Wednesday, October 8, 2014

What problem does the postdoc pose?

A couple of days ago, a dialog began on an academic listserve.  An article in the Boston Globe citing a glut of postdocs serving a crisis served as the impetus.  (See the National Postdoctoral Association for a definition of postdoc)

The article addresses the"plight" of the biomedical postdoc,
The plight of postdocs has become a point of national discussion among senior scientists, as their struggles have come to be seen as symptoms of broader problems plaguing biomedical research. After years of rapid growth, federal funding abruptly leveled off and even contracted over the last decade, leaving a glut of postdocs vying for a limited number of faculty jobs. Paradoxically, as they’ve gotten stuck, the pursuit of research breakthroughs has also become reliant on them as a cheap source of labor for senior scientists.   ...
Their progress is very poorly tracked; the leader of a national report on the state of postdocs has called them “invisible people.” The National Institutes of Health estimates there are somewhere between 37,000 and 68,000 postdocs in the country. Salaries vary, but rarely reflect their level of education. The NIH stipend ranges from $42,000 a year for a starting postdoc, up to $55,272 for a seventh year.
The listserve discussion introduced a need to lobby Congress on behalf of postdocs and the assertion that postdocs experience very real suffering and systematic oppression.

I am not a biomedical postdoc.  I am a postdoc in the social sciences so maybe, I just don't know how it is.  But, my personal feeling is that identifying the nation's doctoral graduates in a highly technical field as a suffering, plighted group is less than desirable, demonstrates an odd view of the world and need for prioritizing problems.

Based on the Globe report, postdocs appear to be receiving a stipend that outside of the field could be considered a salary.  While benefits may be questionable (I just don't know) and reliability of work unstable, well, that seems a very real problem facing Americans generally, not just postdocs.  Finally, we don't all get to be rockstars, super models, trust-funders or socialites... just like we don't all get our own labs.

But what a great nation is this! Society allots funds to support the advanced training of researchers so they may pursue their dream career that has potential to eventually demonstrate societal benefit.  

My brief involvement in the listserve conversation expressed my feelings of pshaw for a designation of postdoc suffering.  For this I have some regrets.  I realize it is not my place to judge the worthiness of felt plight.

And what a great nation is this!  Those that feel wronged are justified in their feelings and to the extent by which they believe it merits Congressional attention they have the freedom to make their opinions heard.  

So, I, professionally, offer a different discussion:

Career dissatisfaction of University graduates seems a going concern.  This extends even to those with the highest degree attainments, PhDs.  All face a difficult job market, income inequality, lower than hoped for wages, etc.

The debate about PhD and postdoc "glut" has taken place, at least, since the early 1980's.  For instance, William Zumeta of the University of Washington, published a Higher Education article in 1982 titled, "Doctoral Programs and the labor market, or how should we respond to the 'PhD glut?"  At that time, Zumeta argued,
at the margin, some important benefits of doctoral programs have generally been understated.  At the same time marginal costs with respect to doctoral enrollments (and thus potential savings from enrollment reductions) have tended to be exaggerated by higher education policymakers in recent years.
A couple of years later, Zumeta published an article that saught to better understand not just the quality of the postdoc experience, but the quality of the postdoc.  The widespread belief at the time was the best doctoral graduates went right on to faculty positions.  Lesser graduates went on to postdoc.  But if the scientific engine depended on the postdoc worker than what did this all say for the quality of science?

While Zumeta called for further data collection and analysis he also stated, "cause for concern" existed.

Research in this field has continued and there is today, a good amount of information on graduate job attainment, experience, etc.

Perhaps the production of PhDs is a subsidized product, like corn.  The public highly values the idea of the farmer and farming and highly values food production.  So, the public seeks to provide some stability to the corn market.

Similarly, the public highly values education, research and the production of science.  So, society provides some stability to the higher education market.  We can argue about how desirable the situation is in corn and PhDs.

Are we using postdocs as a proxy for arguing about funding for research generally and biomedical specifically?  Probably.  

I think the whole discussion may make a bit more sense in the historical context of science policy.

It is after all, the societal goals for science that has fostered the growth of today's research army.  And to the extent the institution of science has faltered on maintaining its own integrity, then perhaps this has led to unrealistic expectations of the institution and/or a general poor quality experience for the postdoc.  

But, I'm not really sure that PhDs interested in research are so different from aspiring actors.  The difference being the researcher is not solely interested in fame (most aren't), but in the production of work that aids society in bettering itself creatively, pragmatically and respectably.  Some of us get there.  Others of us don't.  Much like Jennifer Aniston and that other actor you've never heard of.

I feel grateful that society supports research in the quest for societal benefit and and values broad access to higher education.  Still, it is highly likely that the whole system could work far better.

Monday, October 6, 2014

My Average Observation in the Insurance Journal


Recently, I've been trying to catch up on some readings in the classics.  I love revisiting what was said in the past and consider it in the context of the present and what is said about the future.  It's sort of remarkable how much things remain the same or how today is a caricature of past foresights.

For instance, was George Orwell really that far off?  I'd say the Jetsons characterize today pretty well too...  

In any case, one of these classics, The once and future school of public policy, was by the legendary political scientists, Aaron Wildavsky.  I know I read this for class while in graduate school, but I've found that things take on new depth of meaning after school and one has the patience to more fully consider the words people use.

Amongst, Wildavsky's thoughtful comments, he pointed out the following,
The best bet always is that the future will be like the past plus or minus 5 percent.
This was not the main lesson of the article, but nonetheless.

Today, I have an opinion in the Insurance Journal that falls in line with Wildavsky's observation of life for the most part.

Based on the data provided in charts by Dr. Hartwig of the III, I argue that by adding some context it would appear that future insurance profitability peaks will be, like the past, about average.

Friday, September 26, 2014

City/ Not City



Previously, I briefly discussed Miami-Dade's Master Plan and what looked to me like double speak.  In particular, I concerned myself with the concept of urban expansion versus that of sprawl.  A brief look at the academic literature demonstrated that defining sprawl is difficult and no one accepted metric exists.  So, for Miami-Dade to determine they have urban expansion rather than sprawl is futile.  

The video above demonstrates that defining a city is no simple task, either.  The researcher in the video indicate that cities tend to share similar characteristics but on different scales.  Still the clear identification of city/not city is elusive.    

Thursday, September 25, 2014

Guest Post at Artemis


I have a guest post on the Artemis blog.  The blog and its associated website is a really amazing source for information on insurance linked securities, particularly cat bonds.  I've found it useful in my research and improving my understanding of the risk sharing and trading enterprise.  

The piece is about model risk. Despite grand efforts to help risk managers feel better about the uncertainty in their models, the risk that model is just wrong remains persistent.
In response to client demand, catastrophe modelers are offering improved access to model components and ease of model blending, morphing, fusing, etc. Most notable of efforts are those of RMS, Karen Clark and Company (KCC) and Lloyd’s. RMS(one) promises to provide users with access to over 300 probabilistic models, whereas KCC’s RiskInsight enables users access to internal assumptions. Lloyd’s Oasis offers users choice in “a set of plug-and-play components.”

These efforts are aimed at resolving concerns about model risk but do not actually help to reduce or control model risk. Improved ability to manipulate vendors’ models may buffer companies from volatility produced by model updates. But that volatility is produced by changes in the decision making by the model vendors and their judgments about how best to create a model.

The ability to create one’s own theory on how best to estimate a given risk does not make that theory an accurate representation of reality. 
The rest of the piece is here.

Tuesday, September 23, 2014

Consulting Services for FCHLPM: Sunshiny or Convoluted?

http://borgman.cincinnati.com/
The state of modern science is such that one can legitimately piece it together in a myriad of ways to develop one's own unique perspective on a given issue.

This provides risk model vendors with with opportunity to develop their own secret sauce.  It  provides the vendor with their slice of the market and is therefore, fiercely protected.

Florida has "sunshine laws" which mandates that much of the government's going-ons, particularly meetings, becomes public record.   Florida's Sunshine Laws are in accordance with the Government in the Sunshine Act (1976) signed into law by President Ford.  It was introduced to the Senate- just after Nixon left office- by Florida's very own Lawton Chiles.  Presumably due to Nixon's legendary meeting secretiveness, the bill passed fairly quickly.

The Sunshine Act compliments the 10 years senior Freedom of Information Act (1966) which makes a bunch of government information public with some exceptions.  One exception is company trade secrets.  

So, there is a difficulty: Company's want to keep their information secret, FOIA allows them to, but once they have a "meeting" with public officials it becomes public information.  In order to resolve this difficulty in regards to catastrophe model vendors' secret science, the FCHLPM (those responsible for reviewing catastrophe model science) hold their meetings off public property at the vendors' office.

(Later today: It was brought to my attention that I may not be entirely clear on how FOIA and the Sunshine Law actually work.  However, I am still under the impression that the reason for site meetings [at the vendors' offices] is to avoid public disclosure of trade secrets.  As to how this legally works out, I'm not sure.  Some particulars on how and when FCHLPM things are exempt from public disclosure is here under section g.)   

However, models are becoming increasingly complex.  They have many more moving parts today then when first adopted by the industry in the early 1990s.   For example, under FCHLPM 2000 Standards, AIR submitted a report of 306 pages and under 2011 Standards the report was 404 pages.  

It takes a long time to review this amount of information perhaps longer than a site visit allows.  Besides, FCHLPM members have full time day jobs in addition to Commission responsibilities.  

To resolve this time consuming complexity problem (or so the story goes), the SBA has recently announced a request for consulting services
The SBA is seeking approximately fourteen (14) to sixteen (16) different vendors in seven areas of discipline (Meteorology, Structural Engineering, Coastal Engineering, Hydrology, Actuarial Science, Statistics, and Computer Science) to provide consulting services to the Commission. Respondents should be prepared to provide, at a minimum, the services described in the Report of Activities
The SBA financially administers the FCHLPM and the members of the commission are appointed by a mixture of statutory requirements and selection by the governor and state CFO.  The SBA is, ultimately, overseen by the Governor, the Chief Financial Officer and the Attorney General- all elected positions.  

Though the consulting services hired will provide their scientific evaluation to the FCHLPM who remain the decision makers, the consulting services, it seems, could be answering to the SBA.  

This adds a layer of non-transparency to the expert advising system.  In addition, it is unclear how much freedom of evaluation and access to information will be maintained by the FCHLPM.  Will the FCHLPM still be able to evaluate as they see fit or will their responsibilities be limited to decision making based only on the consulting services information? 

It is certainly not uncommon for a government agency to contract private expertise, demonstrated by by the colloquially termed Beltway Bandits.  But it is also not uncommon is for governmentally hired private expertise to produce information selectively favorable for their client.  

Clarification of who is the client helps improve transparency of potential incentives- particularly in situations of modeling science which is easily pieced together in different ways and really more theory than accepted knowledge, anyway.   

Improved transparency about how this new expert advice system will work is important for democracy and the continued integrity of the FCHLPM.  

Friday, September 19, 2014

How Different Insurance Actors Handle Recent Changes in Market Judgment of Risk


A dominant characteristic of the insurance market right now is that it does not have enough large loss to maintain pricing stability.  On Monday, the Insurance Journal ran three different stories that demonstrate several types of institutional behavioral responses to changes in the market judgement of risk.

The first article covered the recent Reinsurance Rendezvous, an annual event in Monte Carlo where the world's reinsurers get together and do whatever it is that they do behind closed doors such as, throw lavish parties.  The article reported that reinsurers are very much disgruntled with market pressure to bring their pricing down.   According to the article, originally from Reuters, Nikolaus von Bomhard, chief executive of Munich Re  claimed, “I am disappointed, exasperated, and even rather appalled by what is happening in the market."

Reinsurance shareholders are expected to benefit from the market dynamic.  The article reports, “Returning capital to shareholders reduces the pressure to do something that has higher risk,” said Moody’s analyst Stan Rouyer.  Earlier this year year, Swiss Re was reported to have done this in the form of a special dividend.

In the second article, the Insurance Journal reported that the Louisiana Citizens Property Insurance Corporation seeks to lower rates for a handful of residential policyholders and, overall, for some commercial policyholders.  The reason for the change is reported as the cost of reinsurance.   Here, the ability to offload more risk onto reinsurers for cheap has led to lower overall pricing for the public.

In the third article, the Insurance Journal reported that primary insurers (i.e. State Farm, Farmers and Allstate) in Texas are increasing homeowners rates.

The article reports the primary insurers are claiming that increased risk warrant raising rates,
Luis Sahagun, a spokesman for Farmers, said the insurer needed to adjust its rates to account for the “increasing costs associated with covering the risks faced by customers” in Texas. That includes tornadoes and hailstorms. 
“The costs associated with paying for losses resulting from fires and water damage have also kept growing,” he said.
Deeia Beck, the Texas Public Insurance Counsel reportedly argued that the raising rates are driven by profit margins,    
She said State Farm’s new rates were excessive and based on projections that “exaggerate future expected losses.” Further, the company is citing unreasonably high expenses to justify its new rates, she said.
Farmers, meanwhile, is trying to reap a “greatly excessive” profit in Texas, she said. That includes substantial profit generated from management contracts between Farmers’ holding company and its subsidiaries. 
To the extent primary insurers are able to pass perceived increases in risk onto reinsurers at a low cost, charging the policyholder for the cost of additional risk while the actual cost of managing the risk may not have changed because of the substantial decrease in reinsurance pricing would seem like a means of creating additional profit as Beck suggests.  

Here, the advantage of low reinsurance pricing is had by the primary insurer.

Though, the geophysical risk hasn't changed, pricing of the risk has changed quite a bit due to reinsurers market conditions.  Which again highlights that pricing catastrophic weather risk likely has more to do with market perceptions than scientific measures of the hazard.

Thursday, September 4, 2014

Rating Agency Outlook Performance


My understanding of a rating agencies outlook is that it is a generalized prediction about more specific predictions to be made sometime over ~2 years.  A rating is itself a prediction about a company's credit worthiness- will they or will they not pay someone.

Interestingly then, what you have with outlooks are predictions about future predictions.

How do outlooks perform?

(unless otherwise noted, a year's outlook was published the previous September.  So, the 2013 outlook was published in September 2012)

2013 Outlook









Fitch: Stable outlook over the next 12-24 months
Moody's: Stable outlook over the next 12-18 months

2014 Outlook

Fitch: Stable over the next 12-24 months; moved to NEgative outlook in January 2014
Moody's: Stable for next 12-18 months

2015 Outlook
Fitch: Negative over next 12-24 months
Moody's: In June- Negative outlook over the next 12-18 months; Can't find September report

It looks like outlook predictions don't perform all that well.  Consider Fitch's:

  1. In September 2012, they guessed stable over 12-24 months.  
  2. Twelve month's later they guessed stable again.  
  3. Three months later this became negative. 
  4. Nine months later (ie. this month) they guess negative for the next two years.  

This means that the original outlook was only good out to 15 months.  The second outlook did not hold true very long at all.  We will have to wait to see how the negative outlook of January and September 2014 will perform.

In their 2014 outlook, Fitch argued that would could trigger a downgrade in their outlook is, "Catastrophic Loss with Interest Spike,"
A sizeable catastrophic loss in conjunction with significant unrealised investment losses from an abrupt jump in interest rates is viewed as the greatest threat to the sector’s stable outlook at this time.  
I don't monitor interest rates but a sizeable catastrophic loss has not occurred (2013, 2014).  So something other than a 'catastrophic loss with interest spike' encouraged a downgrade.

This means that not only are the outlooks not so great but the reasoning behind them may not be so wholly transparent.

Tuesday, September 2, 2014

Financial Morality


In the academic world there is a group of social scientists who discuss the use of "risk" as a modern form of moral regulation: Alan Hunt, Tom Baker, Richard Ericson, etc.  That risk has moral connotation seems intuitive.  The idea of doing something that has the potential for harm or loss inherently conjures feelings of goodness and badness.

From this, Hunt Baker and Ericson, have argued, modern institutions of risk such as, insurance, act as morally governing.  They define good and bad risks and to the extent that this aligns with certain portions of the population, the result is good and bad people or populations.  

In my experience, the idea that financial decision making has moral implications and/or depends on moral judgements meets a great deal of push back by those that see financial decisions (and the decisions behind those decisions) made by a group of "rational agents."  From this perspective, judgements are not really value based on considerations of good ideas and bad ideas but simply on what is economically advantageous.

The circular argument in this perspective is that to prize economic theory or economic advantage over other considerations IS a value judgement.  And to consider some judgements better than others to achieve profit or financial sustainability IS a moral judgement: Profit is Good/ Financial ruin is Bad.

A good example showed up in the comments section to a recent FT article foreshadowing a financial crisis even more dire than the last.  Bagehot by-the-Bay wrote, 
In some industries — high tech and the airlines, for example — bankruptcy is not a sin, it’s part of the natural order of things. I suppose one either believes this, or not.  ...
Mr or Mrs Bagehot identifies bankruptcy as a moral bad (i.e sin) for some but a virtue for others- much like taking multiple wives is morally good for some and morally bad for others.  It depends on what flavor of marriage industry to which one subscribes.  It depends, according to Bagehot, on what one "believes" about the meaning of bankruptcy beyond the identification of its occurrence.

There is nothing about the fact of bankruptcy that is inherently value laden but it is how one responds to the risk or realization of bankruptcy that gives it significance.  At times, bankruptcy has the potential to impact,  directly or indirectly,  a broad range of people with different value sets.  For example, bankruptcy may cause loss of employment, economic volatility, "bad credit," etc.  Different groups may approach the bankruptcy event differently much like "high tech" may approach it differently from some other industry.

Making decisions about risk including financial risk, necessitates consideration of outcomes to be sought after or avoided, values to be upheld or neglected.  In short, consideration of what is morally good and bad.

Thursday, August 28, 2014

Economic Politics and Expert Judgements


Commonly, economists, actuaries, risk managers and economic decision makers, generally, are both viewed and view themselves, as disinterested, objective purveyors or economic truth.  They simply call it as they see it or rather, make decisions based on market indicators.

However, individual experts may interpret information differently.  Scholarly literature from the social sciences demonstrates that people, laymen and experts alike, rely on desired objectives, culture, and values for decision making.

Thus, expert judgements reflect the relationship between what the decision maker thinks to be desirable and their expectation of what will be.

In short, an expert judgement is indicative of perspective.  

From the political arena of economic policymaking, two recent examples are found.

One recent example comes from the recent speech given by the Federal Reserve System's Chairwoman Janet Yellen,
In my remarks this morning, I will review a number of developments related to the functioning of the labor market that have made it more difficult to judge the remaining degree of slack. Differing interpretations of these developments affect judgments concerning the appropriate path of monetary policy.
The Chairwoman dedicated the majority of her speech to discussing different economic factors and trends that provide a complex picture of the US economy.  

Following Yellen's speech, the FT reported on the mood of the market,
Ms Yellen’s comments on the level of slack in the US labour market were deemed more balanced than had been seen previously – and the mild sell-off in the equity and bond markets appeared to suggest some disappointment among those expecting her to live up to her dovish reputation. 
In effect, these market interests act as a constituency some were pleased and other's displeased by Yellen's interpreation and her foreshadowing of future decision making.

Another example comes from the voting experience of the Bank of England on appropriate monetary policy.

Disagreement by members of the BoE Monetary Policy Committee demonstrates that the same economic information can render different judgements based on perspective.  In addition, the FT suggests that the voting conflict indicates that BoE has a different perspective on appropriate action given information about the global economy,

This leaves the BoE as the only major monetary authority in the world edging closer to a rate rise. In the eurozone, the European Central Bank has pledged to keep interest rates low for an “extended period of time”. The Bank of Japan has pledged to continue with its quantitative and qualitative easing programme until it hits its newly established inflation target of 2 per cent.  

Expert judgement on appropriate monetary policy or means of obtaining monetary policy goals clearly integrate something other than market factors alone.  

The idea that expert judgements about economic matters are somehow objective and not riddled with perspectives, values, desires, personal experience etc. is a form of "boundary work."  The phrase comes from the social science literature and refers to the efforts and practices by some decision makers or practitioners to exclude other types of interests (examples here and here).

Often, boundary work is used to describe the efforts of technological experts to exclude the interests of the public and regulators.  However, delineation between technological decision makers and societal politics is not possible because the two are part of the same social system.

The above examples demonstrates that expert economic decision making is itself political and social. Therefore, decision making is not predetermined by market forces but malleable based on interpretation of information and decision maker's desires about who's values to maximize and how best to do so.  

Tuesday, August 19, 2014

Miami-Dade's Master Plan

From Flickr: Veronique Lee

Miami has a Comprehensive Development Master Plan that is the holy scripture for all that is Miami-Dade County land management.  It is an immensely powerful document.

Its creation and management is generally guided by Florida Statutes Chapter 163.  But specific goals for the Master Plan are set out by County Ordinance Chapter 2, Article XV, Sec. 2-113.  The purpose of the Master Plan is mandated as  follows:      
It is the purpose and intent of this plan to assure for all people of Miami-Dade County safe, healthful, productive and aesthetically and culturally pleasing surroundings; to attain the widest range of beneficial uses of the environment without unreasonable degradation, risk to the health or safety, or other undesirable and unintended consequences; to preserve important historic, cultural and natural aspects of our national heritage; to maintain, wherever possible, environment which supports diversity and variety of individual choice; to achieve a balance between population and natural and man-made resources which will permit the high standards of living and a wide sharing of life's amenities, and to enhance the quality of renewal resources and approach the maximum attainable recycling of depletable resources. 
Obviously land management in the County is intended to meet a smorgasbord of goals.  Policies like these can be difficult to hold decisions makers accountable too because the goals are varied, perhaps conflicting and vague.  It is easy for a decision maker to point to any part of this legislation to argue the morality of their decision.

 Digging deeper into the Master Plan, one comes across naturally conflicting statements and double-speak.  For instance, the Master Plan's section on Land Use sets out the objective of development that encourages
"contiguous urban expansion when warranted, rather than sprawl."
Sprawl however, is generally synonymous with expansion of urban areas.   Galster et al (2001) define sprawl as,
a pattern of land use in a UA [urbanized area] that exhibits low levels of some combination of eight distinct dimensions: density, continuity, concentration, clustering, centrality, nuclearity, mixed uses, and proximity.  
 Despite the double-speak in the Master Plan objective, it is clear that the concept of sprawl or urban expansion is seen as in conflict with higher order goals developed by the County for the creation of the Master Plan.

Further, there is reason to believe that Miami land management planning is failing miserably at meeting those goals set out in by the Land use objective and the County mandate.  For one, Miami is seen to have one of the greatest degree of sprawl in the country (Galster et al. 2001).    As well, it is seen as one of the most stressful places to live.  It also, is notorious for its risk.

Can Miami-Dade County decision makers be held accountable to the public policies they are intended to uphold?

Update, later today:
Other scientific work by Lopez and Hynes (2006) indicates that Miami has very low sprawl.  Lopez and Hynes use a different process of defining and measuring sprawl.  Both Galster et al and Lopez and Hynes offer lengthy discussions about the difficulty of defining sprawl.

Without a clear definition offered as a policy goal, it is difficult to evaluate if a policy has produced sprawl or not.  This is akin to affordability issues in Florida insurance.  Without a quantitative definition of affordability, evaluation depends on the mood of the public.  

Public discontent about the environment, risk, sprawl, blight etc.  perhaps, has less to do with any of these specific ill defined goals than with discontent about land management practices.

Friday, August 15, 2014

Flood Risk and the Miami-Dade Urban Development Line

Several days ago I wrote about how Miami's climate change flood risk is the latest rational for development.  Much akin to the 1970's urban blight.   I'd like to follow up on the assignment of Commissioner Rebeca Sosa to the Sea Level Rise Task Force.

In 2013, Sosa voted to move the Miami-Dade's contentious Urban Development Line westward.

The switch from Ruvin to Sosa for chair of the Task Force is telling of Miami-Dade County's politics.   Ruvin has long been a proponent of environmental protection and specifically to that pertaining to the Everglades.  His Task Force report advocated for protecting the Everglades.  Sosa, clearly does not feel quite the same about the importance of leaving the Everglades undeveloped.


As shown in the satellite image above, the region is wetlands.  To build on it requires draining the land.  More recent residential development shows the land drained to create "waterfront" properties.  These are high flood risk properties.

The image below (taken from this report) shows regions of Miami-Dade and the era of which they were developed.  The red shows progressive movement into the Everglades.


Florida's entire economy is rests on the assumption that population will continue to grow.  Population is assumed to drive real estate development and jobs.  The below image is frequently reproduced by the Florida Legislature's Office of Economic and Demographic Research.  
However, the wetlands are prone to flooding and impacts from sea level rise.  So, while Florida grows its population and Miami puts them in flood prone areas, the state's flood risk grows.

This puts Miami in an interesting situation.  On one hand it advocate for a perspective of growing flood risk due to climate change.  On the other they seek to develop high flood risk areas while the state attempts to develop an "affordable" private flood insurance market.  These goals are incompatible.

It will be interesting to see how this continues to develop.

Tuesday, August 12, 2014

Are catastrophe bonds worth it?


Earlier this year, the Wall Street Journal had an article on catastrophe bonds.  At the end of the article, they mention that over the lifetime of the market (since 1996) the cumulative total risk is $51 billion.  At Artemis, they estimate the total risk at about $61billion.

The WSJ reports that total losses from natural hazard events is $682 million.  Assuming that some losses came from somewhere else too the total loss over the last 15 years is likely somewhere between $682 and $1B.  The latter is a nice round number so I will use it.

Over the last 10 years, the average yield on catastrophe bonds has been about 8% (dat from same WSJ article).  That is the money paid to investors in the bond.

So, estimated total paid out to investors since 1996 is somewhere around $3B (taking into consideration the $1B loss).

Since 1996, for every dollar an insurer pays the investors to make the risk worthwhile, they have seen a return of about 25 cents (all unadjusted dollars).

Obviously, this seems a good deal for investors.  It is a nice trickle of money from policyholders, to insurers, to the capital markets.  But what are the opportunity costs policyholders?

In recent years, CPIC has offered the largest catastrophe bonds ever.  This year, the bond is $1.5 billion.

With the assumed average 8% yield, if CPIC doesn't end up needing the bond, then it pays investors somewhere around $120 million.  If they do need the bond, they get $1.5 billion.

With at least some possibility that CPIC will exhaust their total claims paying capacity (bonds and all), is there something more productive that can be done with $120 million of policyholder money (aka taxpayers)?

Where resources are limited, such is the case with policyholder pocketbooks, and public policy is to manage risk for the public welfare, policy makers ought to consider if this scenario is an effective use of public funds.

Especially considering that capital markets are fickle- what is relatively cheap and available now can become scant and pricey in a matter of moments.

Would $120 million invested elsewhere have an improved return, reduce the total risk in Florida and thereby contribute to social stability over a longer term?

Perhaps...

Mitigation, infrastructure and education come to mind.  I have no doubt there are innovative ideas that could arise if the question was critically examined.

Wednesday, August 6, 2014

Miami, Sea Level Rise and the Resurrection of "Urban Blight"

Harvey Ruvin, the long serving Miami-Dade County Clerk of Courts, has been active in Miami-Dade County politics and environmentalism since at least the 1970’s.  As a county commissioner, early in his career, he sought to restrict building on Fisher Island to preserve the natural environment and create a public park.

At that time, there was a great deal of political controversy over how to develop Miami Beach. The fight was over how best to overcome "urban blight" on South Beach. One side wanted parks and community centered rejuvenation.  The other side wanted high-rise condominiums and tourist centered rejuvenation.

In his memoirs of sleazy South Florida politics, Miami Beach ex-Mayor Alex Daoud, reported what most Miami residents already know: real estate and tourism won the battle.

Perhaps, Mr. Ruvin had the foresight to understand the public costs of basing the area's economy on developing luxury private real estate.  Just a couple of years ago, the county approved $77 million of public funds to replace the water and sewer lines running out to the very private and populated Fisher Island.  

Currently, Miami-Dade County is actively replacing many of its water and sewer lines.  Since their original installment over 50 years ago, population in Miami-Dade has doubled.

Updating infrastructure is part of community living.  The built environment only lasts for so long and needs repair and replacement.  Some argue that nearly all of nation needs infrastructure updates because much of it dates back to around 1950- give or take a decade.

But where public financial resources are in limited supply, as they always are, questions arise about what should get fixed, when it should get fixed and who has responsibility for fixing it.

Today, Miami Beach is again facing tough decisions about its future development.  Current debate uses public concern over sea level rise in much of the same way debate in the 1970’s used urban blight.

Mr. Ruvin is again at center stage of the development debate as chairperson of the Miami-Dade Sea Level Rise Task Force.

The Task Force recently released a report using sea level rise predictions to support the need "not just to update, but in a sense, to reinvent our urban infrastructure."  

Like the Rorschach inkblot tests used by psychologists to understand a patient's motivations and thought processes, interpreting necessary actions from predictions of future sea level rise indicate the underlying interests of those using the predictions to advocate for public policy change. 

The Task Force is not the first to use estimates of coastal risk to encourage specific financial investment and land management practices.  But developing a land management plan that incorporates public concerns about the environment and community well-being is significant enough to warrant its own discussion regardless of concerns about changing flood risk. 

Public funds spent on reinventing infrastructure cannot be spent elsewhere such as, improving county schools, public parks or whatever the public would like to see in their community. 

Still, the sea level rise predictions bring up many important issues, moral and economic, that the South Florida public needs to discuss.  For instance,
·      Given the report’s use of a predicted two-foot sea level rise by 2060, is it reasonable to invest the public's limited financial resources into infrastructure for a city that is effectively (and rapidly) sinking?  
·      If the public is footing the bill for keeping the sea at a safe distance, who should benefit from the investment and what should that benefit look like?
·      What does adopting a larger view of flood risk mean for the equitable distribution of that risk in accordance with National Flood Insurance Program goals?

These tradeoffs are central for political debate.  Yet, they have been easily masked in discussions about flood science as issues of zoning, preservation and community were once hidden behind quick declarations of ill-defined urban blight.

Recently, Ruvin announced that Miami-Dade Commissioner Rebeca Sosa will be taking over his position as Task Force Chair.  Sosa has been active in Miami-Dade County politics since at least the mid-90's and served on several committees responsible for county planning and "revitalization."  Figures as much.

Monday, July 7, 2014

The non-problem of Citizens’ executives and their questionable ethics


Citizens Property Insurance Corporation has built itself a notable history of questionable ethics.  Most recently, South Florida newspapers have brought attention to the revolving door between Citizens’ executives and the private industry. 

A revolving door between public service and private interests is not unique to Citizens.  It is a common concern in nearly all aspects of US politics.  For example, personnel often move between journalism (the job of informing the public) and advocacy (the job of influencing the public). 

Former Vice President Dick Cheney served as Halliburton CEO in between many years of holding high-level public offices.  This revolving door caused great speculation over motivations behind US military action in Iraq. 

Let us not forget Florida’s own Governor, Rick Scott, who seamlessly moved between the private insurance industry and Florida public office.  Last year, his tie to Heritage Insurance Company was a much-discussed public controversy.

Citizens manages the largest hurricane risk in the world.  The job of running Citizens is demanding and its executives are powerfully influential in the global insurance and risk transfer industry. 

Public policy makers face very real challenges in finding executives with the skill and expertise required to run Citizens, but little interest in realizing their own full earning potential after working there.  Indeed, it is hard to imagine that such a person exists.

Given no obvious solution to the political revolving door so prevalent in our political system, why does Citizens’ CEO Barry Gilway seek to investigate the career paths of Citizens’ previous executives?

One possibility is that Governor Scott is up for reelection.  The governor is responsible for appointing two members of Citizens’ Board of Governors.  So, if Scott loses the election, the new governor could replace Gilway.   

Investigating Citizens is a timely show of symbolic politics.  While policymakers can do little to solve Citizens’ revolving door problem, Gilway can take credit for making ethical behavior a legacy of his management.  Perhaps this will discourage his potential successor from critically examining Gilway’s own career path after Citizens.   

Another possible explanation is that Scott, Gilway and/or others seek to establish a precedent that questions Citizens’ legitimacy and perhaps, builds a case for its eventual termination. 

Consider a hypothetical scenario where upon thoroughly investigating Citizens’ executives, the corporation’s inspector general, Bruce Meeks, finds that by, its very nature, the corporation cannot function by established conflict of interest regulations.  Such a finding sets the stage for political attack on the establishment of Citizens in the first place.

Whatever the reason, a spectacle about specific Citizens’ executives and their career history draws the energy and attentiveness of the public away from two far more fruitful underlying issues in Florida.

First, Florida’s democratic governing process is fragile.  Many South Florida residents will recall the election of 2012: the poorly managed waiting lines, unreasonably long ballot and shameful efforts to restrict voting rights, which received international attention.  There was the 2000 election debacle where Florida demonstrated all sorts of trouble counting ballots.  Also, last year, several Florida mayor arrests boosted the state’s reputation as a “hothouse for corruption.”

A struggling democratic process has impacts on managing public programs like Citizens.  When the process ensuring democratic accountability of elected officials is challenged, the public has difficulty managing the responsible behavior of the executives that elected officials appoint.   

Second, Florida’s economic goal of real estate development conflicts with the public goal of affordable property insurance.  This conflict underlies all debate regarding Citizens, its pricing, its management and its existence.  

These two problems are far more amendable to policy solution than attempts to socialize decision making about the career paths of insurance executives.  Paramount to resolving these problems is a renewed focus on the democratic accountability of elected officials and debate involving the public’s moral values regarding Florida’s economic policies. 


Political efforts that focus public energies on difficulties having no solution rather than underlying policy problems performs a disservice to society and further underscore Florida’s shaky democratic process.  This is where the unethical behavior lies.

Thursday, July 3, 2014

Florida Sea Level Rise Politics


While North Carolina seeks to manage the perception of sea level risk placed upon itself, Florida is all about their sea level rise.  Undoubtably, economic and political dynamics influence the different approaches the two states have taken to this particular coastal risk.

The image above shows a prediction of sea level rise for South Florida taken from a recently released report by the Miami-Dade Sea Level Rise Task Force.  

Notice the difference between the predicted sea level rise based on historic measurements and that based on all sorts of other stuff.  The difference in planning for 4 inches of sea level rise is likely different from planning on 2 feet of rise.  

Watching how North Carolina and Florida manage the debate about flood risk will certainly be interesting.  How they proceed will offer lessons of good ideas and bad ideas for other states and nations.  

Wednesday, June 25, 2014

North Carolina Sea Level Rise legislation


A couple of year's ago, North Carolina passed the HB 819 discussing the topic of sea level rise in the state.  However, note that North Carolina refers to the phenomena as "sea level change."

My understanding is the controversial bill amended somewhat the controversial existing legislation.  This caused quite the stir amongst climate change policy advocates and scientists involved in studying sea level rise.

Some excerpts of the legislation:
SECTION 2.(a)
§ 113A-107.1. Sea-level policy. 
(e) The Commission shall be the only State agency authorized to define rates of sea-level change for regulatory purposes. If the Commission defines rates of sea-level change for regulatory purposes, it shall do so in conjunction with the Division of Coastal Management of the Department. The Commission and Division may collaborate with other State agencies, boards, and commissions; other public entities; and other institutions when defining rates of sea-level change.
SECTION 2.(c) 
...The Commission shall direct the Science Panel to include in its five-year updated assessment a comprehensive review and summary of peer-reviewed scientific literature that address the full range of global, regional, and North Carolina-specific sea-level change data and hypotheses, including sea-level fall, no movement in sea level, deceleration of sea-level rise, and acceleration of sea-level rise. When summarizing research dealing with sea level, the Commission and the Science Panel shall define the assumptions and limitations of predictive modeling used to predict future sea-level scenarios. ... The Commission shall also compare the determination of sea level based on historical calculations versus predictive models. The Commission shall also address the consideration of oceanfront and estuarine shorelines for dealing with sea-level assessment and not use one single sea-level rate for the entire coast. ...
The legislation directs the Coastal Resources Commission to direct its science panel to write up an update to the  2010 report, "North Carolina Sea Level Rise Assessment Report." The science panel is made up of North Carolina scientists- mostly from government and universities.  The Coastal Resources Commission is made up mainly of business owners in the coastal region (and I think there are a couple of mayors).

The graph below is from the original 2010 report and provides estimates of future sea level rise in North Carolina based on historical measures.

     
The controversy comes from disagreement about what role North Carolina political interests should play in determining measurements of sea level risk.

Of particularly dispute, the Science Panel was instructed to use historic measurements of sea level rise to estimate future rise (though, it is unclear to me who exactly instructed them to do so).  Therefore, many estimates of sea level rise based on various assumptions about climate change, future earth and social conditions, etc. cannot be used.  

North Carolina's management of risk measurements is by no means unique.  

Florida does something similar regarding hurricane risk.  Standards set by the FCHLPM require that models approved for use base hurricane risk predictions on the historic HURDAT record and so, "near term" sorts of predictions cannot be used (despite their use on the international risk transfer market).  

Nor should we forget outright rejections of flood risk estimates by Florida, Alabama and Mississippi and hurricane risk estimates by Massachusetts.

What is most intriguing about North Carolina's method for controlling the idea of risk imposed upon itself is the political arrangement of doing so.

The expert science panel does not appear to have authority or autonomy to determine the best means of going about measuring risk.  It appears as somewhat of a capture of local business interests through its oversight by the Coastal Resources Commission.

Specifically, the legislation requires that the Commission and the Science Panel must work together and negotiate acceptable scientific reasoning and conclusions (See section 2c above).

Certainly, this ruffles feathers in the scientific community and those in society that value autonomy of the scientific process... or at least a guise of autonomy since is never truly "unfettered."

A better idea may be to have elected officials appoint an independent research panel of scientists with relevant expertise.   The reports this independent panel produces can then be used to help guide public debate about how much risk we wish to plan for given other public policy objectives.  

Pros/Cons, Costs/Benefits, and moral values to be maximized (e.g. public safety) are good tools for this debate.  

Tuesday, May 27, 2014

What Florida's SB 542 teaches us about catastrophe insurance in the US...


Recently, Florida passed SB 542 setting up the regulation of a private flood insurance market.  I think the wisdom of this can be debated.  Regardless, the wording of the bill highlights the the dynamics at play in determining the cost of catastrophic property insurance for flood and hurricane.  (The earthquake insurance market may be a little more like a traveling circus than like the more patterned dynamics of flood and hurricane).

Let's start with the introductory wording of the bill.  I have highlighted a few things.  Then, I'll say a few words about why the wording is interesting and what it demonstrates.

627.715 Flood Insurance.—An insurer may issue an insurance
199  policy, contract, or endorsement providing coverage for the
200  peril of flood on any structure or the contents of personal
201  property contained therein, subject to this section.
202         (1) The Legislature finds that:
203         (a) The National Flood Insurance Program (NFIP) is a
204  federal program that enables property owners in participating
205  communities to purchase flood insurance. A community
206  participates in the federal program by adopting and enforcing
207  floodplain management regulations that meet or exceed federal
208  floodplain management criteria designed to reduce future flood
209  risk to new construction in floodplains. The program was created
210  by Congress in 1968 because insurance covering the peril of
211  flood was often unavailable in the private insurance market and
212  was intended to reduce the amount of financial aid paid by the
213  Federal Government in the aftermath of flood-related disasters.
214  Since the creation of the NFIP, generally flood insurance
215  coverage has been unavailable for purchase from private market
216  insurance companies.
217         (b) The Biggert-Waters Flood Insurance Reform Act of 2012
218  reauthorized and revised the NFIP. The act increases flood
219  insurance premiums purchased through the program for second 
220  homes, business properties, severe repetitive loss properties,
221  and substantially improved damaged properties by requiring
222  premium increases of 25 percent per year until premiums meet the
223  full actuarial cost. Primary residences lose their subsidized
224  rates if the property is sold, the policy lapses, repeated and
225  severe flood losses occur, or a new policy is purchased.
226  Policyholders whose communities adopt a new, updated Flood
227  Insurance Rate Map (FIRM) that results in higher rates will
228  experience a 5-year phase-in of rate increases to achieve
229  required rate levels.
230         (c) The Biggert-Waters Flood Insurance Reform Act of 2012
231  also encourages the use and acceptance of private-market flood
232  insurance. The Legislature finds, however, that there has been a
233  long-term inadequacy of private-market flood insurance available
234  in this state. Such inadequacy suggests that the private market
235  in this state is unlikely to expand unless the Legislature
236  provides multiple options for the regulation of flood insurance.
237  In addition, the consumers of this state will be protected from
238  excessive premiums by the continued oversight of insurance rates
239  by the Office of Insurance Regulation and the continued
240  availability of flood insurance from the NFIP.
241         (d) The NFIP, as amended by the Biggert-Waters Flood
242  Insurance Reform Act of 2012, will prevent many property owners
243  from obtaining affordable flood insurance coverage in this
244  state. The absence of affordable flood insurance threatens the
245  public health, safety, and welfare and the economic health of
246  this state. Therefore, the state has a compelling public purpose
247  and interest in providing alternatives to coverage from NFIP by
248  promoting the availability of flood insurance from private
249  market insurers at potentially lower premium rates so as to
250  facilitate the remediation, reconstruction, and replacement of
251  damaged or destroyed property in order to reduce or avoid harm
252  to the public health, safety, and welfare, to the economy of
253  this state, and to the revenues of state and local governments
254  which are needed to provide for the public welfare.

Flood (and hurricane) insurance is not really about the flood and hurricane risk
What risk does this legislation seek to manage?  A gut reaction to this question is likely, "Flood risk, obviously".  But this is not really so.

The strong emphasis of this bill is on NFIP and what Biggert-Waters did to NFIP rates.  So strong is this emphasis that the bill begins with an entire paragraph on the history of the federally run NFIP.  The risk being managed by this bill is uncertainty surrounding federal decisions about NFIP rates and the potential effect these decisions may have on Florida's real estate heavy economy.

Certainly, much of Biggert-Waters was recently repealed by Obama and the passing of the Homeowner Flood Insurance Affordability Act.  But what about the next flood event that has Congress scrambling to appease the public by again scheduling to increase rates on flood properties?

To the extent that Florida can successfully encourage the private market to pick up flood risk while also controlling the rates charged then the state can buffer against Congressional fiddling with flood risk.
Thanks to ramseur78 on Flickr
By creating the goal of "affordable property insurance" for flood, Florida establishes a means to enable the public to participate in decision making about the size of flood risk they wish to insure against.  The public's perception of flood risk may be different from Congressional or market determinants of flood risk, but, then, that is precisely why this legislation was created.    

The state's residual market for hurricane risk (primarily), Citizens Property Insurance Corporation, shares the same wording of "affordable property insurance."  Legislators worded it this way for similar reasons- market judgements of hurricane risk were far greater than the public cared to manage with insurance.

Solutions to US catastrophe insurance woes do not necessarily relate to causes
Paragraph c, lines 232-236 establish a weird cause and effect conclusion.  True, private market insurance has traditionally been unavailable because, traditionally, insurers found flood insurance difficult to measure.  But, that this "suggests" the need for state rate regulation is a straw man.

Some would have argued that it "suggests" the need for a federal backstop.  It could also "suggest" the warrant of having a federal flood insurance program.  It could suggest power politics between the federal government and the insurance industry (sort of a "Yeah?! well make us provide flood coverage" mentality).   It could also "suggest" a need to revise land management and real estate policies.

That is, a lack of private flood insurance could suggest many things and the legislature's leap is not intuitive.  Leaps in logic, when imbedded into public policy, can result in policy that is unhelpful and possibly harmful.

Perhaps more interesting than why private market insurers have not historically provided flood insurance in the US is why they are suddenly excited to do so now.  In recent years, modeling methodology has warmed insurers up to the idea of covering flood risk.  With a growing comfort around flood modeling and a high demand for big risks by the capital market the insurance industry has been chopping at the bit for the US to release some of its flood risk to the private market.  Florida, lead by (unsettling) insurance savvy, Rick Scott, has done just that.  

Threats to the state and national economy are bipartisan.
After regulatory changes to Citizens rates in 2007 and the introduction of "affordable property insurance," the then governor, Charlie Crist, became notorious in the insurance industry.  He was, along with his orange glow, symbolic of all that was wrong with "political" ratemaking in Florida. In general, it was felt that the democrats had it out the for insurance industry.

(05/30/14: Well, it was and still is but with my reversal of Crist's party affiliations it may not really have much to do with Crist's actions...)

Yet, Rick Scott, heralded as an insurance industry mascot, has demanded affordable property insurance, as well.  This is made complete with legislative fiddling with regulatory requirements to get there.

The difference between the two governors is that Citizens is a public insurance facility whereas this state flood insurance legislation seeks to encourage private insurers to write flood.

However, I wonder how material the difference actually is.  Insolvent insurers, whether a public residual market or private market companies, are still a public problem and money to resolve the problem comes from the same public.

The point is that when the cost of insurance threatens the economy, whoever is in charge and whatever their partisan flavor, they give in to economic concerns.  Likely, rightfully so.

But it also demonstrates that ratemaking is a political process: from choosing science to go into a model, to choosing how to implement models, to choosing what rates to charge regardless of models and negotiating those decisions with the public, insurers, reinsurers and capital markets.

Charlie Crist: The (ex) Democrat that enabled
affordable property insurance for hurricane
5/30/14: Sorry!
The (ex) Republican, then Independent now Democrat
Rick Scott: The Republican that enabled
affordable property insurance for flood
















Insurance is intended to provide for the general welfare 
Finally, line 254 states what nearly all insurance legislation that I have ever read states: "...provide for the general welfare."


In many ways, insurance is a form of privatized government and provides for the economic stability and safety nets that we put government in charge of.  Jobs, the creation of capital, spreading risk over larger populations, etc are all benefits of using insurance instead of relying wholly on government.    

The successful implementation of an insurance regime is judged largely on how well general welfare goals are being met- detected mostly in the mood of the public.  If those goals are not being met (e.g. people can't hold onto their mortgages because insurance costs are too high and they are upset) then government steps in to provide an alternative.  

Therefore, the insurance industry as a whole has a responsibility to  and interest in meeting the needs of the public.  When it doesn't it faces great challenges in access to policyholders and limits on freedom to judge the characterization of risk for itself.