Thursday, October 3, 2013

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.

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