Wednesday, May 30, 2012

Citizens' Risk Transfer


Artemis has posted an interesting image of Citizens loss coverage that was used in a recent board meeting.  That image is above.

Artemis also mentions that Citizens' Everglades Re is looking to "double the total amount of private market risk transfer purchased this year to $1.5 billion."

Of the $750 million cat bond already sold, Artemis says that
Collateral is being handled using a trust account into which the proceeds of the sale of the notes will be entered. The proceeds will then be invested in highly rated Treasury money market funds. 
The deal priced at the upper end of the expected range and will pay a coupon to investors of 17.75%.

Wednesday, May 23, 2012

Summer Vacay

I am enjoying some summer vacation time in Miami and windy Bimini.  I will be slow to the blog =)

Tuesday, May 15, 2012

How Quickly Things (don't) Change

Recently, I noted some failed attempts to alter the finances of the FHCF.  I was mainly just keeping notes.  Yesterday, the Insurance Journal picked up a story that ran in The Miami Herald on May 10th which claimed that the FHCF was short of money given a storm that would cause it to run short of funds.  Kinda old news.  What was new news was that the FHCF is short on funds given "new" estimates.  So how much did or did not change from October 2011 to May 2012?

October's estimate (from sources cited here) :
  • FHCF had total obligations of $18.389 billion which exceed the projected year-end fund balance of $7.170 billion, 
  • The senior managers from Citi, Goldman Sachs, J.P. Morgan, and Barclays estimated the bonding capacity of the FHCF to be from $5 billion to $11 billion leading to an average estimate of $8 billion in bonding capacity.
  • The FHCF is short $3 billion
  • FHCF will have an additional bonding capacity of $6 billion from 12 to 24 months after the hurricane, which would enable the FHCF to pay its entire obligations and leave an estimated $2.78 billion in bonding capacity to fund losses in a subsequent hurricane season.
  • the fund would be liable for about $17.3 billion exceeding the projected $8.5 billion in cash reserves by the end of this year,  
  • Could borrow up to $7 billion after a hurricane. 
  • The FHCF would be short $1.757 billion   
  • Goldman Sachs — said Florida likely could borrow no more than $4 billion following a storm. 
Two things appear evident:
  1. The most notable change is that Goldman Sachs has changed their risk perception of the FHCF by about a billion dollars.  (Perhaps they were on the low end of the optimism scale in October anyways.)
  2. The quest for headlines can make old risk sound like new risk or riskier risk.  It appears that May estimates as reported in the news are within the range of October's estimates- even by the amount that the FHCF will could end up short.   

Monday, May 14, 2012

The Role of Risk Models in Decision Making about Loss

In a Financial Times opinion, Frank Partnoy, law professor and financial market regulatory expert, identifies computer models as a main culprit in creating false perceptions of risk in the recent $2 billion loss by JPMorgan Chase.  He says that the models were also partly responsible in several other historic losses: Barings Bank (1995), Long-Term Capital Management (1998), Enron (2000), and Lehman Brothers and AIG (2008).  He argues that the single modeled value-at-risk number is not sufficient to describe the risk to investors.  

In each case the victim was thought to be a well-run, relatively safe institution. And in each case the culprit was financial innovation and mathematical models that wrongly suggested positions were low-risk. Each of these firms traded complex financial contracts and then used a single number – “value at risk” – to estimate its maximum probable loss, just as a weather forecaster might estimate the likely cost of hurricanes during an upcoming season. 
Partnoy argues that the problem with the current system is that regulations have failed to push financial institutions to reveal additional information so as to better disclose the full risk.
The law should require JPMorgan to tell investors what would cause a $2bn loss. 
law should punish anyone who defrauds investors by citing one value-at-risk number and then losing 30 times that amount.
Such solutions make some assumptions.  Most notable, it assumes that producing more information would result in better decision making about the risk.

Blogging on Finance at Reuters, journalist Felix Salmon, discusses much of the same, but suggests that the problem is not a lack of information but the way the information produced by the models is used in decision making about risk.  He argues that by this point in time, the models are well known to be "faulty" but
The problem is that pretty much by definition, it’s impossible to model model risk.
Depending on assumption inputs, the models can produce any number of loss probabilities and loss events.  This is seen clearly in comparing catastrophe models.  It is ultimately the human user that makes judgements about which model to use and what the modeled risk means for the decision at hand.  Salmon suggests that it is the responsibility of upper management at financial firms to consider the risk of the model to the larger system it is being used to help manage
I know that your highfalutin’ models say that these exposures are risk free, but I don’t understand how this isn’t risky, so go unwind this trade 
Salmon resolves a set of pragmatic "dumb rules"
Your sophisticated platform needs to be built on a foundation of dumb rules: simple limits on how big any one position can get, on how much exposure you can have to any one counterparty, or in general on any trade which is based on the hypothesis that your desk is smarter than anybody else on Wall Street.

Friday, May 11, 2012

What's FAIR in Massachusetts?


Massachusetts Attorney General Martha Coakley (D) announced her approval of Mass insurance regulators rejection of a rate hike for its state run property insurer, Massachusetts Property Insurance Underwriters Association

Coakley requested that the insurance commissioner reject the hike because the proposed increase was 
'unsupported, and would contravene the statutory intent' of making insurance available to homeowners at reasonable rates
Apparently, Coakley did not find that the 
undisclosed hurricane models that insurers claim predict the likelihood and damage of a major hurricane hitting Massachusetts
provided sufficient evidence that the rates needed to be increased.  


Coakley's office argued to the Commissioner that
the industry failed to provide witness testimony and evidence in support of its hurricane predictions and reinsurance costs.  
The Mass Insurance Commissioner Joseph Murphy agreed with Coakley that the requested increase had not been appropriately justified
If you want to raise rates on Massachusetts consumers, you had better do your homework and be prepared to justify the increase that you are seeking
Murphy revealed a bit of political risk perspective when he adds that the state's Division of Insurance is concerned with

Ensuring that insurance rates are commensurate with the benefits provided at the most reasonable cost (emphasis mine)
This is an interesting twist of the common insurance phrase that rates must be commensurate with the risk.  From the perspective of a political official their is no doubt a relationship between the benefits provided to the public and the risk experienced by the politician when increasing rates.


The increase was requested to allow for the purchase of more reinsurance and 
 a “profit-provision” add-on that alone equated to $15 million of additional annual profit. Without the add-on, the increases averaged two percent statewide. Between Fiscal Years 2007 and 2011, the FAIR Plan’s profit totaled more than $200 million.

James Hansen on President Obama

James Hansen had an OpEd in the NYTimes a couple of days ago describing his reaction to a Rolling Stones interview with Obama.  Hansen's takes a notable political position that President Obama,
does not provide the leadership needed
Dr. James Hansen




For a public figure like Hansen, those there are fightin' words in an election year. Further, Hansen takes the position that the US should directly intervene with other nation's economic activity on the grounds that if it did not the outcome would be "apocalyptic."
President Obama has the power not only to deny tar sands oil additional access to Gulf Coast refining, which Canada desires in part for export markets, but also to encourage economic incentives to leave tar sands and other dirty fuels in the ground.
It can be argued in order to make his case, some poetic license was taken with the scientific literature.  Such is the standard fare in arguments about weather extremes.

Julian Brookes at the Rolling Stones reflects nicely on Hansen's political position taken in the OpEd.


Wednesday, May 9, 2012

Ends and Means of Catastrophe Modeling and Citizens Bonds



It was announced recently that Citizens Property Insurance Corp has sold $750 million in catastrophe bonds.  It is not only the largest sum of bonds that they have sold, but the largest to have ever been sold. The bonds will mature in 2014 which is also the deadline that the Citizen's Board of Governors has set for reducing Citizens' policies by about half.

AIR did the modeling for the bond.  They seem to do the modeling for many of the bonds being sold now- at least based on the list from the link above.  S&P graded the bonds at a B+, which is slightly higher than most other catastrophe bonds. To arrive at this rating, S&P had to answer the question "What is the risk?"  of more specifically, "What is the modeled risk?"

The raters chose to use AIR's catastrophe model that is "conditioned" on warmer than average sea surface temperature (SST) rather than the standard catalog because the conditioned model
 generated a more conservative (higher probability of attachment) result.

AIR conditioning methodology results in elevated estimates of risk 
On average, the increase in the mean frequency of the conditioned catalog over AIR’s standard catalog is approximately ten percent, although regional differences can be higher.


AIR highlighted their SST conditioning method in a report earlier this year.  The firm argued that their conditioning methodology is better than other firms' SST forecasting methodology because
There are currently severe limitations in forecasting sea surface temperatures (SSTs), and so-called “medium term” models based on a forecast of SSTs are beset by immense uncertainty.
AIR explained that their
WSST catalog is based on the standard catalog, but is modified based on the frequencies and intensities (by coastal region) of tropical cyclone activity during those years since 1900 when sea surface temperatures have been higher than the long-term average. It does not attempt to predict, or forecast, either SSTs or hurricane activity.
The company proposes that end users should choose models based on considerations of the long term average.
Ultimately, one critical benchmark by which a model should be judged is whether the loss estimates it produces are consistent with historical information, including trended industry and company reported losses. Models should not contain any inherent bias such that they consistently produce results above or below the trended historical loss data available.

If there is no unique scientific basis for choosing a model that deviates from the risk generated from the historical average, then any choice to deviate is a decision to value something beyond calculations of risk (eg. risk avoidance).

To further illustrate, consider that for the purposes of windstorm ratemaking in Florida, warm (or cool) SST is not used as a predictor of hurricane activity or losses.  Although, in principle at least, it could be.  

Friday, May 4, 2012

Power, Politics and Citizens Board of Governors



Some time ago, Toluse Olorunnipa, writing for the Miami Herald, pointed to a lack of political will in the Florida legislature to make changes to Citizens’ policies given upcoming elections.
Yet, legislation that has already passed is open to ideological interpretation.  Political ideals can be passed through and implemented through the Board of Governors which has close ties to executive and legislative powers.  For example, in April, the Board considered raising rates for new policies inciting a debate as whether or not this is legal to do.  The Board Chairman, Carlos Lacasa, argued that  
In plain language, a new policy is not subject to the cap.
But the state's CFO, Jeff Atwater, countered
The removal of the cap for new business is beyond the scope of legislative intent.  
I would urge the board to carefully consider the policy implications.  
Senator Mike Fasano supported this counterargument stating,
The intent of the legislation we passed took into account all policies, all policies.
Nowhere will you find that someone suggested … that this would only deal with existing policies.
They would know, as Atwater introduced the Senate bill that created this cap in 2008.  The cap was voted for by Fasano, too (and Haridopolos).  In fact, in the predominately Republican Senate that year, the cap passed 32-7.

Atwater's advising could weigh heavy on Lacasa as Atwater originally appointed him to the position and the Board of governors is mandated to
serve at the pleasure of the appointing officer; and 
subject to removal at will by the officers who appointed them.   
But it is the House Speaker, Dean Cannon, who reappointed him and Cannon is up for reelection.

And while Lacasa wasn't in Congress at the time to vote for the cap, he was around, with the others mentioned above, to introduce and pass the bill that created Citizens.  Lacasa was appointed by Atwater because, as Atwater explained
He knows firsthand the original intent behind Citizens and can guide the board back to that intended purpose
Hence, one of the board members suggested (as reported by the Insurance Journal) that going for the rate hike on new policies is an effort to test "ambiguity in the law."  (Perhaps also political relationships amongst Cannon, Lacasa, and Atwater?)

The Board did back away from this proposal (for now) with the resolution to study the matter further and to decrease Citizens total policies just shy of half by 2014.  This is a grand goal established for a recently passed law to depopulate Citizens (627.3511). Although the grandness of the goal does not appear to be actually in the law.  The statute puts in place a depopulation program that will pay private insurers $100 per residential property they accept so long as they accept at least 25,000 (a minimum of $2.5 million).

The Board of Governors as of today....
Appointed by the Governor Rick Scott (R)
  • John Rollins (here and here too)  served as vice president at AIR Worldwide.  Mr. Rollins was chief actuary at Citizens Property Insurance Corporation, the Florida residual market property insurer, and before that at Florida Farm Bureau Insurance Companies.
  • John Wortman  he served as chief executive officer of Louisiana Citizens Property Insurance Corporation from 2007 to 2010, during which he lead a depopulation program.  According the the Louisiana Dept. of Insurance, 
As evidence of the reforms implemented under Wortman's leadership, the bond market responded last year to an offering of $300 million of auction rate bonds that enabled Citizens to save approximately $15 million per year as a result of that refinancing. During the crisis facing Citizens as a result of a class-action lawsuit filed in Jefferson Parish, Wortman was able to access a bond that allowed Citizens to pursue its pending appeal largely due to his reputation earned over a 40 year career in the insurance industry. The offer to write that bond was communicated to Citizens from Warren Buffet's Berkshire Hathaway Company by Mr. Ajit Jain, who is Mr. Buffett's right hand man, and knew Wortman from their years working in the insurance industry. 
Appointed by the Chief Financial Officer Jeff Atwater (R) 
  • Don Glisson, Jr. is the Chairman and Chief Executive Officer of Triad Financial Services, the second largest provider of manufactured housing loans in the USA, trailing only Berkshire Hathaway Finance. Triad’s wholly owned subsidiary, CIS Financial, located in Hamilton, AL, is a full service mortgage banking company specializing in real estate secured transactions in the manufactured housing and site built industries. CIS is an issuer of GNMA securities and services FHA and conventional mortgage loans. Don is currently the Vice Chairman of the Manufactured Housing Institute (MHI). In October of 2012 Don will become the Chairman of MHI for a two year term. A member of the Board of Governors of Florida State University, College of Business.
  • Nancy Baily, former president  of Travelers of Florida, the second largest U.S. property and casualty insurer. Baily, who runs a non-profit in Tampa that helps Lou Gehrig's Disease patients, is the former chair of the Florida Insurance Council, an insurance industry trade group.
Appointed by the Speaker of the House Dean Cannon (R)
  • Chris Gardner, a shareholder with Kuykendall Gardner, an insurance broker and consultant in Winter Park. He has been in the insurance business for 18 years
  • Carlos Lacasa, a former state legislator who is vice president and general counsel of Managed Care of North America. A Miami native. Lacasa was re-appointed by Cannon (originally appointed by Atwater).  
Appointed by the President of the Senate Mike Haridopolos (R)
  • Carol Everhart, vice president of insurance services at BB&T in Tampa.
  • Tom Lynch, president of Plastridge Insurance agency in Delray Beach.


Wednesday, May 2, 2012

A Reattempt to Show Citizen Account Data in Some Useful Way

Some time ago, I had data up on this blog regarding Citizens policies.  The data was taken from the Company website, particularly their "Snapshots."  I don't think that the way I presented the data was all that helpful to me or to anyone else.  I am reattempting here.  All dollar values are adjusted for inflation into 2011 values.  Year 2003 = 100.

Some notable things are that the total number of policies in the Coastal account has remained fairly constant, yet exposure and premiums have increased by about 50% since 2003.  However, while the PLA policy count and exposure has increased by ~200%, premiums are similar to what they were in 2003.  The CLA policy count and exposure peaked dramatically in 2007 and has since decreased.  In 2011, although policies and exposure were about 100% greater than they were in 2003, premiums are roughly the same as they were in 2003.

5/7/12- It has been pointed out to me that one way to consider the premium and policy count data is that premium decisions precede policy counts.  That is, when the government suppresses Citizens's rates, policies increase.  When citizen's policies are allowed to increase, policies decrease.  Hence, the seemingly inverse relationship between policy counts and premiums.


Tuesday, May 1, 2012

US Homeowners Premiums 2000- 2010

Last year, the WSJ carried an article indicating that the average homeowners insurance premium has increased by about 60% since the year 2000.  However, when adjusted for inflation, premiums appear to be only 20% higher than they were in 2000.  Data from the III.


Recent Failed Attempts for the FHCF

Earlier this year, Republican Senator JD Alexander introduced a bill in the Florida senate designed to reduce the overall financial obligations of the Florida Hurricane Catastrophe Fund.

That bill died last March.  But it's analysis had some interesting info:
The October 18, 2011, estimate noted that the FHCF’s total obligations of $18.389 billion exceed the projected year-end fund balance of $7.170 billion, thus the FHCF may need to raise up to $11.219 billion through bonding in order to fund its liabilities. 
The senior managers from Citi, Goldman Sachs, J.P. Morgan, and Barclays estimated the bonding capacity of the FHCF to be from $5 billion to $11 billion over the 12 months following a storm, leading to an average estimate of $8 billion in bonding capacity. However, the estimate anticipates that the FHCF will have an additional bonding capacity of $6 billion from 12 to 24 months after the hurricane, which would enable the FHCF to pay its entire obligations and leave an estimated $2.78 billion in bonding capacity to fund losses in a subsequent hurricane season. 
Sen. Alexander believes that the FHCF is "short $3 billion in being able to meet the statutory commitments in the cat fund."  So, in turn, he has introduced a "Florida Insurance Tax Pre-Payment Program" to the state's budget, which would increase money going into the FHCF.   The Insurance Journal offers the following description
The plan envisions insurers and financial institutions purchasing tax credits whereby they would receive a discount on the dollar for paying their state premium taxes early. The plan calls for insurers and banks to receive up to $1.5 billion in tax credits over 10 years. That money would then be lent to the cat fund, which would have to pay it back to the state. 
It would mark the first time the cat fund has ever borrowed money from the state’s general revenue fund. That means if the cat fund is unable to pay its debt due to overwhelming hurricane losses it could have an impact on the state’s credit rating.
But this did not pass either- vetoed by the Governor.