Tuesday, April 24, 2012

Florida's Income Inequality


According to a report by the Center on Budget and Policy Priorities, since the late 1990's, income disparities between Florida's middle and upper income families has grown significantly.  Florida ranks amongst those states with the largest income gaps between high income and middle income families.  Indeed, it has the 7th largest gap in the nation.

The US Census reports Florida's Gini Index as 0.474.

Monday, April 23, 2012

Is insurance really the unaffordable part in Florida housing?


Florida's Citizens Property Insurance Corporation is charged with increasing the availability of affordable property insurance in the state.  What is "affordable"?  The term is undefined in the law creating Citizens.  Perhaps, this is intended as it allows a great deal of flexibility over time in deciding what is or is not affordable.  Undefined, the term serves as a politically symbolic gesture, meaning different things to different interests. Concurrently though, the term is reminisce of "affordable housing" mandates.  Since the National Housing Act of 1937, affordability algorithms have changed several times. Today, households with housing costs over 30% of income are considered "burdened."   

The following graphs are from a US Census report using 2006 housing data.  Admittidly, they are several years old and before the mortgage debacle of 2008, but nonetheless...  

The following definitions apply:
Monthly owner costs:
•Mortgage
•Second mortgage and/or home equity loans
•Real estate taxes
•Homeowners insurance
•Condo fee (if applicable)
•Mobile home cost (if applicable)
•Utilities – Electricity, Gas, Water and Sewer, and Other Utilities
Without burden = under 30% of income spent on housing costs
Moderate burden = 30% to 49.9%
Severe burden = over 50%




SMOC = Selected Monthly Owner Costs
The above graphs give some interesting ideas to ponder. Consider that Florida has the second to lowest median income level in the country ($50-59,000), but it's median property values are second only to that of California and Hawaii.  The percentage of Florida mortgage holders that are considered burdened is between 40 and 49.9%, however those states with similar burden levels (HI, NV, NJ, RI, and MA) have greater incomes than that in Florida.  Figure 11 indicates that burden increases with property value until a certain point (i.e. property values of $500k or more).

When monthly home costs are considered as a proportion of the total cost, it is evident that the majority of the monthly cost is the mortgage.  In Florida the proportion is 63.6% (2% lower than the national average) of income while insurance is 21.9% of income (3.6% higher).

Hence, is the perception of a Florida homeowners insurance affordability problem actually a problem of insurance cost or is it really a problem of the cost of Florida homes in a state with relatively lackluster incomes?

Thursday, April 19, 2012

The Hadley Centre Jumps to Conclusions


Science is a process.  Scientific understanding is gained over time, through discussion, inquiry, agreement and disagreement. Indeed, while there can be agreement on some aspects (eg. hypothesis, methods, etc) they may disagree on the conclusions or the implications of the conclusions for science and society.  
 
Researchers with the Met Office Hadley Centre published a paper in Nature earlier this month. The article makes the following claim:
We have shown that volcanic and aerosol processes can drive pronounced multidecadal variability in historical NASST, which leads to improved (for the early twentieth century) or reproduces (for the later period) the observed historical trends. In these simulations, it is the inclusion of aerosol indirect effects that allows us to capture the magnitude and the temporal and spatial structure of SST variability. Our results show that volcanoes and, crucially (from a policy and climate impact perspective), anthropogenic emissions of aerosols can drive NASST variability resembling that which is observed. This work suggests that we need to reassess the current attribution to natural ocean variability of a number of prominent past climate impacts linked to NASSTs, such as Sahel drought.
The release of the paper was met with a number of questions and considerations from the scientific community.

Roger Pielke Sr. took issue with one of the authors' assumptions
Thus they neglect to  consider that the reason the models themselves do not reproduce these interactions [i.e. systematic climate shifts linked to multidecadal variability], is due, not to just the neglect of human aerosol forcing, but because the models inaccurately represent the multidecadal variability even in the absence of human climate forcings.
Nonetheless he suggests that while the article was an "informative study"  the conclusions were off the mark
It should have been written, however, as a sensitivity experiment not as an attribution study since the multi-decadal model simulations have not shown skill at predicting North Atlantic climate pattern variations prior to significant human climate forcings.
Judy Curry at her blog took issue with the how aerosols were modeled in the study
Specifying aerosol characteristics (which is mostly done here, esp sulfate) and then allowing interactive cloud microphysics and optics results in an overestimate of the aerosol indirect effect, since compensating dynamics and precip don’t influence the aerosols. 
She concludes that she is "unconvinced" by the paper and questions Nature's wisdom in publishing the article.

Likewise, others dismissed the paper all together and considered it an indication of a decline in credibility of Nature.  Pat Michaels of George Mason University and the CATO Institute suggested that
This paper marks, in my opinion, the death of credibility for Nature on global warming.  
May God rest the soul of Nature.
Presumably, accepting this perspective, the article was reprinted at Watts Up With That.

As commentary on the article in Nature, Amato Evan, pointed out that assuming that the article is spot on then one implication would be that
the AMO does not exist, in the sense that the temperature variations concerned are neither intrinsically oscillatory nor purely multidecadal.  
and therefore,
swings in hurricane frequency and intensity might therefore be the regional response to variations in the concentration of pollutant aerosols against a background of global warming, and thus completely man-made. 

And so, it would seem that there is much to discuss regarding the article, its findings, and its implications, if any.  Yet, the lead author has moved to quickly debunk over a decade's worth of research on Atlantic Ocean oscillations with one short Letter in Nature
Our research implies that far from being natural, these [SST] changes could have been largely driven by dirty pollution and volcanoes. If so, this means a number of natural disasters linked to these ocean fluctuations, such as persistent African drought during the 1970's and 80's, may not be so natural after all.
But the third author, Paul R. Halloran, realizes the preliminary nature of their conclusions
However, it's important to note that these findings are based on only one model, so further research using other next-generation climate models is required to shed further light on the mechanisms at play.
Why would some be interested in fast forwarding the process of discussion and further inquiry?

The publication of the research was quickly picked up by the financial industry.  The FT ran with an article titled "Study finds air clean-up linked to US hurricanes" (which is inaccurate).  The article further suggested that decreasing air pollution "helped to cause more disastrous hurricanes" (also, way unfounded).

The article continues, indicating the societal problem that the Center had in mind when producing the information and identifying its conclusions,

The study is likely to be closely read by the insurance industry, said Matt Huddleston, Met Office principal consultant for insurance. 
“The industry uses near­term estimates of how many hurricanes will hit land, and the Atlantic surface temperature is an important component of that,” he said. 
“The research means they can better understand why rates of hurricane landfalls may have varied, and also it raises the potential of prediction if there were short­term changes in pollution levels.” (emphasis mine)
  

Wednesday, April 18, 2012

What role for the "Contrarian"?


Coming from a foundation of climate science and some climate change politics I was only familiar with one being a contrarian in regards to climate change- "climate change contrarian."  The construct seemed to surface as the "climate change denier" moved through popular concern from that of scorned miscreant to a fetish in the folk lore of the dogmatic few.  Contrarian has become more politically correct, if you will.  

Considering this, an article titled "Regulatory Contrarians" by Brett McDonnel and Daniel Schwarcz, both profs of one type or another at the University of Minnesota Law School, piqued my interest.  The authors define "regulatory contrarians" and suggest that there is a role for them in insurance politics and policy making and that as of yet, contrarians are an underutilized resource in the policy making process.  


The authors redefine a problem with the financial regulating system, the risk that
regulators will fail to invoke their authority to address newly emerging financial risks or more generally to modify existing regulatory schemes when modification is warranted. 
Their proposed solution is
charging an entity that is affiliated with, but independent of, a financial regulator with the task of monitoring that regulator and the regulated marketplace and publicly suggesting new initiatives or potential structural or personnel changes.

This would be the place for the contrarian.

The following is the abstract:
This Article explores the role that “regulatory contrarians” can play in promoting more adaptive financial regulation. Such contrarians have several distinguishing features. First, they possess persuasive authority by virtue of their position, access to media and officials, or speaking engagements and reports. Second, they are affiliated with, and enjoy privileged access to, a regulatory entity but are nonetheless independent, as reflected in their budget, staffing, and/or priorities. Finally, they are tasked with studying the regulatory process, policy positions, and the regulated market and in some way reporting on deficiencies and potential improvements. The Article argues that regulatory contrarians can modestly limit the risk that regulators will fail to adapt to newly emerging and ever- shifting financial risks, by either failing to enact new rules or failing to modify or repeal old rules. Despite this potential, the Article argues that, in the domain of financial regulation, contrarians are used only in a small subset of the instances where they can provide value. Currently, financial regulatory contrarians fit into four basic categories: (1) Ombudsman Contrarians, (2) Consumer Representative Contrarians, (3) Investigative Contrarians, and (4) Research Contrarians. Whereas the first two types of contrarians are limited in their subject area to consumer protection and services, the latter two types of contrarians are limited in their methodological scope. Finally, the Article argues that the Dodd-Frank Act holds the potential to improve financial regulation by transcending historical limitations embedded in the traditional categories of financial regulatory contrarians.
The authors, use contrarian to signify individuals and groups that act in some capacity as advisories weighing in on the direction of regulatory innovation, seemingly not so different from a science advisory board.  Given the connotation associated with my experience with the word "contrarian" I wonder about the wisdom of framing the traditional advisory role in this way.  Yet, in this article, contrarian is framed in a positive light, a means to pursue democratic ideals.  

The authors give several examples of contrarian organizations suggesting that there is much that can be learned from the experience of these groups to help them work better.  This is surely the case.  But as well, given the likeness of "regulatory contrarians" to the advisory groups that consider complex science information (e.g. financial markets) and make policy suggestions, often times thereby guiding the future direction of research (e.g. financial innovation),  it is also desirable to take lessons from the experiences of scientific advisory persons and groups and associated literature.  I hear these things are well intentioned and promising, but have a way of going politically awry.  

Monday, April 16, 2012

A Problem with Catastrophe Bonds


Today, the Financial Times reported that catastrophe bond issuance has "hit its highest level" since the market began.  Serge Chiaramonet of Credit Suisse Asset Management, suggests that despite the perceived current success, there are not enough parties involved.
The main problem with the cat bond market is that a relatively small number of players control a very large part of the market. You probably have seven or eight investors that control the majority of the demand.

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.

Monday, April 9, 2012

Moral Hazard or Just Standard Political Hazard?

Often, it is argued that offering property insurance, particularly at a "low" cost, for properties in hazardous areas creates a moral hazard and causes the great flock to become nonchalant about the disaster risk.  In turn, the risk is increasingly difficult to insure because it is increasingly expensive.  There are two prominent options for solving this problem that are notably coupled: do away with government managed insurance programs (e.g. NFIP and Citizens) and increase the cost of insurance.  The two solutions are coupled because private insurance will increase the cost of the policy to avoid insolvency.

The moral hazard argument has moved beyond the insurance business interest group and is found in expert analysis of disasters and losses.  It has made an appearance in the  esteemed Galloway Report  and much more recently in the Congressional Testimony of disaster insurance expert Howard Kunreuther.   While speaking about Small Business Administration disaster loans
It creates a moral hazard problem by encouraging people to locate their homes and business in hazard-prone areas...
However, as I see it, there are two reasons while the moral hazard argument is false.  First, a moral hazard depends on having the ability to cause the loss or increase the probability of the loss oneself.  Where disasters are concerned, there seems to be no moral hazard as no one can cause the loss nor does anyone have an interest in the loss occurring.  Further, substantial deductibles are in place as the traditional means of controlling the potential for moral hazard.  Second, although some homeowners are able to purchase land for development and may choose to do so in a flood plane because they can buy cheap insurance, most people buy homes that have already been built.   Building a large concentration of homes in vulnerable areas is the decision of government and developers, not would-be-homeowners.  And while such decision makers would fall into the category of "people"  they are not the public interest people or the "we the people" implied in the above statement.      

No less of a problem for insurability than a large moral hazard are the large political affects of the availability of insurance.  The present homeowners insurance arrangement, insulates land management decision makers (e.g. city commissioners, state politicians, and building code enforcers) from responsibility of poor land management because the costs of their decisions are managed between insurer and insured.  Land managers, as a third party, are advantaged by the existence of the insurance contract.  In this case, those responsible for land management decisions are able to use the property insurance contract between insurer and homeowner, to protect against the political risk of losing the endorsement of the building interest.  The cost of managing this additional political risk is passed on to policyholders.  The practice of passing on political risk to policyholders and insurers is largely uncontrolled and challenges the ability of insurers to maintain the disaster risk as insurable.