Thursday, April 12, 2012

Is this number excessive or inadequate?

In Florida, insurers or rating organizations "carry the burden of proof by a preponderance of the evidence to show that the rate is not excessive, inadequate, or unfairly discriminatory."  This places a great deal of pressure on science as interests scramble for numbers to prove their point.  In an industry overflowing with statistical data, there is no dearth in measures that an insurer and its regulating authority can come up with to indicate the excessive or inadequacy of the cost of a policy.  

Not so long ago, the Consumer Federation of America produced a report on the dynamics of weather related insured losses in the US.  The CFA considered the premium to surplus ratio and decided that given this ratio over time, the insurance industry was "overcapitalizing" and that rates have become excessive.

In rebuttal, the III considered the industry "well capitalized" and chose not to focus on the premium to surplus ratio but instead offer statistics about the surplus portion of the ratio.  The III describe a 3.3% decrease in surplus from 2010- 2011 to exemplify the great losses that the industry faces.  Therefore policy costs are warranted.

Both of these analysis (ie. the numbers) are probably accurate, but which one indicate success or failure in pricing insurance policies may ultimately depend on what you want to have come of policy costs.

In a past post, I described the CFA report as "ridiculous."  In short, the report overlooked an astonishing amount of context to arrive at its conclusions.  Unfortunately, rather than explaining the overlooked context, the insurance industry defended themselves with different numbers (and shortage of context) to justify their actions, thereby showing an astonishing lack of tact....But, it provided for a good example of the use of science in insurance politics.

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