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."