Thursday, March 22, 2012

Citizens' Exceedance Probability

In 2011, Citizens announced that it has $16 billion to cover claims.  So, what is the probability that Citizens will have a loss year resulting in claims in excess of $16 billion?  It so happens, that it is the same probability of another Great Miami Hurricane of 1926, 0.9% per year or 1 out of 111 years, or if you choose to round up, 1 out of 100 years.

That is a statewide view. Concentration of Citizens' exposure varies by county.  Considering most of the losses incurred by Hurricane Andrew and the Great Miami Hurricane was in Dade County, it is worth considering this county specifically.

Hurricane Andrew 1992
Great Miami Hurricane 1926
In Miami-Dade County, Citizens has about 26% of the county's total insured exposure.  Considering this, given another Hurricane Andrew, Citizens will be responsible for about $14.4 billion of the losses.  Given another Great Miami Hurricane then they would be responsible for about $33.9 billion.  The probability of insolvency is still 0.9%. 

Is this an acceptable insolvency risk?

Writing for the Miami Herald, Toluse Olorunnipa, points out that the acceptability of Citizens' insolvency risk must be considered in respect to other perceived risks at the moment.
Fundamental to the debate is whether or not Citizens’ financial troubles warrant major reforms and premium hikes.  
Olorunnipa suggests that concern about upcoming election risk, has left the  FL Legislature with
little political will to pass large-scale reforms and prepare Citizens for another Andrew, or a Katrina.   
(If it were to occur today, industry damage for Katrina would be $39 billion.  At 17%, Citizens would be responsible for about $6.6 billion)  

Insolvency Risk as Proxy for Underlying Problems

The potential total loss of a storm is a product of the total exposure.  Whether that loss is paid now in the form of premiums or later in the form of assessments, it will inevitably need to be paid. Yet, policyholders feel that regardless of timeframe, they are unable or unwilling to pay more.  If total exposure increases, so too will the potential total loss.

The irony should not be missed, then, when speaking of Citizens pricing, Florida Rep. Senator JD Alexander declares,  
If we allow this state to put ourselves in devastating financial conditions, because we’ve obligated beyond our ability to pay, shame on us. 
 Obligated beyond our ability to pay, indeed.

About the data...

Loss data comes from the AIR report Assessing US Hurricane Risk: Do the models make sense?
The report makes the following comments about the losses:

Given that the losses are industry wide, the losses from the subset of events affecting Florida are higher than if incurred within Florida were used.  Loss events were grouped into loss years for analysis.  The data is a closed set.  The sum of the probabilities of experiencing a given loss year equals 1.

The III claimed that Florida's insured exposure was about $2.7 trillion in 2007.  Adjusted for inflation (CPI) and Florida GDP, 2011 exposure is estimated to be about $2.964 trillion.  2011 GDP was found here.

Based on aggregating data from the company website, Citizen's 2011 exposure was about $510 billion or 17% of the total state's exposure.  Therefore, given a loss year, Citizen's is on the hook for about 17% of the insured losses incurred.

Also on the Company website, as of February 2012, Citizens had $49.4 billion in Miami-Dade County exposure.  The Florida Insurance Council reports that as of the end of 2008, Miami-Dade County had $178.5 billion of insured exposure.  Adjusted to 2011 FL GDP and Inflation (CPI), that is ~$191 billion in insured exposure.  Therefore, Citizens has about 26% of Miami-Dade's total exposure. 

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