Tuesday, December 18, 2012

(Mis)Conduct at Citizens... So what?


Recently, there has been a heated debate over the behavior by Citizens Property Insurance Corporation's decision makers.  On one side, the public and the media claim misconduct by Citizens' key personnel.  On the other side, Citizens' key personnel downplay the claims and appear angry at the allegations.  We could argue at length about who is right in the situation.  Instead, a more fruitful discussion is, "So what?"

Florida is subject to a large hurricane risk. Some argue that this is the "largest hurricane risk in the world... by orders of magnitude." This risk is understood by looking at history and to the future. Because there are large variations in climate and different legitimate perspectives on science, judgments of that risk will differ.

Scientific research demonstrates that judgements about risk arise from such things as ideologies, values, and trust.  This is as much true for the public as it is for scientists.  So, when Citizens' decision makers and the public demonstrate outrage with each others' decisions, be it about rates or hotel costs, it is a sign of a growing distrust of each other's ability to judge and manage risk and identify with each other.  This is as much a problem for the public as it is for Citizens itself.  

Citizens recently sold the largest catastrophe bond ever as a means of covering losses from a catastrophic event that exhausts its resources.  The sale demonstrated the importance of public and government trust in establishing a successful risk management scheme.  Standard and Poor's assessed Citizens' credit worthiness as A+, based in part by "support for Citizens from Florida's governor, chief financial officer, and legislature."  Growing descent about the risk and distrust of one another will eat away at this support and may challenge outside interests' faith in Florida's ability to pay for its catastrophes.   

Efforts to "refocus on the facts" and educate the public about its risk will likely be met with resistance.  It will only widen the divide between the public and Citizens' administrators because the information does not have shared value in society.  Indeed, much of the public is not worried about those facts, as they have facts of their own that speak to different concerns about the hurricane risk.

Florida must develop and maintain a version of the hurricane risk that is politically affordable in order to successfully mange it.  The public and Citizens' administrators need to be receptive of each others concerns, establish an insurable hurricane risk for today, and debate the merits of public policies to control the growth of risk into the future.  This will not only serve to establish a successful and stable risk management plan, but will help to reach Citizens' Board Chairman, Carlos Lacasa's new goal to "win back the credibility of the company in the eyes of the public."

Thursday, December 6, 2012

"Reckless" Development

Thanks to Peter Blanchard at Flickr
I've come across several terms recently used to describe a new(ish) social problem.  These terms are reckless development, overdevelopment, irresponsible development, and the like.  

The US economy relies heavily on real estate development.  It has, at least, since the 1930s.  In some sense, then, concentrated building production is a sign of economic success.  Great prosperity has been derived from land development and real estate sales and financing.  It appears however, that in recent years the cost of disasters (and maybe other trends) have led many to take issue with building as a 'good' means of wealth production.  Perhaps this has been further exacerbated in recent years because the public was significantly burned in the real estate market.

Yesterday, the NYTimes ran an op-ed by Andrew W. Kahrl, an assistant professor of history at Marquette, that laid the claim that "increasing the value of shoreline property and encouraging rampant development" has led to a violation of public rights and high disaster costs.  This is a noteworthy cause and effect claim because it is counter to the current prevailing claim that cheap insurance has led to a development problem (and therefore the reasonable solution is to raise rates).   For some time I have taken issue with the current prevailing claim.  I am more inclined to believe that changes in land development policy are needed to address disaster vulnerability problems and/or certain environmental problems.  

Federal development policies and the speculative nature of the real estate market is often overlooked.  Consider that changes to mortgage lending incentives in the early 90's stimulated an enormous building boom into the yearly 2000's.  All the while, insurance rates were increasing.   The FIU Metropolitan Center has reported that during the several years leading up to the economic collapse, housing in Florida was “built without regard for actual demand.”  Even today, Florida has nearly a 20% vacancy rate and is still developing along coasts.

Thus, Dr. Kahrl proposes land development policy changes as a means to resolve current perceived development problems.  An excerpt below,

Reaffirming the public’s right to the beach could be the first step in a more just and sustainable coastal environmental policy. The argument used to defeat the Open Beaches bill — that it would depress real estate values — is precisely the reason we need to reintroduce an updated version of this legislation now. Without the ability of property owners to wall off and claim the beach as their own, coastal real estate values would slowly decline, and the pressure to develop would dissipate (or at least become more ecologically sensitive). 
I’m not calling for a full-scale retreat from the coast. Long before the modern age of coastal development, people lived by the sea. Their homes were routinely battered by storms, and they didn’t try to defy nature by constructing fortifications to preserve each attractive stretch of shore, since they knew that what was there today would most likely be gone tomorrow. We need to return to those sustainable practices, and an open beaches act could help us get there. 
By dedicating beaches to the states for use by the public, Congress would be declaring an end to the destructive — and futile — attempts by private property owners to hold back the sea. It would ensure a better future for America’s coasts and restore one of our founding legal principles. We would not be confiscating private property, but merely recognizing who owned it all along: us.