Wednesday, November 13, 2013

Political Differences Between the Citizens PIC and NFIP

vs.


When Florida Governor Rick Scott ran for office he promised to push Citizens Property Insurance Corporation's rates the an 'actuarially sound' level.   And in recent times, those rates are increasing (though, this has less to do with Scott and more to do with current market dynamics).  Yet, when it comes to federal flood insurance Scott sounds more like a struggling Florida homeowner than the private market insurance advocate he is known to be.  

Recently, Scott and the Attorney General Pam Bondi, together with the Alabama Governor and Attorney General,  filed a brief in support of a lawsuit filed by the Mississippi Insurance Department against FEMA for increasing the cost of flood insurance.  FEMA administers the National Flood Insurance Program (NFIP), the federal government residual market for flood risk. 

In their brief, the group argues that the increased cost of NFIP coverage is 
so high that many homes have become unaffordable leaving homeowners to choose between foreclosure and sale to escape the crushing financial burden imposed by the NFIP rate increases. In many instances, however, sale is not a viable option because the new exorbitant premiums render the properties unaffordable to potential buyers. This cycle has already begun to have a deleterious effect on the real estate markets and economy of the State of Florida. 
We are supporting Mississippi in their lawsuit against FEMA because the NFIP rate hike will not only hurt Florida families but will devastate our real estate market.
This all sounds remarkably similar to the accusations alleged at Florida's state run insurer, Citizens.  Consider, Sen. Mike Fasano
Homeowners can no longer afford these types of increases or even the premiums they're paying now...This is economic disaster for our state if they allow Citizens to continue to go in the direction they're going 
What can be drawn from this observation?  I make two conclusions.  The first addresses the function of residual markets in general.  The second addresses the political difference between Citizens and the NFIP.

First, residual markets, as public policies, have a ratemaking process that incorporates the views and concerns of the public.  Residual markets serve a supportive role in the state and national economy.  They provide "insurance" at a politically acceptable cost to support desired behavior such as, buying cars, buying houses, or going to the doctor.  As residual market rates change they create different sets of winners and losers.  This is where conflict over rates arise.      

Second, differences between the NFIP and Citizens has Florida Governor Scott looking to keep rates low on the former and raise rates on the latter.  Why?   Here are a few considerations:
  • The ability to spread risk by the NFIP over a population (ie. the nation) is greater than Florida's Citizens which can only spread risk as far as the state population.  Scott's constituency is the Florida public, many of which would rather not have the burden of other people's cat losses.  Higher rates for Citizens decreases the future burden on Floridians though doesn't really do much for those hurting today.  Yet, Scott has little if any accountability to those in other states.  
  • To my knowledge, no private companies or few private companies, offer residential flood insurance coverage in the United States.  So, to the extent that a homeowner cannot afford to purchase NFIP coverage or chooses not to buy NFIP coverage they have no other options. Windstorm in Florida is different.  There are many private market companies that offer wind coverage in the state of Florida.  So, lower rates by Citizens "competes" with the private market.  By demanding lower rates on the NFIP there are few constituent insurance interests that Scott risks upsetting.  But, by demanding lower rates on Citizens, Scott will upset all private market insurers in the state of Florida.   
  • This final point is more of a question regarding the science of estimating hurricane risk and the science of estimating flood risk.  Nearly every Tom, Dick, and Harry has an estimate for hurricane risk.  The measurement is highly malleable and changes routinely.  One estimate is scientifically, as good as the next.  But, I'm not sure to what extent this is the case for flood. How does the role of science differ in the ratemaking process of the NFIP in comparison to Citizens?    

Friday, November 1, 2013

Say it ain't probabilisticly so


The above image is from a featured article in The Economist. The article pointed to a substantial rate of publication in the scientific literature of false positives (thinking something is true when it is not) and creative or misleading correlations.   
Academic scientists readily acknowledge that they often get things wrong.  But they also hold fast to the idea that these errors get corrected over time as other scientists try to take the work further.  Evidence that many more dodgy results are published than are subsequently corrected or withdrawn calls that much-vaunted capacity for self-correction into question.  There are errors in a lot more of the scientific papers being published, written about and acted on than anyone would normally suppose, or like to think.  
The Economist attributes the rapid publication of potentially wrong results to political interests of scholars needing to advance their career.  
Professional pressure, competition and ambition push scientists to publish more quickly than would be wise. A career structure which lays great stress on publishing copious papers exacerbates all these problems.   
There is of course something regretful to be said for the quality of research that is at times published.  Still, that the information is published at all is not inherently a problem. 

The pressure to publish, though stressful, often has scientists working within a given area of thought and controversy rather than wandering about the knowledge world.  Areas of controversy often indicate that the resulting scientific consensus is meaningful for decision making out in the 'real world.'    



xkcd comics (xkcd.com)
Thus, every article must be placed into the context of an ongoing discussion.  When they are, surprising or questionable results are easier to spot.  

The problem arises when individual research papers are taken out of debate and social context and readily applied in society for decision making with large scale effects.  And as The Economist briefly mentions, this occurs regularly.


Consider for instance, that publication in a peer reviewed journal is the minimum requirement for use of a scientific finding in the creation of catastrophe models for ratemaking in Florida.  Even if the study is fiercely debated, it remains fair game for use.  The decision to pick a paper out of context and use it for ratemaking has far reaching consequences  socially, politically  and economically.  


As a resolve to this issue, The Economists seeks to revamp the peer review process applied to published work and demands greater replication in scientific studies.  


The idea that the peer review process leaves something for wanting is not new.   In this way, The Economists can get into a long line of interests that wish the published science said something other than what it does.  Certainly room for improvement is always possible.  But this topic is itself vast with a substantial context, so I won't go into it much further.


The need for replication may be an important alternative in studies that involve clinical trials and biomedical science (which the article heavily focuses on).  Outside of those fields though, scientific studies very often use predictive modeling.  Given the same model, replication of results is obviously possible, probable, and certain.  Amongst models with similar assumptions replication is also possible.  Unfortunately, in this type of research replication does not equate to truth about the future.  Therefore, replication is not always a suitable response to the problem of questionable research results.  It's most likely a discipline specific solution.   


Again, where decision making requires reflection on the state of scientific knowledge looking to where scientists agree and disagrees is more promising than relying on any one paper, peer review process, or ability to replicate.