Tuesday, February 21, 2012

The Florida Property Insurance Blame Game



It is no secret that Florida has an hurricane insurance problem.  Indeed, it is both one of the most coveted and feared "hands" of risk known in the industry.  But what is the Florida problem?  Accusing fingers point wildly.  Here are a few on the A-List.

The Florida Hurricane Catastrophe Fund
Ah, this is a favored culprit existing as a thorn in the side of many an insurance executive.  The FHCF acts as a state run reinsurance program.  The most common claim is that the FHCF doesn't have enough money to cover a large event and if it goes bust, Florida property insurance policyholders will have to foot the bill in the form of assessments or surcharges.

Some in FL government, like its insurance savvy  Governor, Rick Scott, have sought to solve this problem by encouraging private insurers to purchase reinsurance from the private reinsurance market.  Such arguments are that although private reinsurance premiums are higher than those available through the FHCF, it is lower than what it would cost policyholders if the FHCF is insolvent.  Scott states,
Don’t create a state organization that says they’re selling a product that they’re really not selling. To believe that you can go borrow money after a significant disaster is not realistic. We’ve got to live in reality.


Private Insurers
A recent (ridiculous) report by the advocacy group, Consumer Federation of America (CFA), has argued that the problem in Florida and elsewhere is that
insurers have "mastered" hurricanes by shifting the lion's share of the risk and costs to consumers and taxpayers.  In other words, property casualty insurers have paradoxically emerged as masters of risk avoidance, rather than continuing their historic role of risk taking.  
 They also argue counter to the Rick Scott that the FHCF, "through premium accumulation
and bonding, no real risk for its reinsurance."  This is rested on the argument that private insurers are sitting on so much money as surlpus that
Even if all of the top ten catastrophic events, including the September 11, 2001 attack, the Northridge Earthquake, and the top eight hurricanes, had occurred in the last year and had been paid for last week (a total of $162 billion in 2010 dollars after tax), the property-casualty industry surplus would still be at $418 billion and the leverage ratio would still be at an ultra safe ratio 1.0. 
Therefore, the solution is... well, according this report fairly jumbled.  It seems that more regulation on rates is the primary solution offered as well as doing away with those darn
"nonscientific pricing models, such as short-term catastrophe models." 
Yet while some, like the CFA, view the accumulated surplus of private insurers to be an indication of them sucking American property owners dry, others, like Dr. Robert Hartwig, president of the Insurance Information Institute, argue that this is merely an indication of a healthy and thriving private insurance market
Insurers remained solvent, met their financial commitments, and some even grew their businesses during one of the most challenging economic downturns since the Great Depression. The industry’s business model was put to the test, and passed with flying colors.

Windstorm Mitigation Discounts
Windstorm mitigation discounts gets little attention but one scientists told me that these little legal stipulations have a great influence on Florida's problems.  So concerned are some that the Florida Commission on Hurricane Loss Projection Methodology developed a report in 2010.

It appears that modelers are having trouble modeling the credits and therefore the credits are a problem.  The report states that,
The problems related to windstorm mitigation credits are complex... driven by 1) the use of modeling to determine the impact of various 
mitigation features on expected loss costs, 2) the translation of mitigation relativities to mitigation credits, 3) the inclusion of mitigation credits in the ratemaking process, 4) gathering information regarding the insured population and reflecting that in the rates, and 5) potential inspection fraud and errors in determining windstorm mitigation credits.
The solutions offered are lacking beyond
other methods for financing or incentivizing property owners need to be considered as it is clear that relying on the insurance system as the sole funding source for mitigation via credits is not sustainable.
Citizens Property Insurance Corporation
Of course no discussion about Florida's hurricane insurance problem would be complete without a hat tip to the State's Citizens Property Insurance Corporation.  Citizens is often claimed as The Problem in Florida's struggle with its insurance regime.  The list of complaints goes on including: It is not actuarially sound, its rates are too low, its rates are too high,  it is an unfair subsidy, etc. 

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