March 19: No fun in the Florida sun

The lede:

Some interesting reporting in the daily press about the Florida HO mess. The story is important, but I wish the reporter had taken another step back. Instead of writing about dastardly gents making off with our fair premiums, I think she should look at how a dysfunctional market (rates seem high to the consumer but are half what they should be) becomes a playground of opportunity. That might be a lot to ask of a daily newspaper, though.

An actuary, risk manager or anyone else in P/C might see the writing as breathless – (“My stars, Captain Butler! What is this reinsurance the Yankees have?!”) – but it is extraordinarily hard to write about capital flows in layman terms. I think the reporter understands the issues better than the conventions of newspaper journalism allow her to reveal.

Meanwhile, it can be fun trying to figure out what is going on in some of the transactions, like this deal:

In 2007, one of the reinsurers with which United Property and Casualty did business was a Grand Cayman Island reinsurer called Caymaanz.
What made the transaction stand out was how much United paid for reinsurance from Caymaanz.
In return for $6.5 million in storm protection, the Florida property insurer paid Caymaanz $6.5 million — $5.5 million for the coverage and $1 million for the purchase of Caymaanz stock.
If there had been a hurricane, United would have gotten back essentially what it paid in. Without a storm, Caymaanz and its owners walked away with an untaxed, unregulated profit. Don Cronin, chief executive of United, said he did not remember what United made on the deal.

Anyhoo, what really happened there? And from an actuarial perspective, where is the risk transfer? It sounds like a $6.5 million deal for $6.5 million protection with like a 90% profit commission and – I think this would be key – one free reinstatement. Without the reinstatement, it’s a lot harder to pass risk transfer, I would think, unless you’ve got a big expense ratio, and I don’t think this deal has much of a ceding commission, as that likely would have been mentioned.

I don’t price a lot of cat business, but it might help to know the attachment point, too.

Maybe the reporter didn’t see the importance of expenses. Or maybe she just wasn’t interested in the risk transfer angle. There might be some tax implications that she’s not interested in, or just isn’t aware of.

And the stock purchase is, well, innnnnteresting. I think the value of a small Cayman cat reinsurer might – help me out here – waver if a big hurricane hit Florida. I’m no stock analyst, but I know a bit about enterprise risk management, and this makes my spidey-sense tingle.

This story is part of a series with other pieces here and here and here. The Aon study the series refers to – a more clinical look at Florida’s HO market – can be downloaded here.

Update: Demotech, an actuarial consultancy that pores through the Florida market, responds.


  1. About $5B seems to be the central estimate du jour for the Chilean quake, with another couple Bill for Xynthia, so this year in cats is shaping up to be a lot worse than 2009. Oh, and a big New York quake scares me – not this year, but just in general, as I think a lot of homeowners will call their Congressman after they find out they have zero coverage.
  2. Tillinghast’s CLIPS survey: Rates were flat in Q4. Tillinghast’s is an apples-to-apples study, looking at renewal prices on expiring, so perhaps a bit more robust than the insurance brokers and agents’ study.
  3. The cavalry rides into the sunset.
  4. Career advice for actuaries. Oh, and get your handicap into the teens.
  5. What kind of job triggers a workers comp Viagra claim? If you click through the links to the court reports and think about proximate cause, it almost kind of makes sense, in an almost-kind-of way.
  6. A Harvard kid analyzes the CDO meltdown. Conclusion: bad underwriting.
  7. Obligatory math-nerd-picks-March-Madness post.
  8. What can capital modelers learn from zombie research?

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