For the quarterly Council of Insurance Agents and Brokers survey, the chart shows decreases ebbing:
Full survey results here (pdf).
Snagging some confidential documents from the Department of Insurance, Sarasota Herald-Tribune reporter Paige St. John questions the financial strength of several leading Florida homeowners insurers, including the state’s largest private HO writer – Universal P&C – and the Florida arms of Allstate and State Farm.
(Let’s add quickly: Allstate Florida and State Farm Florida are subsidiaries of much larger organizations. So the supposed threat to the Florida companies doesn’t extend to the parents.)
The problem: According to the documents, those companies don’t have the capital to withstand a 100-year hurricane. More than a half-dozen smaller companies have the same problem.
How does this happen? Looser regulation, according to the report. Until 2010, the state required them to show their ability to withstand a 100-year storm. But according to St. John, they gamed the process. Insurance Commissioner Kevin McCarthy removed that requirement, hoping premiums would fall.
And some insurers appear to have gamed the system. They used a tough model to set cat loads for their rates, resulting in higher rates. But they turned to a milder model for the report the state requires.
Other companies ignored the impact of demand surge, the very real inflation in construction costs that follow a storm.
Insurers defend themselves:
Almost all of the companies disputed the state-required test and said they could survive based on their own methods that predicted substantially smaller hurricane losses.
If the big one hits, St. John’s report concludes, hundreds of thousands of policyholders could lose their insurers, and the remaining insurers and taxpayers would end up with the bill.
Of course, the reporter herself appears to have played both ends of the cat modeling game. She excoriated insurers for depending on them to set rates, implying rates are too high. Now she criticizes insurers for failing to rely on them enough, implying insurers’ capital is too low.
Rather than wonder what the reporter really believes, I’ll just say that all insurers have an important interest in the capital adequacy of every insurer.
I’ll be on assignment, as they say, for the next week, so light posting.
The British phone hacking scandal is a classic tale of how reputational risk can cripple a company. Even so, I don’t think News Corp. will be ramping up an ERM program.
Background: Rupert Murdoch’s News Corp. since 2005 has been fighting allegations that its News of the World newspaper hacked into the cell phones of newsmakers, up to and including the British Royals.
Phone hacking is illegal; one reporter goes to jail. The company pays a settlement to a prominent soccer player over another hack. The company says these were isolated events.
They weren’t. The practice dates back to 2002, when the company hacked into, and deleted, the phone messages of a missing 13-year-old. The child had been murdered, but the hacking gave the parents forlorn hope – their child must be alive, they reasoned. She was checking her messages.
And the company had been paying hacking victims secret settlements for years.
The scandal blew up this summer. So far, top News Corp. executives have resigned, a major acquisition (BSkyB) has been called off, and News Corp. stock is reeling.
CEO Rupert Murdoch and his son faced a grilling before Parliament. They pleaded ignorance.
Usually, ERM is associated with financial companies, but here is a nonfinancial company that could have used it.
But would it have wanted it? Long before this summer, an ERM program would have aggregated all the hacking settlements and presented them on a spreadsheet. It would have labeled the incidents as key reputational risks. It would have been labeled as likely to emerge. (Believe me, journalists gossip.) And the size of the emergent risk would have been considered great.
All of this information would have been reported to the board, regularly, for several years. Given all that, would Rupert Murdoch be able to testify thus:
The 80-year-old billionaire described himself as “absolutely shocked, appalled and ashamed” when he first heard allegations two weeks ago that the tabloid had ordered the hacking of a cellphone belonging to a 13-year-old British schoolgirl who was kidnapped and later found slain in 2002.
But he refrained from describing such illegal tactics as “endemic” at News International, the British subsidiary of his media giant News Corp., and when asked if he bore ultimate responsibility, as News Corp.’s chairman, for what happened at the News of the World, he replied succinctly: “Nope.”
Those responsible, he added, were “the people that I trusted to run it and then maybe people they trusted.” He described himself as the best person to lead his company through the crisis.
Madison – The state will pay nearly $234 million to settle a bill on a past raid to a state medical malpractice fund, Gov. Scott Walker announced Wednesday.
The state Supreme Court last year ordered the money be repaid after finding that state officials in 2007 had illegally raided $200 million from the Patients Compensation Fund, which is intended to compensate victims of medical malpractice and their families. An additional $33.7 million was added to cover interest and lost earnings for the fund.
I’m not sure the state needs a medical malpractice fund at all, given the private market does a pretty good job, even at the higher layers the Wisconsin fund sells. (Medmal rates have been falling for maybe five years.)
I think government can play a productive role when markets are troubled. Flood insurance and Florida homeowners are examples. One struggles with adverse selection. The other has an affordability problem.
But the insurance solutions need to be market based. The government insurer should behave like a real live insurer – charging adequate rates and creating a stable financial base.
That means the surplus is there for the policyholders, not the politicians, a la Wisconsin. And it means the surplus needs to be adequate to the risk underwritten. At Florida’s Citizens Property, it’s not. (A recent bond offering lets the company cover something close to a 1-in-100 year hurricane, but I think 1-in-1,000 is where it should be.)
The alternative is a sort of political playpen, where political considerations shunt money to other causes or create perverse subsidies. The state of Wisconsin, for example, raided its medmal insurer to balance its own budget. Citizens forces everyone in the state to subsidize coastal properties.
If the government wants to subsidize, say, living in a floodplain or in a high-rise along the coast, it has plenty of opportunities to do so without gumming up insurance markets.
In J-school, you learn to lead with your best stuff. So:
ACE’s allegations range from the facially inaccurate to the apparently clairvoyant, but they all boil down to one evident principle: ACE wishes it had signed a different contract.
From that, I think you can tell the writer – New York Life – is in a snit. The dispute centers on the amount ACE will pay for a New York Life’s Korean subsidiary. It’s playing out in New York State Supreme Court, and SNL Financial has details behind its firewall.
ACE agreed to pay $74.7M for the unit, subject to post-closing adjustments, part of a much larger deal for New York Life Insurance Worldwide. These adjustments cover issues that arise after the original deal is struck – a tiny accounting adjustment is uncovered, or some event changes the value of the company. The adjustments are usually trivial.
Not this time.
ACE says the price should come down more than 25% – $20.9M, citing accounting glitches New York Life uncovered after the deal was struck.
New York Life does not agree. It says the price should go up $17.7M.
So now you have two parties $39M apart on a $75M deal. A gap like that, the deal should die. Instead, it has gone to court.
But the dispute isn’t over the sales price – that will come later. For now, the companies are arguing whether the dispute should end up in court or in an arbitration.
Like most insurance deals, this one had an arbitration clause – sending contract disputes to an arbitration panel, in lieu of court.
ACE argues that in this unique circumstance, arbitration would cause the famed irreparable harm. New York Life gets shirty at the thought:
As ACE well knows, however, the parties are bound to the contract that they signed, not to the imaginary one that ACE now wishes it had negotiated. Not only does the contract between the parties not limit the purchase price adjustment procedures in the myriad ways concocted by ACE in its complaint, but it contains an explicit arbitration provision for disputes exactly like the one at issue here.
No surprise that NY Life worries a court date could cause it irreparable harm.
Slow news this week, as summer doldrums set in.
Print machine manufactures a working wrench – in color!