Monthly Archives: June 2010

Number games

Apparently liberal web site Daily Kos thinks its polling firm has bilked it, and it’s relying on a statistical analysis of poll results that appear to show some extraordinarily unlikely patterns.

The pollster, Research 2000, vigorously denied the accusations. And it is fighting the accusations hard, to the point of having its lawyer insist that another critic, Nate Silver of fivethirtyeight.com, cease and desist from his harsh commentary.

The analysis can be found here. And I think the analysis is worth summarizing. Of course, I don’t know whether any results or fabricated. Nor do I know what legitimate adjustments Research 2000 makes to its raw data. I think the discussion is important for actuaries and other number crunchers to understand.

Parts of the critique are tough to follow, in part because the authors – a political consultant, a retired physicist and a wildlife research technician – are trying to explain fairly sophisticated analysis in Everyman terms. That’s never easy. It’ll take a long post from me just to summarize their work.

Basically, the authors work off two principles. Continue reading

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Tort inflation: Steady today, but for how long?

Insurance Information Institute today published a paper Bob Hartwig and I wrote about the state of tort inflation in the United States. The short story – things are benign at the moment, but could heat up in a hurry.

The good:

  • Tort costs per person have been stuck at about $830 per person the past couple of years.
  • Securities class action settlements rose to $3.8 billion last year, but remain far below their peak at the popping of the stock bubble.
  • Malpractice costs have fallen, in nominal terms, four years running, a sign that malpractice caps work.

The not so good:

  • Court decisions in Georgia and Illinois threaten malpractice caps, and this could signal a new judicial trend.
  • The percentage of firms that expect to be sued is rising.
  • The plaintiff bar continues to search for “the next asbestos” or “the next Big Tobacco.” Current possibilities include Chinese drywall and global warming.

The entire study is here. An executive summary is here.

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QOTD: Non-insurance edition

Turns out my neighborhood housed a Russian spy cell. This surprised a lot of people, including Jessie Gugig, who told the New York Times:

They couldn’t have been spies. Look what she did with the hydrangeas.

P.S.: She was joking.

Top New Orleans chef sues BP over seafood losses

Via Business Insurance.

Basically, the chef of one of Zagat’s top 5 N.O. restaurants wants a class action suit because of the loss of fresh, local ingredients. I find that hard to argue with.

You know, if I were BP’s risk manager, I’d just hang my head and cry.

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Claim of the month

A moment, please, for Steven Harder of who fell from an excavator in 2004 and suffered a brain injury.

Over the years he received $414,000 in workers’ comp claims from State Fund Insurance. And he sued the manufacturer of the equipment he had been using when the accident happened.

His eyes became extremely sensitive to light, so sensitive that he had to wear dark glasses all the time, even during visits to the eye doctor. And he could not walk well. As his lawsuit progressed, he arrived at court in a wheelchair.

The wheelchair was probably a mistake. Claims Journal takes it from here:

At a lunch recess, the Judge Pro Tem witnessed Harder walking to a restroom with a normal gait and without the assistance of a wheel chair or any other type of assistance, the DOI said.

Undercover video was obtained of Harder on Sept. 10, 2008, showing him wearing a wet suit and engaging in mining activities, the DOI said. It was noted that during these activities, Harder was not wearing a hat or dark glasses. He was observed using a cane only occasionally.

Turns out Harder wasn’t injured on the job, the California Department of Insurance alleges. He was hurt in an auto accident shortly before and staged the work accident so he could file a claim.

He’s in the Yolo County Jail, charged with insurance fraud.

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Shaky

University of Illinois models a Big One along the New Madrid fault, which runs from Southern Illinois to northeastern Arkansas. The numbers are beyond staggering:

  • 86,000 casualties
  • 7.2 million homeless
  • 2 million in temporary shelters
  • 2.6 million homes without electricity
  • 425,000 ruptured pipelines
  • 3,500 damaged bridges, with 15 major bridges unusable (remember, this is along the confluence of the Missouri, Mississippi, Ohio and Cumberland rivers).
  • $300 billion of direct economic losses.

Insured losses are usually less than economic losses because public infrastructure like roads and bridges aren’t insured. However the $300 billion estimate doesn’t include business interruption losses. The study estimates indirect losses, of which BI would be a part, would be around $600 billion. So I don’t think it’s a stretch to call this a $100 billion insurance event.

By contrast, Katrina, the worst U.S. catastrophe, generated about $45 billion in insured losses, adjusted for inflation. The 1994 Northridge earthquake came in at $18 billion.

Missouri and Tennessee absorb most of the wallop, since St. Louis and Memphis are the biggest nearby cities.

The entire study – all 350 megs of it – can be downloaded here.

Those who take the whistle-past-the-graveyard approach to ERM will prefer the Purdue and Northwestern experts. They believe the New Madrid fault is shutting down.

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Fixing Social Security

On Saturday, thousands of Americans spent a day learning about the nation’s fiscal problems and voted on the following solutions:

  • Raise the limit on taxable earnings so it covers 90% of total earnings.
  • Reduce spending on health care and non-defense discretionary spending by at least 5%.
  • Raise tax rates on corporate income and those earning more than $1 million.
  • Raise the age for receiving full Social Security benefits to 69.
  • Reduce defense spending by 10% – 15%.
  • Create a carbon and securities-transaction tax.

I’m not too interested here in the politics of fiscal policy, or whether it is wise to tighten spending in a weak economy. Rather, I’ve boldfaced two items that really only apply to fixing Social Security, so I can link to AAA’s Social Security game.

The game lets you try to fix Social Security’s current problems, either through benefit cuts or increases in taxes or other funding sources. It takes about two minutes to play.

Now my favorite approach ……..

  • Increase the payroll tax by a half-point on workers and employers.
  • Increase the earnings cap – the maximum amount subject to Social Security tax – to $127,500.
  • Bring new government employees into the plan.

…….. solves 98% of the funding problem. Nudging the payroll tax or the earnings cap a bit higher would solve the problem completely. My point: Social Security has a bit of a problem, but it’s not nearly the bloodbath that some have portrayed. That’s why I prefer a solution that doesn’t cut benefits or raise the retirement age.

The flip side, of course, tells you that solving Social Security’s problems would not really make a serious dent in the nation’s long-term fiscal situation. The solution lies in fixing health care.

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June 25: Actuarial roundup

  • Trading in box office futures died in the finance reform bill struck early Friday morning. Recall I was having fun with the idea here.
  • I’m a little late to chime in, but as Post Online summarizes, Florida is making it easier for foreign reinsurers to underwrite U.S. business, and that’s part of a nationwide trend. Foreign reinsurer had to post collateral equal to their liabilities to write U.S. business. Now Florida takes the reinsurer’s financial strength rating into account. This helps Florida – its hurricane exposure means it needs every reinsurer it can get. It also helps the foreign reinsurer, obviously. U.S. reinsurers take another one on the chin.
  • State-based cat (re)insurers don’t charge actuarially sound rates, General Accountability Office finds. (Florida, we’re looking at you.) III summarizes the study. Actual study is here.
  • Obama warns health insurers not to jack up rates ahead of Obamacare’s rollout.
  • Warren Buffett didn’t win a $30 million bet against France in the World Cup, despite the reporting here. It sounds more like he put up a $30 million limit that would pay if the French hadn’t melted down like butter at Three Mile Island. Nate Silver had France’s a priori probability of winning World Cup at 1.92%. Off that basis, Warren probably charged between 2 or 3% of the limit, or between $600,000 and $1 million.
  • 34 seconds: Speaking of World Cup, famed announcer Andres Cantor calls Landon Donovan’s goooooooooolllllll. (h/t esteemed Neil Young biographer Dan Durchholz)
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Can’t anybody around here add?

Ugh.

In Aetna’s recent rate filing, the insurer said its plan met the 70% minimum. But once the errors were identified, medical-claim spending fell below the 70% requirement. The proposed rates were higher than they should have been, officials said. Aetna notified regulators of its mistakes this week, about the same time the state’s consultant reported the problems.

“There were multiple errors … in the way [Aetna] annualized premiums and in the compounding of the rate increase,” said state Insurance Department spokesman Darrel Ng.

And just a sad coincidence, I’m sure, that these errors, and Wellpoint’s, both indicated a higher rate.

Seriously, this is bad news for the actuarial profession. It is our job to properly estimate rates. I know the calculations can be intricate, but that’s why we make good money.

And from a public policy perspective, health care costs will only come under control if everybody in the system screws their bolts down tight. That of course includes actuaries.

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Quinn’s odd assets

This fairly solid Irish Independent piece is fairly upbeat on the future of Quinn Insurance, the high-profile Irish insurance failure.

Now maybe you don’t care so much about Quinn, but it is high profile in Ireland, and it’s high profile to me, mainly because it’s the source of actuarial merriment. Here, for example, are some assets that the Financial Regulator thinks will be sold:

  • A hotel in the Czech Republic.
  • A windfarm.
  • A landfill.

Well, that’s putting the old premium dollars to work. A typical p/c insurer might invest in something a bit more liquid, perhaps, so it can pay off if there’s a run of claims.

The Independent is optimistic because the Irish business seems to have been profitable; it was an expansion into UK at insufficient rates that was driving losses. (Basically, the company was burning its way into the market.) With that problem fixed, the company’s outlook is good, the newspaper concludes.

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