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.

1 comment:

  1. Great post. The definitions of affordability and actuarial soundness will get proper adjustments next time a major hurricane rips through...

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