Wednesday, February 29, 2012

The Pointless Claim of Moral Hazard



Last Saturday the NYTimes described moral hazard as the "flip side" of self-reliance.  This is not entirely the case.  The flip side of self-reliance is the democratic value of promoting the general welfare.  This two sided coin is the classic American identity crisis because as we pursue one we impinge on the other.

The potential for moral hazard exists whenever there is a guarantee of any kind.  It is a nuanced concept because while insurance is intended to protect against risk and, in some cases, encourage acceptance of risk (eg. insurance against mortgage loans given to those that are likely to default) it may also encourage the policyholder to seek out realization of the risk.  Hence, the policyholder’s moral conscious is altered-- the line between good and bad behavior becomes a bit fuzzy.  It is a concern for insurers because, in theory, if the moral hazard is not controlled it can change the probability of the insurer experiencing loss and therefore, affect the probability of insolvency.  And while some believe that moral hazard is rampant in society (often regarded as insurance ‘fraud’) others contend that in the grand scheme of things, it really isn’t all that bad.  These differing views was well demonstrated in the article.

The NYTimes article, admirably, cited Tom Baker’s classic work, On the Genealogy of Moral Hazard but, entirely missed his larger argument.  As a democratic society that seeks to protect its members from some of the “hazards and vicissitudes of life” (said FDR) the potential for moral hazard is par for the course.   Therefore evoking the argument is pointless because economic theory cannot dictate good policy from bad.  Stirring up the moral hazard argument, is therefore, self-serving as a means to argue for “the interests of the economically powerful.”  Baker writes,
"... the economics of moral hazard systematically-and wrongly-undervalue efforts to protect the injured, the sick, and the poor, and absolve the more fortunate of their responsibility for that situation. The real lesson of moral hazard should be that the world is a relational web that cannot be reduced to truism.”
And so, for a government working to promote the public welfare the larger value goal may justify accepting the moral hazard.

Thursday, February 23, 2012

Falling Down on the Job at Climate Central and The Daily Climate

Flickr
Climate Central, a "research and journalism organization providing clear and up-to-date information to help people make sound decisions about climate and energy" picked up a story written by Rae Tyson for The Daily Climate.  The Daily Climate "does not espouse a political point of view on the news but instead reports the truth to the best of our ability. Editorial integrity is the foundation of our mission."

Here are five steps steps they have taken to falling down on the job

Step 1: Journalism? Here? What? 
The story is really a plug for a particular framing of climate change adaptation by the investment advocacy group, Ceres.  So, both parties fall short on their ambitions of research, journalism, truth, and editorial integrity.

Step 2: Fail to do the research
The article starts out implying GHG emissions have led to changes in extremes that have led to increases in insured losses.  Not only is this an unsupported claim, the article proceeds to cite an uninteresting statistic of "14 weather related disasters causing $1 billion or more in economic damage."  The statistic is uninteresting for the exact reason that the previous statement is incorrect- failure to accurately account for changes in society.  To add insult to injury, Climate Central, linked the statement to their coverage of NOAA's release of billion dollar weather events since 1980- a highly criticized analysis (see here and here) that has since led NOAA to reevaluate their analysis.

Step 3: Espouse political points of view
Sharlene Leurig of Ceres, is the interviewed source for the article.  Rae Tyson, the reported claims that "The statistics she offered are not good news for taxpayers."

Try harder to not espouse a political point of view.

Step 4: Skip over editorial integrity
The largest insurance company in the state of Florida is the state of Florida.  And the liability that the state holds is so huge that ... the next time the big one rolls in the system will bankrupt itself.
The article, Leurig and, by extension, Ceres, conflates the situation of state run insurance programs developed to meet democratically agreed upon goals with climate change politics.  While the article is about climate change, the statement is, not only one of some opinion, but about an unrelated issue.  It's a low down, dirty, claim if I ever saw one.
We don't actually have the money to adapt to climate change – to adapt to more intense droughts and floods and wildfires – because we're burning thru GDP trying to recover from the last disaster just to encounter the next one.
It should raise eyebrows that Ceres is working under the assumption that we are "burning through GDP" as losses are, in part, of product of GDP.  This statement also implies that if we didn't have current disasters we could afford to address future ones.  This is an argument for adapting to current weather extremes.

Step 4: Lead the interviewee down irrelevant paths
Consumers shop for insurance based on price. Won't market pressures force insurers to simply bail from vulnerable locales rather than raise rates?
So far, that has been the way that the insurance industry in the U.S. has approached risk. When a risk gets too high in the area and they cannot increase pricing, they just move out of that area.
This is a fairly standard, negotiating tactic by the insurance industry that has nothing to do with climate change.  Yet, if all the groups associated with this report are insistent upon bringing this up, they may want to take a closer look at Florida's state insurer and its history which goes back much farther than any concern of climate change and is related to the irrelevant point brought up here.

Tuesday, February 21, 2012

The Florida Property Insurance Blame Game



It is no secret that Florida has an hurricane insurance problem.  Indeed, it is both one of the most coveted and feared "hands" of risk known in the industry.  But what is the Florida problem?  Accusing fingers point wildly.  Here are a few on the A-List.

The Florida Hurricane Catastrophe Fund
Ah, this is a favored culprit existing as a thorn in the side of many an insurance executive.  The FHCF acts as a state run reinsurance program.  The most common claim is that the FHCF doesn't have enough money to cover a large event and if it goes bust, Florida property insurance policyholders will have to foot the bill in the form of assessments or surcharges.

Some in FL government, like its insurance savvy  Governor, Rick Scott, have sought to solve this problem by encouraging private insurers to purchase reinsurance from the private reinsurance market.  Such arguments are that although private reinsurance premiums are higher than those available through the FHCF, it is lower than what it would cost policyholders if the FHCF is insolvent.  Scott states,
Don’t create a state organization that says they’re selling a product that they’re really not selling. To believe that you can go borrow money after a significant disaster is not realistic. We’ve got to live in reality.


Private Insurers
A recent (ridiculous) report by the advocacy group, Consumer Federation of America (CFA), has argued that the problem in Florida and elsewhere is that
insurers have "mastered" hurricanes by shifting the lion's share of the risk and costs to consumers and taxpayers.  In other words, property casualty insurers have paradoxically emerged as masters of risk avoidance, rather than continuing their historic role of risk taking.  
 They also argue counter to the Rick Scott that the FHCF, "through premium accumulation
and bonding, no real risk for its reinsurance."  This is rested on the argument that private insurers are sitting on so much money as surlpus that
Even if all of the top ten catastrophic events, including the September 11, 2001 attack, the Northridge Earthquake, and the top eight hurricanes, had occurred in the last year and had been paid for last week (a total of $162 billion in 2010 dollars after tax), the property-casualty industry surplus would still be at $418 billion and the leverage ratio would still be at an ultra safe ratio 1.0. 
Therefore, the solution is... well, according this report fairly jumbled.  It seems that more regulation on rates is the primary solution offered as well as doing away with those darn
"nonscientific pricing models, such as short-term catastrophe models." 
Yet while some, like the CFA, view the accumulated surplus of private insurers to be an indication of them sucking American property owners dry, others, like Dr. Robert Hartwig, president of the Insurance Information Institute, argue that this is merely an indication of a healthy and thriving private insurance market
Insurers remained solvent, met their financial commitments, and some even grew their businesses during one of the most challenging economic downturns since the Great Depression. The industry’s business model was put to the test, and passed with flying colors.

Windstorm Mitigation Discounts
Windstorm mitigation discounts gets little attention but one scientists told me that these little legal stipulations have a great influence on Florida's problems.  So concerned are some that the Florida Commission on Hurricane Loss Projection Methodology developed a report in 2010.

It appears that modelers are having trouble modeling the credits and therefore the credits are a problem.  The report states that,
The problems related to windstorm mitigation credits are complex... driven by 1) the use of modeling to determine the impact of various 
mitigation features on expected loss costs, 2) the translation of mitigation relativities to mitigation credits, 3) the inclusion of mitigation credits in the ratemaking process, 4) gathering information regarding the insured population and reflecting that in the rates, and 5) potential inspection fraud and errors in determining windstorm mitigation credits.
The solutions offered are lacking beyond
other methods for financing or incentivizing property owners need to be considered as it is clear that relying on the insurance system as the sole funding source for mitigation via credits is not sustainable.
Citizens Property Insurance Corporation
Of course no discussion about Florida's hurricane insurance problem would be complete without a hat tip to the State's Citizens Property Insurance Corporation.  Citizens is often claimed as The Problem in Florida's struggle with its insurance regime.  The list of complaints goes on including: It is not actuarially sound, its rates are too low, its rates are too high,  it is an unfair subsidy, etc. 

Monday, February 20, 2012

ENVS and its Future Direction


About a year or two ago, ENVS started the wheels turning on the hiring of an "endowed chair."  I must admit that I have not been overly involved in the hiring process, nor am I very much interested outside of the realm of sideline observation, as I am more interested in the shortest and most interesting path between now and Done.  I am ever appreciative of the education that I have received through the program and a handful of faculty that have been influential and kind mentors in this process.

Yet, from the sidelines, I have become intrigued by what I have heard about the hiring process; and I have learned that the overly educated are not immune to the lure of gossip and self interest.  (After all, here I am telling the world about it!)  Indeed, gossip seems to run amok in several departments in varying in shades of malice.

I am inclined to believe that the reason the situation exists as it does in ENVS, is that there has never been a clearly defined goal for the new hire.  And, while no one can say what the hire is supposed to accomplish, most everyone seems convinced that the new hire will determine 'the future direction of the program.'  There are two groups of thought for the goals of the hire.   From my limited experience, it seems that the ENVS faculty are firmly divided in what the new hire should bring to the program.
  1. Roughly half believe it is a means to provide the students with additional advising staff (particular graduate students) and the program with more classes (particularly for the undergraduates).    
  2. The other half believe that the new hire should be a high profile individual thereby bringing notoriety to the program.  Judging by the few names that I heard thrown around from this camp's thoughts on the ideal candidate, the individual should be nothing short of a full-fledged politician.
It is important to note that a faculty position at this University pay grade and title traditionally has minimal teaching obligations tied to it.

The goals of the hire are therefore conflicting.  One way to meet these conflicting criteria, then, would have been to promote a faculty member of high standing to the Endowed position, and hire someone to replace that individual.  If, then, the means to meet these conflicting ends was decided against, then what does it say about the future the program?

One measure of intended direction may be the fields of study of those selected to be interviewed.  There are clear study areas where ENVS could use some bolstering.  For instance, ethics has a relative dearth of faculty representatives.  As well, the study of the social or political process of making decisions about the environment could also use some more representation and schools of thought.  That is to say, that of the three main "core" areas of the program (ie. science, policy, ethics/values), science has by and large the vast majority of faculty representation.  In effect, there is a heavier emphasis on environmental science rather then environmental studies.

One can argue the interdisciplinary nature of nearly all work (for instance, "Of course there is policy and ethical relevance, look at this social problem I have defined with my science!").  However, most of the candidates have a clear emphasis in producing natural science while only a minority of candidates have the emphasis in understanding how (policy) and why or, why we should (ethics/values), manage the environment in some way.  Is this an indication of where power lies in the program and the desired future direction of the program?

In the context of tradition, (ie. faculty positions at this status generally have minimal teaching obligations), it is also worth reflecting on the information being passed around as a measure of future program direction.  I believe that what I have heard - and that I have even heard it - is due to the unresolved conflicts about the hire, where power lies amongst the faculty, and the preference of goals, possibly other than education.

(Updated 2/21/12, again....)


Again, I have not been involved in the hiring process. What I have heard could be a product of the game of telephone where what really happened and what is reported to have happened involves some exchanges of perception or even malicious intent.  However, overall, I think it does give some insight into the future direction of the program, if only, the direction as I perceive it.  

As well, I have learned the value of word of mouth and the rate by which information spreads should never be underestimated... even when the pillars of the community are involved.

UPDATE (a little later today):
  • A grad student pointed these fun facts out to me (thank you for indulging my new hobby!): 
    • Indeed, 14 of the 35 faculty associated with the program are "straight up" scientists. Only 3 seem to be dedicated primarily to the "values and ethics" side of things. The other 18 fall into a spectrum of working on issues related to decision-making...although with very different approaches...some falling into the more "scientific" side even though they are not environmental scientists per se (e.g., economic modelers,etc.) 
    • Of the 47 current grad students, 5 are listed under Biogeoscience, 6 under Water, 19 under Policy, 14 under Environmental Social Science, and the remaining few in a category of their own. 
    • Of the 5 candidates for the Chair position, only 2 are social scientists in the pool. 

Thursday, February 16, 2012

A.B.D!


It was a very nice day :-)

The next thing is crossing the "chasm" (my friend so eloquently put it) that is the dissertation. So, the "but" in the above is rather large.  However, it is one step closer to bona fide than before so, there is that.

I learned some things that may change some of my views, reaffirm some others, and help me think about the issue from yet even more perspectives.  My committee is super helpful and supportive and I am grateful.

AND, the Journal of Climate accepted a paper I worked on (um, lead authored) yesterday.  That story is here.

Yay!





Tuesday, February 14, 2012

Mitigating Disaster Losses through Insurance (1996)


In 1996, an article was published called Mitigating Disaster Losses through Insurance.

The article outlines a problem with disaster losses caused by a "natural disaster syndrome."  The syndrome is characterized by two trends:
  1. limited interest in protection prior to a disaster and 
  2. high costs to insurers and the federal government following a catastrophic event. 
The article offers some useful information. Including...
In theory, insurance is one of the most effective policy tools for achieving both objectives [promote loss reduction mechanisms and place burden of recovery on those who suffer losses], because it rewards investments in cost-effective mitigation with lower premiums and provides indemnification should a disaster occur.  
In practice insurers generally do not charge premiums which encourage loss prevention measures.  They feel that few people would voluntarily adopt these measures based on the small annual premium reduction as compared to upfront costs of investing in these measures.
Five solutions to the syndrome are proposed:
  1. Improve risk estimates
  2. Use seals of approval on structures meeting codes
  3. Use insurance to encourage hazard mitigation (ie. limit coverage to structures with seal of approval)
  4. Consider comprehensive disaster insurance
  5. Expand protection to insurers against catastrophic losses
  6. Subsidize low income families

Monday, February 13, 2012

He asked, "Why The Short Run?"



"Why The Short Run?" a friend asked.

Blog itself sounds very onomatopoeic.  It is the sound of one pouring thoughts and ideas onto the grand cyber universe for others to take in and ponder... the wisdom? the B.S? the constructive insight?   I struggled with naming my site of thinking out loud. I was concerned that someone would come about and point their NSF grant expert finger at the title and use it as a means to ward off my own claims of legitimacy.

The phrase, The Short Run,  came to me as I pondered a passage in Peter Bernstein's Against the Gods: The remarkable story of risk,
Gamblers may think they are betting on red or seven or four of a kind, but in reality they are betting on the clock. The loser wants a short run to look like a long run, so the odds will prevail.  The winner wants a long run to look like a short run, so that the odds will be suspended.
The lesson here, is that the interpreting of odds and "data," is based on perspective.

I chose the short run rather than the long run, because in my opinion, most of what The Royal We knows is based on a short run of information, used to make decisions about the short run future.  What we know about our environment is based on a few hundred years of data, a short run in terms of the long run of earth's environment.  Even still, knowledgeable experts will argue about the quality of such data, narrowing down what some perceive to be a long run of data into an even shorter run.  Then, we take a short run of data, think about it as a long run, and try to make predictions and decisions about the future and pontifications about the past.

In some fields, the long run is a perspective or estimate of the future where none of the variables are fixed.  The short run is a perspective or estimate of the future where some of the variables are fixed.  This tidbit sealed the deal for me and "The Short Run."

Estimates of the future are always short runs because there are inherent assumptions.  The most prominent assumption is that society will remain constant or change as expected- no surprises.  Other common assumptions are the exclusion of extremes or the inclusion of what we believe to be the extent of extremes.  But the occasions by which this has proved wrong are numerous.

As well, life is a short run.  Each individual, limited by perspective, makes decisions based on their own experience and understanding of the perceived long run.  Perspective will also dictate how information about the current time and future is taken  (ie. bad news, good news, just news).  Perspectives are subject to change with time and space.

So, while I'm generally a bit sarcastic, the picture for this post, does have great symbolic meaning and is not intended to solely step on toes.  The Last Supper was a marvel of perspective works in art history.  Jesus was also one who made claims of legitimacy that others fought.  Based on his relatively short life (and perhaps, insight into the long run depending on your own perspective), he made conclusions about the long run, future and past.  Also, the image is supposed to be at the moment that he made a prediction (ie. someone would betray him.)  To this, everyone at the table has a different reaction based on their own personal situations and beliefs.  Indeed, they had different feelings of risk.  The image is also representative of how societal perspectives change.  At the time that the painting was done and the time that the image depicts, religion was paramount in society.  While religion is still important in society, it plays a different role... because perspective changes.

Monday, February 6, 2012

Myth: By Pricing a Risk "Appropriately" Development and Losses are Controlled


In dealing with meteorological natural disaster risk, there is a common claim that gets tossed around.  It is usually some variation on:


If the risks were priced appropriately (ie. cost increased) then losses would be controlled (i.e. decreased) by way of controlling development.  

For quite some time I have been struggling with this notion as it seems to make sense but it also seems to be not working.  After all, the price of the risk has been increasing for some time and yet, left unadjusted or just by listening to common claims, losses keep increasing.  In fact, even when adjusted, to my understanding, losses are a constant proportion of GDP.  And so, there seems to be little indication that increasing the price of a risk keeps losses down or development.  

Further, this solution does not seem to address the general public problem claim that insurance coverage for such risk is not available or affordable (although, I wonder how useful a problem frame this is as well).  Nor does this solution appear to be the most constructive use of money, a scarce resource, as it the money is not used to address the vulnerability problem.  Instead, if one pays heed to theories of how "extra" money in insurance should be used, then the money would go towards covering additional risks.  In effect, the more money poured into the insurance industry the more risks can be covered and therefore, the more risks will be produced.  As theories go, of course.

It seems, then, that perhaps insurance is not a means to control development.  On the contrary, it is used to support development.  And the more I think about it the more ridiculous the claim sounds.  If the goal is to decrease losses then solutions must address the predominant sources of losses.  It may be that money that would otherwise be spent on paying more for the same product may be better spent in designing better buildings or investigating ways to resolve this mess.

Maybe a good question to ask is, "Who's losses will decrease?"  I have heard that insurers have become concerned about a perceived narrowing between losses and profits. The claim being discussed here may certainly serve to solve this narrowing problem.  But there is no reason to believe that it will solve the public's loss problem. 

Wednesday, February 1, 2012

Choose Your Own Solution, Find a Problem


Have you heard of the tragic water problem in the US?

No, no, not the one about using too much water or too much development in drought areas.

No, not the one about too many pharmaceuticals in our waste water skewing sex ratios in fish and amphibians downstream.

No, not the leaching of fracking chemicals, pesticides, or mercury into groundwater and streams.

Reported in the magazine, Environmental Finance, the problem is the "nation's crumbling infrastructure."
No single piece of US infrastructure is more in need of new commitment than its water systems. Built on platforms developed during the 19th and early 20th centuries, the country’s water infrastructure is aging, its technology outdated and its governance systems ill-equipped to handle rising demand and environmental challenges. No wonder the American Society of Civil Engineers gives the nation’s water systems a D-, the lowest grade of any of part of the nation’s crumbling infrastructure. 
Government is ill-equipped?!  That is quite the loaded statement and nicely preludes the following.    

The answer as proposed by the Johnson Foundation, American Rivers, and Ceres, an "investment theme."  You know, climate change, adaptation, green, affordable housing... themes, like a Mardi Gras dinner or poker night.

The article, written by Ceres, goes on to explain that
But as yet there has been very little attention from the investment community on how to tap into that theme in the US. 
In addition, the rate-paying public and locally elected officials must come to grips with the temporary nature of federal subsidies for infrastructure. Once these subsidies expire, ratepayers are left holding the bag for funding further maintenance, inspection and upkeep, which can be politically unpopular. 
We all love cheap, reliable water, but we don’t love paying for what it’s really worth. The fact is that we pay so little for it today that, in many places, the systems that deliver that water are failing. 
This is an interesting twist as what is described here is not an infrastructure problem but a problem of social and political culture that is resistant to a presented "solution."  Further, as the claim goes, we pay less for water than "what it is really worth" and THEREFORE the infrastructure system is "failing." That is, it is not failing because of age as initially suggested.

I have little doubt that the nation has numerous water problems.  But, I do doubt that a problem is the inability of investors to harness "US water" as a theme or the ineptitude of government.