive VP of the Florida Chamber of Commerce, argued that the Citizens' Board should be allowed to raise rates in order "[t]o secure Florida's future" in whichever direction it is that he perceives to be desirable.

ClimateWire also demonstrates that hurricane risk alone does not sway building trends leading the III's president, Robert Hartwig to proclaim, "Andrew has had basically zero effect in terms of diminishing demand for at-risk property." ClimateWire claims that the reason for this is historically "low" insurance rates.  And today, these rates are provided by Citizens and therefore Citizens is a problem... and a threat to the environment.

But here is where they miss the Kool-Aid flavor, there is no reason to believe that Andrew or any other hurricane would encourage changes in land development or that it should.  Feelings about risk are largely subjective and Floridians seem to sit comfortably with the chance of hurricane landfalls.  Florida has had devastating hurricanes since before it was known to the spanish as La Florida. Yet, here we are, several million people later on a heavily metropolitan peninsula.

As well, since Andrew, insurance rates have become "permanently higher."  Between 2000 and 2010, Florida exhibited over 50% increase in "burdened" households, about a 13% decrease in homeownership between 2005 and 2010, and a nearly 18% vacancy rate in 2010.  But the number of housing units in the state steadily increased (data here).  And extravagant developments are continuously being planned.  However they are not being sold to Floridians but to foreign investors who pay cash (see the FT here and here and the following link).  The Miami Association of Realtors claims that international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes.

Land development policy sways building trends.  Rate policy does not.  Florida's land development policy has long been to build, rebuild, and build some more.  We may come to debate as to whether or not Florida's land development policy is still a good one.  But, to use rate policy as a means to influence building policy is not only ineffective but against publicly held values and public policy of providing affordable insurance and affordable housing.  And to argue that Florida's windstorm rate policy or Citizens has any relation to climate change is to miss the context and heart of the 20 year running rancorous and truly difficult debate about how best to manage the state's insurance regime and its future.

Wednesday, August 8, 2012

Risky or kindly?


In a recent FT article, Gillian Tett reflects on the contributions to risk management that the social sciences, in this case anthropology, has to offer.  Namely, that risks are defined by those that perceive them to be a problem.  Such perceptions act as built in biases in the risk quantification and characterization process.  In Tett's words, "risk management is not an exact science."

For instance, risk perceptions differ amongst those that believe the power to control risk is centralized or dispersed and whether or not such means of control lead to desirable outcomes.  Views on this dynamic vary between industry, the public, and government, but also between different members of each (e.g. different governments).  Not only may interests disagree on the existence or importance of a risk presented by a social dynamic, but so too on the source of the risk and the best means of control.  As well, perceptions can change over time and space causing inconsistent acceptability of risk management policies.

Pragmatic fatalists, who assume that everyone is inherently selfish, assume that the best way to manage risk in a dog-eat-dog world is to trade those risks. Societies which believe in egalitarian co-operation, however, tend to control losses and share the pain, if disaster strikes.  
Similarly, when it is assumed that hierarchies are wise and benign, there is faith in the ability of leaders to steer towards better outcomes. But when people view power structures as capricious and dangerous, they tend to be fatalist. This creates an assumption that the only way to protect against unknowable, unpleasant dangers is to diversify your portfolio.  
Attitudes can change over the course of an economic cycle: pragmatists dominate when life is uncertain but in more moderate periods there is greater faith in benign controls. 

Thursday, August 2, 2012

Do you think they Yada Yada'd over democracy?



Let me start with a question, "Does Florida have a property insurance problem?"  I envision the coastlines alive with a chorus of Floridians and insurers worldwide shouting, "YES!  There is a problem.  Absolutely."

Now I'll try a new question, "What is the Florida property insurance problem?"  I imagine the resounding one syllable "yes," giving way to loud white noise as everyone chimes in with different responses.  Bickering and brawling ensues.  Some, ponder the question more astutely, and suggest that really, Florida does not have an insurance problem at all- it has a vulnerability problem, a climate change problem, a moral hazard problem, an actuarially unsound problem, an affordability problem, an overreaching regulatory problem etc etc and so on and so forth.

Defining the Florida property insurance problem, or lack thereof, is an exercise in expressing political objectives.  Different political interests need not see eye to eye on a problem in order to agree on a solution.  Likewise, interests need not agree on a solution in order to agree on a problem.   In some ways this can be beneficial in the democratic process as it allows for negotiation and compromise.  But when solutions become substituted for formal policy goals, a breakdown of the democratic process can ensue.  Ratemaking or rates becomes a means for achieving any number of political agendas. A token to dispute over instead of discussing underlying issues.  It's like yada yada-ing over the democratic process to arrive at a prefered conclusion.

For example, writing in the Insurance Journal on behalf of R Street, a free-market advocacy group, Ray Lehmann, finds it encouraging that several "strange bedfellows" share the position that Citizens should raise rates.  From the R Street perspective, raising Citizens' rates will solve the Florida property insurance problem.  Lehmann outlines four different problems described by 4 different groups that believe that their risks should be incorporated into Citizens rates.
  1. Florida Insurance Council: Moral hazard risk that arises from "subsidies" and fiscal risk that arises from uncertainty about bonds after a storm
  2. Americans for Prosperity (a free-market advocacy group): insolvency risk and rating uncertainty
  3. Several Environmental Groups: Environmental risk
  4. Florida Insurance Consumer Advocate: Assessment risk
My last question, are any of the above risks described by the interest groups, risks that Florida homeowners wish to insure against?  I hear rustling of papers and a maybe a few murmurs.

Indeed, recent outcry against the Citizens Board's decision to raise rates suggests that a very many people have no interest in paying for insurance to cover these risks.  Being forced to do so, particularly without understanding what it is they are paying for, may suggest a failed democratic process.  Perhaps it is this that politicians are alluding to when they suggest that raising rates is "nothing short of immoral."

Wednesday, July 25, 2012

The price is right for who?



William Baldwin, at Forbes, poses a question to his readers:
How would you like to go into the insurance business, collecting premiums for insuring people against catastrophes?
He proposes that this could be a lucrative venture when the dominate perceived risk is high.  Baldwin leads the reader through a thought experiment using stock put-options.  He shows that model assumptions can play a leading role in creating perceived risk and therefore, risk estimates can vary.  Thus, deciding a good risk price is based on using "circumstantial evidence" and considering one's objectives.  In the excerpt from Baldwin's example below, the risk price could be sufficiently reasoned at $13.  But, given a high perceived risk, a tight market, and a personal goal of profit, $18 is a better price.  
The big question is whether that $18 price is a good one for the risk you are taking. Let’s start with the classic Black-Scholes option valuation formula. Plug in the 21% annualized volatility that stocks have exhibited since 1926 and an assumption that prices drift neither up nor down over time. The formula says those puts are worth only $13. 
[A finance expert] cautions that Black-Scholes underestimates the probability of big moves, like that freakish crash on Oct. 19, 1987. When you hear option traders talking about “tail risk” or “black swan” events, they are referring to this well-known deficiency of the formula. 
Tail risk makes put options worth more than Black-Scholes predicts. But something else makes them worth less: The formula’s assumption that stock prices trend sideways is too bearish.
...
Fat tails and upward drift—experts can debate which of these has the bigger effect and whether the true value of those SPDR puts is closer to $13 or $18. But the circumstantial evidence is that $18 is a rich price because of supply and demand. There are a lot of nail-biters who want protection. People willing to sell insurance are scarce.

Over at Artemis, this same phenomena is discussed in relation to catastrophe bonds. Writers there have given a series of posts analyzing a recent report from Willis.  The discussion is regarding the below chart.

Artemis suggests that despite a general leveling (and slight decrease) of risk estimates, the cost of that risk has continued to increase "steadily."  Artemis suggests that this may be due to increasing perceived risk of investors and reinsurers. Despite risk estimates then, a higher price better suits investor intertests.   

The risk premium has risen steadily over the last year and the average is now back near the highs seen in 2009, in the wake of hurricanes Katrina and Ike. This is interesting considering we haven’t seen a landfalling hurricane for a number of seasons now, and perhaps is more indicative of investors in the sector maturing and realising that they want a certain level of payment in return for this peak risk as well as traditional reinsurance pricing influences 
On the flip side to this discussion however is that a lower risk price could be equally as valid and used to suit other interests- such as public interests.  Because a choice must be made in what the risk is and its price, outcomes of these decisions reveal power dynamics in the ratemaking process.  Consistently choosing high measures of risk suggest that the decision making process is currently dominated by the risk perceptions of investors and financial interests which correspond to goals of profit and economic sustainability.


Tuesday, July 17, 2012

Negotiating Compromise Between Affordability and Actuarial Soundness


The Miami Herald reported on Citizen's Board of Governors recent meeting in Miami and described a "public outcry" against decision makers preference of actuarial soundness over affordability.  At the heart of the matter is debate about a politically acceptable characterization of  risk symbolically represented by the "rate."  

Affordability is a value of well being.  Actuarially sound is a value of skill.  Both are used as goals in the legislative mandate that created Citizens and neither are defined by the legislature.  They are used as battle cries in the political process of debating agreement about risk.  Free from a firm definition, interests propose different meanings. The affordability or actuarial soundness of a rate is determined by the ability of the rate to satisfy a given political agenda.

Reference to affordability often beckons consideration of the HUD defined affordable housing.  According to Miami Herald reporter's, this perspective was alluded to by a state representative from Miami,
“The decisions you [the Citizens' Board] make affect people that you may not think about,” said Rep. Carlos Lopez­ Cantera, R­Miami, referring to low-­income Miamians who have to choose between housing costs and food. 
From Lopez-Cantera's perspective, an affordable rate is one which allows housing goals to be met.  However, from an insurance perspective, an affordable rate is one which enables the continuity of business- the insurer is able to bear the cost of the risk.

Much of the same can be said for value of actuarial soundness.

The definition of actuarial soundness has eluded the insurance industry for some time yet it is very common in legislative mandates concerning insurance.  Most recently, the America Academy of Actuaries has attempted to address the issue by reviewing the literature in several actuarial areas.  They concluded that the term is
used as a general term, assumed to be understood to mean reasonable and consistent with generally accepted actuarial principles and practices.   
Nonetheless, the AAA acknowledges that debate arises as to what a generally accepted principle and practice looks like in application,
In the context of ratemaking for insurance companies, for example, disputes over whether a rate is an actuarially sound cost estimate tend to arise due to differences in opinion over the methods used to estimate future costs; the inclusion, exclusion, or limitation of certain costs; and how the rates are distributed to the individual classes of insureds.
Consider then that an actuarially sound rate is one which supports a given political agenda.  An actuarially unsound rate is one which does not support a given political agenda.  This interpretation gives reason to the debate about methods, because different methods produce different estimates of risk and therefore suggest different rates.  Such a perspective is consistent with the academic literature that discusses the use of the term "sound science" or "scientifically sound" and the contrasting rally cry, "junk science."

Hence, Florida Representative Fran Artiles alludes to proposed Citizen's rate increases as actuarially unsound because certain practices, such as litigation and administration, are inappropriate
I do not believe that a rate increase at this time is the right solution because your [Citizens] costs are not under control.
But for those that are seeking to reduce the size of Citizens', such as current Gov. Rick Scott, the proposed rates are sound.

So, affordability and actuarial soundness are values used as a means, or an ideological tool, to argue for a representation of risk that is favorable for obtaining other goals.

Friday, July 13, 2012

A Fine Line: Some lessons learned from the LIBOR estimate scandal



Recently, the economic and financial media has been awash with talk of a LIBOR scandal.  The London Interbank Offered Rate (LIBOR) is "the most important figure in finance" used to set payments on about $800 trillion worth of financial products (The Economist).  The scandal is that the figure is "rigged" and the process of establishing the LIBOR rate turns out to be a political one where experts work to influence the rate decision.  Emails between key decision makers and producers of the LIBOR estimate reportedly reveal political interests being interjected in the process of determining this most important risk estimate.


The Economist suggest that, in theory, LIBOR is
supposed to be a pretty honest number because it is assumed, for a start, that banks play by the rules and give truthful estimates.
But, there are two things that have become wrong with the process of setting the LIBOR rate and hindered a truthful estimation process.  
First, it is based on banks's estimates, rather than the actual prices at which banks have lent to or borrowed from one another. 
A second problem is that those involved in setting the rates have often had every incentive to lie, since their banks stood to profit or lose money depending on the level at which LIBOR was set each day. 
There are lessons to be learned from this oh, so familiar sounding situation.   


There is no right rate or estimate of risk.  Estimating risk based on something other than observation (eg. a historical average, or actual lending prices) is to give weight to other values, such as profits.  To do this is a decision.  If the decision is to weigh the risk along value preferences, then it is important to acknowledge that the process has become political with potential winners and losers working to influence rate policy.     


Another potential lesson is that there is a fine and non-stationary line between expert judgement and illegal manipulation.  This line ebbs and flows along with the mercy of public perception and trust.  Still not yet recovered from the 2008 loss of trust in the banking and finance industry, the public is quick to perceive bank executives less as insightful experts and more as ruthless money hungry manipulators.  What was once, perhaps, an acceptable practice of using a combination of expert judgment and technical facts now, in a growing number of instances, falls within the realm of illegal activity.  As it becomes increasingly perceived that the LIBOR rates were knowingly estimated for personal gain, banks are facing a potential onslaught of lawsuits akin to the "tobacco movement" of the 1990s.  Perhaps, financial statements will one day come with warnings and graphic images of the Occupy protests =)

Monday, July 2, 2012

Marine Mammal Risk... Governance


I am not in the habit of following the politics of workers' comp policy problems but I do have a soft spot for marine mammal science policy.  What does one have to do with the other?

In 2010, an Orca whale trainer, Dawn Brancheau, was killed at SeaWorld Orlando.  The trainer was an employee and SeaWorld an employer.  At first, SeaWorld was fined $75k by OSHA.  In the last month, Ken S. Welsch, a federal administrative law judge for the Occupational Safety and Health Review Commission (OSHA), ruled on SeaWorld's fighting of the penalty.  He reduced the fines to $12k, reduced the most serious violation from “willful” to “serious,” and demanded that physical barriers must be in place between trainers and Orcas (although I'm not clear if it is just Orcas or all marine mammals).

The case has been covered by insurance industry specific news sources with particular attention paid to the predictability of orca behavior and the precedence that the case sets for potential future mishaps.  But other societal interests have conflated the issue with concerns for human and animal well being.  What has emerged is a public policy issue or more specifically, a marine mammal risk governance issue.  The risk is composed of several political interests with their chosen avenues of marine mammal science used to support their preferred outcomes. Hence, governing the risk is a political process whereby society struggles with the moral, scientific, and economic implications of the intersect between society and marine mammals and defining the proper role and responsibility of marine mammal parks and research centers.  Many of these interests and their perceived risks are represented in the specific issue above...   


Human Well Being Risk
The risk to human safety begs the question (especially, if you are a concerned insurer), "How predictable is marine mammal behavior?"

Apparently, SeaWorld claimed that trained orcas exhibit behavior that can be predicted with more than 98% accuracy.  Welsch, however, rejected the risk estimate arguing that it was not based on science.

The judge instead appealed to an Orca's free-will to argue that there, fundamentally, cannot be any certainty
"Once a trainer is in the water with a killer whale that chooses to engage in undesirable behavior, the trainer is at the whale’s mercy,” the judge wrote in his ruling. “All of the emergency procedures, nets, underwater signals and hand slaps are useless if the whale chooses to ignore them."
A spokeswoman for SeaWorld argued that the science was being misunderstood
These allegations are completely baseless, unsupported by any evidence or precedent and reflect a fundamental lack of understanding of the safety requirements associated with marine mammal care.
There is, then, dispute of what is considered reliable science to support safety decision making between trainers and marine mammals.

There is also a question of the predictability of an individual animal.  Tilitkum, the individual Orca that caused the death of the Brancheau, had also been implicated in two other human deaths at a different marine parks.  The heightened risk perception of Tilitkum is communicated amongst trainers but it was disputed as to whether or not SeaWorld took appropriate precautions to protect its employees from this particular Orca.

Nonetheless, trainers often feel that the risk of harm is worth taking for the experience of caring for these animals.  To them, the risk is minor because constant interaction over time fosters a relationship between the trainer and the animal which enables the trainer to identify or foresee risky situations in situ.  
SeaWorld animal training curator Kelly Flaherty Clark, testified that in a 25-year review of whale behavior she couldn't find a case, other than Brancheau's death, when there weren't environmental or animal cues that would explain an animal's undesirable behavior.  
"Trainers are trained for different scenarios," Clark said. "You have to recognize everything in the environment. It may be behavior. It may be weather."
This perspective also holds that their is greater risk in managing interactions from a primarily business standpoint as well as a risk in losing the cherished ability to interact with the animals.


Animal Rights/Welfare Risk
Captivity vs. No Captivity Debate- The marine mammal captivity issue dates back at least to the 60's.  The No Captivity interest has held that the size of marine mammals and their natural habitat range dictates that captivity is in some way inhumane.  At times, this interest also appeals to the potential high intellect of many of these species.  Several protesters had gathered with signs of "Throw the Book at SeaWorld" and "Stop Imprisoning Orcas."  Comments left on online newspapers seem predominantly focused on this issue (eg. here) 

PETA took a public stance on the case arguing that the only way to reduce the risk it to abolish captivity. 
[T]he only thing that will prevent misery and death in the future is for SeaWorld to stop capturing and confining wild marine mammals and to let these orcas go," said PETA President Ingrid E. Newkirk. "The list of human beings—Keltie Byrne, Alex Martinez, Ken Peters, Steve Aibel, and Dawn Brancheau—who have been killed or maimed by captive killer whales, and the list of orca families torn apart by SeaWorld's greed, will only otherwise grow. 
PETA backs their position using the science produced by ex- SeaWorld Trainers Jeff Ventre and John Jett who now work with The Orca Project.  Their science draws a direct link between the animals' living conditions in captivity and their "desperate acts of aggression toward humans." 


In favor of Captivity, is the view that a wealth of enlightenment is garnered from maintaining the animals in parks.  It is argued that the opportunity to be exposed to marine mammals that are naturally far out at sea fosters appreciation and understanding of them.  Joy is had by families that visit the parks and those that work with the animals.  Research findings of animal behavior and physiology is also gained. 

Economic Risk

SeaWorld and parks like it are large employers and tourist destinations.  The "killer whale shows" of SeaWorld are its centerpiece.  The Orca Shamu serves as the parks mascot and has long been central to the corporation's logo (Although in more recent years the logo has been altered to dorsal fins.  I suppose they could be any dorsal fin.)  Therefore, changes in the perception of orcas or the orca show creates an economic risk for the business itself and potentially for the larger socioeconomic system dependent on the park.  In February 2011, SeaWorld Parks and Entertainment Inc sought to refinance its debt $1.2 billion of debt.  In reviewing the company for rating, Moody's suggested that recent attendance was down due to Brancheau's death. 

Changes in the risk perception of trainer-animal interactions can conceivably be extended to include human-marine mammal interaction such as that which occurs in "swim with the dolphins" type programs.  These programs are available at many parks and resorts throughout the world and are a major tourism draw and fetch substantial participation fees.  The safety of "swim with..." programs is an active area of research and one can find any number of studies that will support that such interactions are dangerous or profoundly healing.

Marine Mammal Health Risk
The risk perceived by having marine mammals in parks are often argued to be balanced by the good that marine park facilities are able to offer sick or injured marine mammals.  Wild marine mammals at risk of interaction with human society, often by collisions with marine vessels, benefit from the veterinary abilities of parks.  Marine mammals have very specific needs that are imposible to satisfy without the proper infrastructure.  Marine parks have the infrastructure necessary, food in quantity and quality, and manpower to "rehabilitate" a sick animal.  Hence, SeaWorld attorney Carla Gunnin told the administrative law judge hearing the case that the resort has a history of rescuing marine animals and is a leader in marine mammal research.

PETER ANDREW BOSCH / MIAMI HERALD STAFF
On the day the ruling of the SeaWorld case was printed by the Miami Herald, on the front page, the newspaper ran a simple image (right) with a caption describing the care given to injured manatees by the local Miami Seaquarium.  The Miami Seaquarium has long come under criticism for the pool size of its veteran Orca Tokita aka Lolita.



Thursday, June 28, 2012

Florida Building Codes: Safe or Sound?


Uncertainty about the ability of a structure to withstand the impact of a hurricane will inevitably give rise to uncertainty about the availability of affordable coverage because all uncertainties trickle down to calculating the insurance industry specific catastrophe risk.  In a hurricane prone state with an economy entwined with the real estate market and the seemingly omnipotent building interest, both the ability of a structure to withstand storm winds and the cost of construction (recouped in the sale price) is of concern.  Hence, building codes (adjusted every 5 years) are a subject of great debate that at times, conflates science and politics.


A large portion of the destruction left by Hurricane Andrew was found to be a result of a failed building code system.  In turn the Florida legislature created the Florida Building Commission charged with creating the Florida Building Code.  The Commission is a 25 member group, all appointed by the Governor, representing the many facets of the Florida building industry.  Aside from being a straightforward set of regulations, the Code prioritizes value preferences for building structures, 
The Florida Building Code shall provide for flexibility to be exercised in a manner that meets minimum requirements, is affordable, does not inhibit competition, and promotes innovation and new technology. The Florida Building Code shall establish minimum standards primarily for public health and lifesafety, and secondarily for protection of property as appropriate.
This prioritization of values prompted a recent article in the Miami Herald urging readers not to mistake a structure built to code as being one that is resistant to strong hurricanes.  Indeed, the Code is a negotiated compromise among conflicting interests and based on the law certain interests get priority.

Ricardo Alvarez expert in Mitigation and Vulnerability suggests that the building codes are only the minimum legal requirements and that these are not necessarily the "best or strongest."  To mitigate storm impacts and protect public vulnerability, "We should be building code-plus."    

Within the last year, the Code was adjusted, reflecting a recalculation of potential wind loads in the state and thereby reducing Code requirements in state except in Dade and Broward counties where requirements were increased.  Jack Glenn from the Florida Home Builders Association argued that new science, including risk modeling, was used to support decisions in favor of prioritized interests that felt that the previous Code required "overbuilding"
Pressures have been lowered but we have done it because the science says we should.
Richard Olson an expert on disaster politics at FIU appeals to the first priority of the Code and uses fear to suggest that the concentration of building along the coasts is a threat to human welfare 
 I stand up in public all the time and say we're going to get our asses kicked. They say, 'You're trying to scare me.' I say, 'Well, yeah.'

Friday, June 8, 2012

Political Process of Negotiating Hurricane Risk

Several days ago, the South Carolina Post and Courier published an article by Tony Bratelme.  The article clearly describes the existing disagreement about the true measure of the hurricane risk at the heart of the windstorm insurance problem that several states are experiencing.  Bratelme's article demonstrates that characterizing the hurricane risk is a political process that rests on interpretation and valuation of science information.  In the end, the cost of insurance reflects the political risk that is created in the process of negotiating agreement about the hurricane risk.

The article follows the travels of a South Carolina resident who seeks to identify the "true" hurricane risk.  The resident eventually finds, of course, that there is no true hurricane risk.  There are any number of statistical measures of the risk and their is everyone's chosen valuation and importance of such analyses but, there is no one true risk measure.

Bratelme first presents a basic analysis of the historical record and then places a valuation on the numbers:
Since 1851, 30 hurricanes had spun within 50 miles of South Carolina. That was one about every five years, which seemed to be the definition of vulnerable.
As he digs deeper he decides that the data suggests that the risk is minimal but

that didn’t really say much about the long-term vulnerability of a particular house in Beaufort or Charleston.
So, he looked to the now common practice of catastrophe modeling.  Upon the Post and Courier's request, prominent tropical meteorologist Kerry Emanuel produced his own statistical analysis with models he uses in his company, WindRisk Tech LLC.  With Emanual's modeled risk in hand, Bratelme determined that the risk is lower than residents are led to believe,
It meant that the truly disastrous ones [hurricanes] were rare and certainly not the impending train wrecks that weather channels and emergency planners sometimes suggest are on the way.
To others however, the same data does indeed suggest an impending train wreck.  For insurance companies, severe hurricanes, although rare, can lead to economic ruin.  Experience with Hurricane Hugo in 1989 and Hurricane Andrew in 1992 heightened insurer perception of "catastrophe" risk.  Such shocks can have grave impacts on the larger socioeconomic system.  The concentration of wealth along coastlines is a concern for insurers even if the probability of loss is "low."

Methodology can incorporate additional risk perceptions in the characterization process.  Bratelme identifies one (of many) instances where this has occurred.  Emanuel and his colleague Michael E Mann, theorize that a lull in North Atlantic basin hurricane behavior and its recent heightened activity is due to pollution production.  Therefore, reflecting on pollution levels to calculate hurricane risk estimates to then calculate insurance premiums incorporates elements of environmental risk (ie. changes in pollution levels) into the price of the policy.  

In the process of writing his article, Bratelme identifies a new dimension of the hurricane risk that is developing.  There seems to be a growing feeling that the means of characterizing the hurricane risk through the use of catastrophe models is a threat (see here too).  Recently, the Massachusetts insurance regulator turned down requested rate hikes specifically citing the models as a reason for doing so. (But of course, such a decision influences insurers' fears of insolvency)

And so, Bratelme nicely shows that while there are many statistical evaluations of the probability and severity of loss, there is no one true hurricane risk.  Likewise, there is no right estimate of the risk.  There are instead, estimates that are better suited for some interests than others and model estimates can be used as tools to support one's chosen risk perspective.  The cost of windstorm insurance reflects a political risk that is created as a result of negotiating compromise between interests and their chosen risk estimates.

Tuesday, June 5, 2012

TV Hurricane Forecasters: Different but the same


The Miami Herald ran an article describing how S. Florida television meteorologists frame forecast information in an effort to elicit specific responses.  The article exemplifies how science information alone does not suggest action or demand a perception of risk.  Instead, interpreting the information as an indication of risk and determining a response requires placing the information into some context and constructing understanding.  Hence, the title of the article indicates that TV meteorologists charged with informing the public of upcoming weather also seek to tell the public what such information should mean to them, "Meteorologists tread line between informing, panicking viewers."  The Miami Herald journalist writes, "TV meteorologists spend a lot of time trying to find ways to make you take them seriously without jumping up onto anchor desks and screaming, 'You're all going to die!'"

But even still, that all will die is only one interpretation of the forecast information and may not align with prevalent risk perceptions.  Phil Ferro of Fox Channel 7 indicates that his goal is to make people react to his information by buying provisions.  "I'll be on TV ad nauseum telling everybody to get ready, yet so many folks will always wait till the last minute to react.  That's what I always work on, how to get people to react, and to stock up on food and water. That's the magic pill I look for every year."

But, buying water is not the only action that is sought.  Television personalities are also charged with growing and maintaining viewership and are therefore competing with the other information venues.  To make their information seem better, TV meteorologists seek to give the impression that their channel has more and better information than another source.  Ferro states that the greatest competition is not other channels, "its your smart phone....One of the ways we combat that is to be very visual, to provide pictures and graphics that just won't work on a cellphone."  

Although the means of communicating the information abounds in graphics, television personalities, and media, the information itself is usually, if not always, consistent with that produced by the NHC.  That is, it is all the same information.  Does the variety of communication tactics create the impression that their is more information than actually exists? Indeed, some graphics may give the impression of less uncertainty than others.  In turn, it is important to study how people understand graphical information as it is not always as one would think.  Often, they interpret less uncertainty in some graphics and more in others even when each image is intended to communicate the same exact information and level of uncertainty.

In 2007, I published an article on this very topic and found that the public often misinterprets hurricane probabilistic information.

Wednesday, May 30, 2012

Citizens' Risk Transfer


Artemis has posted an interesting image of Citizens loss coverage that was used in a recent board meeting.  That image is above.

Artemis also mentions that Citizens' Everglades Re is looking to "double the total amount of private market risk transfer purchased this year to $1.5 billion."

Of the $750 million cat bond already sold, Artemis says that
Collateral is being handled using a trust account into which the proceeds of the sale of the notes will be entered. The proceeds will then be invested in highly rated Treasury money market funds. 
The deal priced at the upper end of the expected range and will pay a coupon to investors of 17.75%.

Wednesday, May 23, 2012

Summer Vacay

I am enjoying some summer vacation time in Miami and windy Bimini.  I will be slow to the blog =)

Tuesday, May 15, 2012

How Quickly Things (don't) Change

Recently, I noted some failed attempts to alter the finances of the FHCF.  I was mainly just keeping notes.  Yesterday, the Insurance Journal picked up a story that ran in The Miami Herald on May 10th which claimed that the FHCF was short of money given a storm that would cause it to run short of funds.  Kinda old news.  What was new news was that the FHCF is short on funds given "new" estimates.  So how much did or did not change from October 2011 to May 2012?

October's estimate (from sources cited here) :
  • FHCF had total obligations of $18.389 billion which exceed the projected year-end fund balance of $7.170 billion, 
  • The senior managers from Citi, Goldman Sachs, J.P. Morgan, and Barclays estimated the bonding capacity of the FHCF to be from $5 billion to $11 billion leading to an average estimate of $8 billion in bonding capacity.
  • The FHCF is short $3 billion
  • FHCF will have an additional bonding capacity of $6 billion from 12 to 24 months after the hurricane, which would enable the FHCF to pay its entire obligations and leave an estimated $2.78 billion in bonding capacity to fund losses in a subsequent hurricane season.
  • the fund would be liable for about $17.3 billion exceeding the projected $8.5 billion in cash reserves by the end of this year,  
  • Could borrow up to $7 billion after a hurricane. 
  • The FHCF would be short $1.757 billion   
  • Goldman Sachs — said Florida likely could borrow no more than $4 billion following a storm. 
Two things appear evident:
  1. The most notable change is that Goldman Sachs has changed their risk perception of the FHCF by about a billion dollars.  (Perhaps they were on the low end of the optimism scale in October anyways.)
  2. The quest for headlines can make old risk sound like new risk or riskier risk.  It appears that May estimates as reported in the news are within the range of October's estimates- even by the amount that the FHCF will could end up short.   

Monday, May 14, 2012

The Role of Risk Models in Decision Making about Loss

In a Financial Times opinion, Frank Partnoy, law professor and financial market regulatory expert, identifies computer models as a main culprit in creating false perceptions of risk in the recent $2 billion loss by JPMorgan Chase.  He says that the models were also partly responsible in several other historic losses: Barings Bank (1995), Long-Term Capital Management (1998), Enron (2000), and Lehman Brothers and AIG (2008).  He argues that the single modeled value-at-risk number is not sufficient to describe the risk to investors.  

In each case the victim was thought to be a well-run, relatively safe institution. And in each case the culprit was financial innovation and mathematical models that wrongly suggested positions were low-risk. Each of these firms traded complex financial contracts and then used a single number – “value at risk” – to estimate its maximum probable loss, just as a weather forecaster might estimate the likely cost of hurricanes during an upcoming season. 
Partnoy argues that the problem with the current system is that regulations have failed to push financial institutions to reveal additional information so as to better disclose the full risk.
The law should require JPMorgan to tell investors what would cause a $2bn loss. 
law should punish anyone who defrauds investors by citing one value-at-risk number and then losing 30 times that amount.
Such solutions make some assumptions.  Most notable, it assumes that producing more information would result in better decision making about the risk.

Blogging on Finance at Reuters, journalist Felix Salmon, discusses much of the same, but suggests that the problem is not a lack of information but the way the information produced by the models is used in decision making about risk.  He argues that by this point in time, the models are well known to be "faulty" but
The problem is that pretty much by definition, it’s impossible to model model risk.
Depending on assumption inputs, the models can produce any number of loss probabilities and loss events.  This is seen clearly in comparing catastrophe models.  It is ultimately the human user that makes judgements about which model to use and what the modeled risk means for the decision at hand.  Salmon suggests that it is the responsibility of upper management at financial firms to consider the risk of the model to the larger system it is being used to help manage
I know that your highfalutin’ models say that these exposures are risk free, but I don’t understand how this isn’t risky, so go unwind this trade 
Salmon resolves a set of pragmatic "dumb rules"
Your sophisticated platform needs to be built on a foundation of dumb rules: simple limits on how big any one position can get, on how much exposure you can have to any one counterparty, or in general on any trade which is based on the hypothesis that your desk is smarter than anybody else on Wall Street.

Friday, May 11, 2012

What's FAIR in Massachusetts?


Massachusetts Attorney General Martha Coakley (D) announced her approval of Mass insurance regulators rejection of a rate hike for its state run property insurer, Massachusetts Property Insurance Underwriters Association

Coakley requested that the insurance commissioner reject the hike because the proposed increase was 
'unsupported, and would contravene the statutory intent' of making insurance available to homeowners at reasonable rates
Apparently, Coakley did not find that the 
undisclosed hurricane models that insurers claim predict the likelihood and damage of a major hurricane hitting Massachusetts
provided sufficient evidence that the rates needed to be increased.  


Coakley's office argued to the Commissioner that
the industry failed to provide witness testimony and evidence in support of its hurricane predictions and reinsurance costs.  
The Mass Insurance Commissioner Joseph Murphy agreed with Coakley that the requested increase had not been appropriately justified
If you want to raise rates on Massachusetts consumers, you had better do your homework and be prepared to justify the increase that you are seeking
Murphy revealed a bit of political risk perspective when he adds that the state's Division of Insurance is concerned with

Ensuring that insurance rates are commensurate with the benefits provided at the most reasonable cost (emphasis mine)
This is an interesting twist of the common insurance phrase that rates must be commensurate with the risk.  From the perspective of a political official their is no doubt a relationship between the benefits provided to the public and the risk experienced by the politician when increasing rates.


The increase was requested to allow for the purchase of more reinsurance and 
 a “profit-provision” add-on that alone equated to $15 million of additional annual profit. Without the add-on, the increases averaged two percent statewide. Between Fiscal Years 2007 and 2011, the FAIR Plan’s profit totaled more than $200 million.

James Hansen on President Obama

James Hansen had an OpEd in the NYTimes a couple of days ago describing his reaction to a Rolling Stones interview with Obama.  Hansen's takes a notable political position that President Obama,
does not provide the leadership needed
Dr. James Hansen




For a public figure like Hansen, those there are fightin' words in an election year. Further, Hansen takes the position that the US should directly intervene with other nation's economic activity on the grounds that if it did not the outcome would be "apocalyptic."
President Obama has the power not only to deny tar sands oil additional access to Gulf Coast refining, which Canada desires in part for export markets, but also to encourage economic incentives to leave tar sands and other dirty fuels in the ground.
It can be argued in order to make his case, some poetic license was taken with the scientific literature.  Such is the standard fare in arguments about weather extremes.

Julian Brookes at the Rolling Stones reflects nicely on Hansen's political position taken in the OpEd.


Wednesday, May 9, 2012

Ends and Means of Catastrophe Modeling and Citizens Bonds



It was announced recently that Citizens Property Insurance Corp has sold $750 million in catastrophe bonds.  It is not only the largest sum of bonds that they have sold, but the largest to have ever been sold. The bonds will mature in 2014 which is also the deadline that the Citizen's Board of Governors has set for reducing Citizens' policies by about half.

AIR did the modeling for the bond.  They seem to do the modeling for many of the bonds being sold now- at least based on the list from the link above.  S&P graded the bonds at a B+, which is slightly higher than most other catastrophe bonds. To arrive at this rating, S&P had to answer the question "What is the risk?"  of more specifically, "What is the modeled risk?"

The raters chose to use AIR's catastrophe model that is "conditioned" on warmer than average sea surface temperature (SST) rather than the standard catalog because the conditioned model
 generated a more conservative (higher probability of attachment) result.

AIR conditioning methodology results in elevated estimates of risk 
On average, the increase in the mean frequency of the conditioned catalog over AIR’s standard catalog is approximately ten percent, although regional differences can be higher.


AIR highlighted their SST conditioning method in a report earlier this year.  The firm argued that their conditioning methodology is better than other firms' SST forecasting methodology because
There are currently severe limitations in forecasting sea surface temperatures (SSTs), and so-called “medium term” models based on a forecast of SSTs are beset by immense uncertainty.
AIR explained that their
WSST catalog is based on the standard catalog, but is modified based on the frequencies and intensities (by coastal region) of tropical cyclone activity during those years since 1900 when sea surface temperatures have been higher than the long-term average. It does not attempt to predict, or forecast, either SSTs or hurricane activity.
The company proposes that end users should choose models based on considerations of the long term average.
Ultimately, one critical benchmark by which a model should be judged is whether the loss estimates it produces are consistent with historical information, including trended industry and company reported losses. Models should not contain any inherent bias such that they consistently produce results above or below the trended historical loss data available.

If there is no unique scientific basis for choosing a model that deviates from the risk generated from the historical average, then any choice to deviate is a decision to value something beyond calculations of risk (eg. risk avoidance).

To further illustrate, consider that for the purposes of windstorm ratemaking in Florida, warm (or cool) SST is not used as a predictor of hurricane activity or losses.  Although, in principle at least, it could be.  

Friday, May 4, 2012

Power, Politics and Citizens Board of Governors



Some time ago, Toluse Olorunnipa, writing for the Miami Herald, pointed to a lack of political will in the Florida legislature to make changes to Citizens’ policies given upcoming elections.
Yet, legislation that has already passed is open to ideological interpretation.  Political ideals can be passed through and implemented through the Board of Governors which has close ties to executive and legislative powers.  For example, in April, the Board considered raising rates for new policies inciting a debate as whether or not this is legal to do.  The Board Chairman, Carlos Lacasa, argued that  
In plain language, a new policy is not subject to the cap.
But the state's CFO, Jeff Atwater, countered
The removal of the cap for new business is beyond the scope of legislative intent.  
I would urge the board to carefully consider the policy implications.  
Senator Mike Fasano supported this counterargument stating,
The intent of the legislation we passed took into account all policies, all policies.
Nowhere will you find that someone suggested … that this would only deal with existing policies.
They would know, as Atwater introduced the Senate bill that created this cap in 2008.  The cap was voted for by Fasano, too (and Haridopolos).  In fact, in the predominately Republican Senate that year, the cap passed 32-7.

Atwater's advising could weigh heavy on Lacasa as Atwater originally appointed him to the position and the Board of governors is mandated to
serve at the pleasure of the appointing officer; and 
subject to removal at will by the officers who appointed them.   
But it is the House Speaker, Dean Cannon, who reappointed him and Cannon is up for reelection.

And while Lacasa wasn't in Congress at the time to vote for the cap, he was around, with the others mentioned above, to introduce and pass the bill that created Citizens.  Lacasa was appointed by Atwater because, as Atwater explained
He knows firsthand the original intent behind Citizens and can guide the board back to that intended purpose
Hence, one of the board members suggested (as reported by the Insurance Journal) that going for the rate hike on new policies is an effort to test "ambiguity in the law."  (Perhaps also political relationships amongst Cannon, Lacasa, and Atwater?)

The Board did back away from this proposal (for now) with the resolution to study the matter further and to decrease Citizens total policies just shy of half by 2014.  This is a grand goal established for a recently passed law to depopulate Citizens (627.3511). Although the grandness of the goal does not appear to be actually in the law.  The statute puts in place a depopulation program that will pay private insurers $100 per residential property they accept so long as they accept at least 25,000 (a minimum of $2.5 million).

The Board of Governors as of today....
Appointed by the Governor Rick Scott (R)
  • John Rollins (here and here too)  served as vice president at AIR Worldwide.  Mr. Rollins was chief actuary at Citizens Property Insurance Corporation, the Florida residual market property insurer, and before that at Florida Farm Bureau Insurance Companies.
  • John Wortman  he served as chief executive officer of Louisiana Citizens Property Insurance Corporation from 2007 to 2010, during which he lead a depopulation program.  According the the Louisiana Dept. of Insurance, 
As evidence of the reforms implemented under Wortman's leadership, the bond market responded last year to an offering of $300 million of auction rate bonds that enabled Citizens to save approximately $15 million per year as a result of that refinancing. During the crisis facing Citizens as a result of a class-action lawsuit filed in Jefferson Parish, Wortman was able to access a bond that allowed Citizens to pursue its pending appeal largely due to his reputation earned over a 40 year career in the insurance industry. The offer to write that bond was communicated to Citizens from Warren Buffet's Berkshire Hathaway Company by Mr. Ajit Jain, who is Mr. Buffett's right hand man, and knew Wortman from their years working in the insurance industry. 
Appointed by the Chief Financial Officer Jeff Atwater (R) 
  • Don Glisson, Jr. is the Chairman and Chief Executive Officer of Triad Financial Services, the second largest provider of manufactured housing loans in the USA, trailing only Berkshire Hathaway Finance. Triad’s wholly owned subsidiary, CIS Financial, located in Hamilton, AL, is a full service mortgage banking company specializing in real estate secured transactions in the manufactured housing and site built industries. CIS is an issuer of GNMA securities and services FHA and conventional mortgage loans. Don is currently the Vice Chairman of the Manufactured Housing Institute (MHI). In October of 2012 Don will become the Chairman of MHI for a two year term. A member of the Board of Governors of Florida State University, College of Business.
  • Nancy Baily, former president  of Travelers of Florida, the second largest U.S. property and casualty insurer. Baily, who runs a non-profit in Tampa that helps Lou Gehrig's Disease patients, is the former chair of the Florida Insurance Council, an insurance industry trade group.
Appointed by the Speaker of the House Dean Cannon (R)
  • Chris Gardner, a shareholder with Kuykendall Gardner, an insurance broker and consultant in Winter Park. He has been in the insurance business for 18 years
  • Carlos Lacasa, a former state legislator who is vice president and general counsel of Managed Care of North America. A Miami native. Lacasa was re-appointed by Cannon (originally appointed by Atwater).  
Appointed by the President of the Senate Mike Haridopolos (R)
  • Carol Everhart, vice president of insurance services at BB&T in Tampa.
  • Tom Lynch, president of Plastridge Insurance agency in Delray Beach.