Friday, July 19, 2013

Weinkle et al in Congress!

In a Congressional hearing yesterday, a graph from a paper I worked on was blown up for discussion.  The picture above shows the image with some senators.  A video of the hearing can be found here and the paper can be found here.

The hearing began with Sen. Barbara Boxer (D- CA) explaining that the hearing was about "climate change and the serious threat it poses to our nation.  This isn't a political hearing or a solutions hearing; it's a hearing where I hope we will listen to the experts."  She cited some scientists saying some things about what can be expected from climate change, some stats on disasters and disaster losses, concluding that climate change is real, happening, and posing a threat.

This was followed by Sen.  David Vitter (R- LA; in the picture on the right) who stated, that the hearing fell on the heals of Obama's announcement of a "sweeping climate action plan which will undoubtedly tighten the Federal government's grip on our economy" and that he looks forwards to "digging down into the science, what exactly it suggests and it doesn't suggest, and I certainly look forward to economic impact on the American people as they face very, very tough times."

The title of the hearing was "Climate Change: It's happening now."  Both Boxer and Vitter agreed with the title.  Yes, it is happening.  So the hearing had to be about politics and solutions because once people agree to a fact, they then have to decide what to do about it if anything.  So the scientific experts were being used to provide information that would explicitly or implicitly support or negate spending the model to implement the policies of Obama's climate action plan. This forced judgment of the goodness or badness of the policies on the scientific ability to attribute observed extremes to climate change. This is unnecessary and difficult to do.

The graph above indicates that there is no global long term trend in hurricane landfall frequency or intensity according to the reliable record.  The observation says nothing about the warrant in creating policy intended to adapt society to extremes like hurricanes or changes in extremes like those expected with climate change.  Regardless of climate change, policy that protects society from loss, disruption, and suffering seems like a good idea.  But the decision to implement those policies rests on felt "moral obligation" (as the Obama Administration called it) of which science has no authority.  

Wednesday, July 17, 2013


Recently, the politicians and the news have been awash with claims of a subsidy for flood risk provided by the National Flood Insurance Program (NFIP).  Similar sorts of claims have been and continue to be made about a subsidy for Florida hurricane risk.

But, how would you know a subsidy exists? What standard of comparison would you use? Is the existence of a subsidy dependent on perspective?

A classic measure of risk is average loss.  Traditionally in insurance this was called the pure premium- the sum of all losses over the number of years represented in the loss data. With the welcoming of catastrophe models, the pure premium became better known as the average annual loss (AAL).  The AAL is similar but different to the pure premium.  The AAL is calculated by multiplying the probability of a certain size loss times the loss, then adding all those up.  This is done for an entire model's event catalog.

Above is a graph comparing the estimated annual Florida hurricane loss by model type.  The first three estimates are pure premiums found using a commercial company catastrophe model for the all lines industry portfolio for Florida.  From left to right, the first two differ only by the inclusion of storm surge and run on a "stochastic" or "near term" catalog. The third is the company's FCHLPM approved model which means it has a "historic" catalog.  The final estimated is the AAL for normalized Florida historic event economic losses.  These were gathered from here.  Economic losses divided by two is a standard way to estimate insured losses.  One thing to note, all but the historic AAL includes estimates for demand surge.

In both 2011 and 2012 Citizens, alone, brought in about $2.2 billion in earned premium (written was similar).
There are, of course, many reasons not to rate and price insurance solely on the AAL or pure premium.  But, choosing one estimate of risk over another, particularly an estimate other than a historical average, represent hedges. There are tradeoffs in doing this. The table below shows each model's annual loss estimate compared to the normalized historic loss events. (There are some caveats for event loss versus loss year but this is fine for demonstration purposes).  Consider the annual loss estimate to be a prediction which will rarely if ever be spot on, but will come in too high or too low compared to the observed event.  The table demonstrates tradeoffs and compromise in the political process of ratemaking.

For example, using the pure premium from the Historic model, policyholders would be paying too much 68% of the time but too little 32% of time.  When policyholders are not paying enough to cover losses, insurers are burdened with the risk of running a deficit.  In comparison, using the Wind model, policyholders pay too little 13% of the time but too much 87% of the time.  This scenario sees insurers’ decreasing the probability of not having enough money for a loss and increasing profitable years, but it also increases the frequency that policyholders pay more than they needed.  Interestingly, the Wind +Surge model estimates a larger pure premium than wind alone, but with no change in the number of times the estimate comes up too high or too low.  It would seem that there is no added advantage, however, consider that the insurer is making a little bit more every time the estimate proves too big.  Given that policyholders do not want to pay more than they have to for their coverage, an 11-71 split will appear undesirable to purchasers of insurance.  Thus, the Approved FCHLPM model represents a compromise.

Thursday, July 11, 2013

Sea Level Rise and Miami Beach: Context to the policy issues discussed in that Rolling Stones article

Recently, my inbox has been awash with stuff about climate change induced sea level rise (SLR) and Miami Beach.  The NOAA reports that the average sea level rise in the Miami area has been 2.39 + 0.43 mm/yr (yes that is mm) or 0.78 + 0.14 ft/century (yes that is 100 years).  

The question of course: Does 2.4 mm/yr warrant action and if so, what action?
A recent Rolling Stones article outlines three policy issues in relation to talk about SLR and Miami Beach, the context for which the article's author, Jeff Goodell, neglects.  In italics, I present the Rolling Stones problem frame and policy solution.  Then some context.

SLR will cause salt water intrusion and limit the availability of freshwater therefore, a desalination plant is needed.
For many decades Miami has been interested in a desalination plant, but the cost has proved politically prohibitive. The concern was/is that South Florida population was lowering the water table which would be devastating to the Everglades ecosystem, cause salt water intrusion, and problems with the availability of fresh drinking water (and sinkholes as demonstrated in northern Florida).  What is more, (my impression has been) if the population was less reliant on the Everglades for fresh water then more of it could be available for development.

SLR will flood Miami Beach therefore, a development plan and infrastructure update for the area is needed that force people to move out of the area.
In the 1970's, a South Beach/Miami Beach Redevelopment plan was advocated for which included a number of dikes and canals for the Miami Beach area.  The goal of that plan was to create an exclusive community and get rid of lower income residents which were considered a contributor to "blight."  The Venice like aspect of the plan never came to fruition, but apparently never went away either.  Ridding the area of lower income residents however was achieved quite successfully.

In addition, there has been much recent advocacy for increasing investment into existing US infrastructure (roads, water treatment).  Recently, The Economist featured Miami in its own assessment of this infrastructure debate.  Arguing that infrastructure should be updated in Miami Beach due to SLR is simply to take advantage of an existing demand for investment of this kind.    

SLR will cause hurricane losses to become more severe, therefore the cost of insurance needs to increase to communicate this risk. 
Florida has been having problems with their windstorm (hurricane) insurance since the 1970s due to trends in development.  Climate change is no more a factor for this than is the moon made of green cheese. However, if climate change is accepted as something that is affecting losses through impacts on hurricanes, etc., then the science used to establish insurance rates can be altered.  There is a great international financial interest in this for several reasons which have little to do with climate change.

Climate change science, including investigation into changes in mean sea level, has been very informative over the years and "climate change" is an important, complex global issue.  But the primary problem here for Florida, Miami, and Miami Beach is a moral and ethical one regarding desired land management policy (including population growth and density) for Florida's future.  Believing that the former dictates courses of action for the latter is not only false but impossible and effectively removes the public from participating in constructive public debate about the future of where they live.

Tuesday, July 2, 2013

Does Florida have a competitive P/C insurance market?

Healthy competition is much in the eye of the beholder. There are often rules- fair fight tactics.  Generally, there are winners and losers.  For certain though, competition requires more than one player. Depending on the context, different numbers of players are desirable.  For example, most card games can be played between two people but much more interesting and fun when played with four.  

In a market, let's say a Florida P&C market, how many participants is sufficiently competitive?  

Tales from Hurricane Andrew and fierce competition that pushed rates "too low" seem to suggest that too much competition is an equivalent bad to too little.  

Below are graphs comparing the number of domestic P&C companies by state.  The top graph shows number of companies per person adjusted to the average ratio.  The below graph shows number of companies per state adjusted to the average numer of companies. Population and company data reflect the year 2010.  P&C data gathered from the III's Insurance Factbook, 2012.

*Delaware value= 8.49

In the context of state population, Florida is below average, but not the lowest and comparative to many other states.  Yet, when considering number of companies by state, Florida is well above average.

Is it competitive?   It would appear to me that yes, Florida has a competitive insurance market.

Is it as competitive as one may hope? I suppose that is open to interpretation.