Thursday, October 3, 2013

The Competition between Government and Insurers

In light of our Federal government's shutdown over disagreement over the budget and the Affordable Health Care Act (ObamaCare). I share some excerpts from my dissertation and additional thoughts.
In many ways, the insurance industry rivals government.  Insurance has a governing effect on society by enforcing punishment in the form of monetary costs for behavior it judges as morally reprehensible.  When insurers’ sense of “moral risk”  conflicts with government’s the two compete for the public’s trust to identify those risks worth fearing or accepting.  Similar to government, insurance provides for the general welfare, creates employment, and contributes to national GDP.  To the extent that income going to taxes is unavailable for insurance premiums, the insurance industry and government compete for revenue to provide these serves.  In 2012, insurance policyholders in the United States spend over $1.8 trillion in insurance premiums.  By comparison, in 2011, the Federal government collected $2.3 trillion in taxes.  If considering revenue as a proxy for power, the insurance industry provides the Federal government a worthy opponent.   
Though the insurance industry and the government may seem as adversaries, the two have grown and prospered from a symbiotic relationship.  Beginning in the 1930’s, property and casualty (P/C) insurance has played a pivotal role in the success of Federal economic policies for real estate by providing windstorm coverage, which included the hurricane peril, to meet mortgage lending requirements.  However, around the 1960’s, insurers began struggling to manage the large catastrophic losses coming from the nation’s growing urban areas while also providing coverage at an affordable rate.  As a result, governments created P/C residual market to support the economic policies that depended on the availability of affordable property insurance.  
This is also about the same time that the federal government created Medicare and Medicaid.  According to the government's Centers for Medicare and Medicaid Services
The Medicare and Medicaid programs were signed into law on July 30, 1965. President LBJ is pictured at the signing ceremony in Independence, Missouri at the Truman Library. Former President Truman is seated beside him. LBJ held the ceremony there to honor President Truman's leadership on health insurance, which he first proposed in 1945. 
Truman's goal of federal health insurance came into conflict with the American Medical Association and his policy was eventually dropped.  But, the date of 1945 is significant for two reasons.  First, WWII ended in 1945 and troops came back, started families, and were able to take advantage of New Deal policies.   Second, Congress refrained from regulating much of the insurance industry by passing the McCarran-Ferguson Act (US PL 15) leaving it up to the states to do so.  Taken together, the increase in population, New Deal Policies, and the Act facilitated growth of the real estate sector and (I believe, for example here), the health and medical sector.  Now these two national wealth producing sectors rely on the availability of affordable insurance.  

However, for many reasons, which I will not go into here and now, the insurers have trouble offering coverage at a price that we are able to pay or willing to pay.  And so, we have seen the growth and expansion of P/C and health residual markets since around the 1960's. 
Residual markets are public policies.  Studying residual markets provides an opportunity to assess the implementation of the democratic process and roles of state and federal government in serving public objectives in managing risk.  Like any other public policy, the progress of residual markets in meeting stated public objectives is of interest to ensure a successful democratic governing regime.  The political controversy surrounding residual markets in recent years gives reason for their evaluation in relation to the goals policymakers have intended them to achieve.  Using a specific public policy [I use Citizens Property Insurance Corporation] as a case study of the democratic process reveals power relationships in society and points of contention thereby leading to a fruitful discussion for how policymakers can improve policy outcomes.    
The power dynamic between government and insurance is clearly evident yet often unexamined. Instead, each accuses the other unfairly pricing our society's risk (for example, here or here).  At they same time, the two refuses to address underlying policies and practices that lead to difficulties with implementing a successful and stable insurance regime.  It is this inability or unwillingness to address underlying issues that represent a failure of the democratic process.  

As the saying goes, "you can fool some people some times, but you can't fool all the people all the time."  A recent Gallup Poll, indicates that the public is aware of the government's democratic process failures and has chosen to favor politics over policy,
Americans are more likely to say the budget debate is an attempt by both sides to gain political advantage (47%) than an important battle over principles (37%).
Another poll, indicates that the public resents a government shutdown as an exercise of power over the decision making process of social well being policies, such as health care. 
Though politics without policy is largely inseparable  one without the other suggests a floundering governing process.

The Prediction Racket



I have not been posting regularly because I have been trying to finish up my dissertation.  Here is my dissertation abstract and the time/location of the defense.

Tuesday, October 8, 2013 at 2:45pm at the Center for Science and Technology Policy Research, University of Colorado at Boulder
               
The Prediction Racket: 
Constructing, Characterizing and Governing Florida's Hurricane Risk
The prediction racket describes a situation in Florida where insurance rate decision makers look to catastrophe models to reduce uncertainty about future loss and in the process characterize ever more risk.  To alleviate the racket’s affect on the public, the Florida legislature mandated its residual market, Citizens Property Insurance Corporation (Citizens), provide “affordable property insurance.”  However, Citizens struggles to satisfy its mandate because disagreement about the risk detracts from constructive debate needed to reconcile conflict between insurer economic sustainability and insurance affordability.  This undermines legislative efforts and threatens Florida’s democratic process.

This dissertation examines the interrelated social and decision process of constructing understanding of the hurricane risk, negotiating its characterization, and implementing insurance.  Three independent research projects address each part of the process.  First, I consider the conflicting claims that hurricane losses have increased due to geophysical changes or social changes.  I assemble a global dataset of hurricane landfalls and find no long-period trends, support earlier research conclusions that societal changes explain increasing losses.  Second, I present the ratemaking process as wholly political and examine the role of catastrophe models in the evolution of Florida’s hurricane risk affordability and insurability.  I find that, over the period of analysis, conflict over modeling science attributed to the decline of perceived insurability of Florida’s hurricane risk.  I conclude that without a means to judge the scientific quality of the models, they serve in the ratemaking process simply as political tools to support interests’ preferred rate decisions.  Finally, a policy evaluation of Citizens identifies trends in its success and failure meeting the goal of affordable property insurance.  I attribute responsibility for performance to four main factors: 1) the use of Citizens as means to deflect market judgments of risk, 2) the logical impossibility of an actuarial sound residual market, 3) the politicization of the hurricane risk, and 4) false assumptions in the state’s economic model.  The dissertation concludes with a list of policy options designed to expand the scope of debate beyond one of insurance ratemaking and towards considerations of policy that improve the availability of affordable property insurance.