Transcript sccompetitivealliance.org

Alabama Affordable Homeowners Insurance Commission
Presentation of
J. Robert Hunter, FCAS, MAAA
Director of Insurance
April 11, 2012
Bob Hunter’s CV
• Federal insurance Administrator under Presidents Ford and Carter
(ran the National Flood Insurance Program among other duties)
• Also served FIA as Chief Actuary
• Texas Insurance Commissioner
• Executive committee Member NAIC, Vice Chair Western Zone
• Advisor to the state of Florida after Hurricane Andrew and after
2004/5 hurricanes
• Advisor to the California Earthquake Authority
• Fellow of the Casualty Actuarial Society (by examination) and
Member of the American Academy of Actuaries
• Actuarial Supervisor: Insurance Services Office
• Schraeder-Nelson Publications Award; article of the year for Enron’s
Impact on State Insurance Regulation, Regulator Magazine, Insurance
Regulatory Examiner’s Society 2002; Same award in 2007 for How
Regulators can Return P/C Insurance Industry Profits to Reasonable
Levels.
2
A BRIEF LOOK AT CFA’s STUDY
“THE INSURANCE INDUSTRY’S INCREDIBLE
DISAPPEARING WEATHER CATASTROPHE RISK”
(How Insurers have Shifted Risk and Costs
to Consumers and Taxpayers)
3
P/C INSURANCE ECONOMIC CYCLE
25.0%
20.0%
Op. Income as % of Premium
15.0%
10.0%
5.0%
0.0%
1967196919711973197519771979198119831985198719891991199319951997199920012003200520072009
-5.0%
-10.0%
4
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
PURE NET LOSS RATIOS
120.0%
100.0%
80.0%
60.0%
P/C L/R
HO L/R
40.0%
20.0%
0.0%
5
YEAR
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
S
SURPLUS
$700
$600
$500
$400
$300
$200
$100
$0
6
LEVERAGE RATIO
NPW/SURP
3.00
2.50
2.00
1.50
1.00
0.50
0.00
YEAR 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
7
Implied Excess (Deficit) Capital
Assuming Premium/Surplus Ratio = 0.9:1
Excess/(Deficit) Capital (Policyholder Surplus)
100
50
2000-2002: Tech
bubble bursts,
9/11, high
underwriting
losses erode
capital base
21.6%
2006/07: Low CAT losses,
strong underwriting
results since 1940s
increase capital
14.4%
13.4%
2009-10: End of
financial crisis,
rising asset
prices. modest
u/w losses
push capital to
record levels
Annual Change in
Policyholder Surplus
$81.9
25%
20%
$41.7
$22.9
15%
10%
0
8.2% ($10.8)
($10.6)
-50
-5.1%
($65.4)
-150
2000
2001
6.2%
-1.5%
2002
2008: Financial
crisis causes
sharp drop in
capital
($76.5)
($103.0)
($124.6)
2003
2005: Katrina, Rita, Wilma
produce record CAT losses
8.9%
($32.7)
($49.2)
-100
-8.8%
12.3%
-12.0%
5%
0%
-5%
-10%
-15%
2004
2005
Capital Excess (Deficit)
2006
2007
2008
2009
2010
Annual Change in Capital
Record Policyholder Surplus (Capital) Has Resulted Significant Excess Capital in the
P/C Insurance Sector As of Year End 2010. Deteriorating Underwriting Losses, Higher
CAT Activity, More Modest Market Returns Will Likely Shrink Excess Capital in 2011.
Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has
$74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.
Source: Insurance Information Institute calculations from A.M. Best and ISO data.
* Net Premiums Written
“Review and Outlook for the P/C Industry.” August 10, 2011, Presentation given by III President Robert
Hartwig to the Vermont Captive Insurance Association (Slide 73)
8
HOW DID P/C INSURERS ELIMINATE
HURRICANE RISK?
1. Reinsurance and risk diversification.
2. Hollowing out of coverage in the homeowners insurance policy.
*Hurricane Deductibles of 2%, 5% and even more
*Caps on replacement cost (even if demand surge takes place)
*Eliminate coverage for certain items (such as if a home becomes
a non-conforming use; mold)
*Anti-concurrent causation clause
3. Move to models for pricing with astonishing rate increases at coasts
4. Shifted high risk properties to pools
These steps shift risk either back to people or to taxpayers. For example a 5%
deductible instead of a $1,000 deductible on a $200,000 home would mean
$9,000 more front-end cost to a homeowner, which could be part of a disaster
Relief claim.
10
TOP CATASTROPHES IN USA
EVENT
PRE-TAX POST TAX
2010 DOLLAR LOSS
1. Hurricane Katrina, August 2005
$45.5 billion $29.6
2. World Trade Center, Pentagon terrorist attacks, September 2001
22.9
14.9
3. Hurricane Andrew, August 1992
22.4
14.6
4. Northridge, California earthquake, January 1994
17.3
11.2
5. Hurricane Ike, September 2008
12.7
8.3
6. Hurricane Wilma, October 2005
11.4
7.4
7. Hurricane Charley, August 2004
8.5
5.5
8. Hurricane Ivan, September 2004
8.1
5.3
9. Hurricane Hugo, September 1989
6.7
4.4
10. Hurricane Rita, September 2005
6.2
4.0
The catastrophes were ranked by III based on size of loss in 2005 dollars, which we do not display here.
What is displayed is the actual dollars in the year of the event. We calculate the post-tax figure by
deducting the corporate tax rate of 35 percent.
Source: Insurance Services Office (ISO); Insurance Information Institute (See
http://www.iii.org/facts_statistics/catastrophes-us.html). (Ranked on constant dollar cost to insurers)
11
INDUSTRY ULTRA SAFE
Even if all of these top ten catastrophic events,
including the September 11, 2001 attack, the
Northridge Earthquake, and the top eight
hurricanes, had occurred in the last year and had
been paid for last week (a total of $162 billion in
2010 dollars after tax), the property-casualty
industry surplus would still be at $418 billion and
the leverage ratio would still be at an ultra safe ratio
1.0.
[The ratio 1.0 is calculated as follows: $430 million in premium divided by ($580 million in
surplus less $162 million in assumed after-tax loss) Data on Net Premiums Written and
Surplus for all insurers is from A. M. Best Aggregates and Averages, 2011 Edition, Page 369.]
12
WHO PAYS WHEN INSURERS DO NOT?
Consider a hypothetical $100,000 home that incurred different levels of wind damage
under the Hurricane Andrew compared to Hurricane Katrina. Assume the home had a $500
deductible under Andrew and a 5 percent deductible under Katrina. If the home was in a
flood plain and not elevated, damages that totaled 50 percent of the home’s value would
trigger a “non-conforming use” under the National Flood Insurance Program and the home
would have to be upgraded to withstand a “100-year” flood. If such an improvement costs
$10,000, the damage situation with $50,000 in losses would be:
Benefit after Deductible
Damage Andrew
Katrina as a % of Andrew
Katrina
$10,000 $ 9,500 + $1,000 + $10,000
$ 5,000
(Consumer pays $500 in Andrew; $6,000 in Katrina)
24.4%
$50,000 $49,500 + $1,000 + $10,000
$45,000
(Consumer pays $500 in Andrew; $16,000 in Katrina)
74.4%
How much of this would end up being paid by taxpayers is unclear, but some would.
13
SOME OTHER SLIDES TO CONSIDER
1. III Presentation
14
FIRST NINE MONTHS OF 2011 FINANCIAL RESULTS
($ Billions)
Net Earned Premiums
$323.8
Incurred Losses (Including loss adjustment expenses)
Expenses
93.6
Policyholder Dividends
1.1
Net Underwriting Gain (Loss)
Investment Income
Other Items
264
-34.9
36.5
1.7
Pre-Tax Operating Gain
3.3
Realized Capital Gains (Losses)
Pre-Tax Income
5.5
8.8
Taxes 0.8
Net After-Tax Income $8.0
Surplus (End of Period)
Combined Ratio
$538.6
109.9
Source III @ http://www.iii.org/articles/2011-first-nine-months-results.html
15
$880
$879
$853
$849
$848
US
HI
ND
NE
NJ
$789
$881
MO
IL
$892
AK
$794
$893
CO
$800
TN
$919
$970
SC
MN
$987
AL
$919
$991
KS
AR
$1,016
CT
$922
$1,021
NY
CA (4)
$1,035
$1,069
RI
$1,000
MA
$1,069
DE
$1,200
$1,123
Top 25 States
$1,185
$1,400
$1,430
$1,460
$1,600
$1,511
Average Premiums For Home Insurance
By State, 2009* (1)
$600
$400
OK
MS
LA
FL (3)
$0
TX (2)
$200
*Latest available.
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the
policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: NAIC; Insurance Information Institute. III Slide
16
Average Expenditures For Auto Insurance
By State, 2009
$741
$738
$738
$728
MS
SC
IL
$785
US
CO
$786
HI
$754
$811
PA
GA
$815
WV
$754
$826
WA
$800
CA
$837
$897
AK
AZ
$913
MI
$860
$929
MD
TX
$944
NV
$860
$952
CT
MA
$969
$1,006
FL
RI
$1,021
$1,000
DE
$1,099
LA
$1,057
$1,101
NJ
$1,200
$1,128
Top 25 States
$600
$400
NY
$0
DC
$200
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
17
Source: © 2010 National Association of Insurance Commissioners. III Slide
Average Expenditures For Auto Insurance
By State, 2009
$655
$652
$646
$634
$623
$620
$616
$610
$598
$591
$578
MT
AL
VT
TN
WY
IN
OH
NC
ME
WI
KS
$510
$656
AR
ND
$667
VA
$521
$668
MO
SD
$680
OK
$532
$694
MN
IA
$699
KY
$555
$713
NM
ID
$716
UT
$559
$718
NH
$600
NE
$723
$800
OR
Bottom 25 States
$400
$200
$0
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
18
Source: © 2010 National Association of Insurance Commissioners. III Slide
ALABAMA PERSONAL LINES PREMIUM
BELOW NATIONAL AVERAGE
NAIC data shows total 2009 premiums as follows:
Line
Auto
Home
Total
USA
AL
$785
$880
$1,665
$652
$987
$1,639
The home and auto combined premium is lower in
Alabama than USA.
19
SOME OTHER SLIDES TO CONSIDER
1. III Presentation
2. DOI Presentation
22
INSURANCE INDUSTRY RESULTS
• Return on Net Worth for 2000-2009:
–
–
–
–
Property/Casualty Industry = 6.3%
Avg. of 301 other industries = 9.4%
P/C Industry ranked 200 out of 302* industries
P/C Industry ROE was lower than the 301- industry
average for all 10 years
* # of industries in S&P’s COMPUSTAT database for which 10 years of data was available.
AL DOI Slide 13
23
P/C Insurance Below Average Risk and
Requires Lower Returns on Equity
Beta – sensitivity of stock price to market = 0.97 when 1.00 is average. P/C
Insurance Industry risk below average
Financial Safety Index– = 1 when 1 is lowest risk on scale of 1 to 5. P/C
Insurance Industry risk below average
Stock Price Stability – = 83 when 50 is average and 100 is safest. P/C
Insurance Industry risk below average
Industry should have lower ROE than Fortune 500 because it is lower risk.
Also, it is not a selected group of top performers like the 500 is. Also, the data
include large mutuals like State Farm who have lower returns because they do
not service stockholders. Also, the base for measurement of ROE, equity, is
excessive for P/C insurers.
24
No wonder then, when Investment Advisor Seeking Alpha “used Morningstar
Direct to create an equal-weighted P&C insurance index (of) the largest and
highest-quality P&C insurance names and those with a long trading history”
they found the P/C industry “a 12.4% annualized total return from 1973 to
2010, compared with a 9.8% annualized total return for the S&P 500 during
the same time frame” Apples to apples, P/C insurers make more than S&P
500 even though they have less risk! EVEN SHOWING NO UNDERWRITING
PROFIT!
It’s also no wonder that Warren Buffet reported this in his 2011 letter to
shareholders:
“I believe it likely that we will continue to underwrite profitably in most –
though certainly not all – future years. If we accomplish that, our float will be
better than cost-free. We will profit just as we would if some party deposited
$70.6 billion with us, paid us a fee for holding its money and then let us invest
its funds for our own benefit.”
25
INDUSTRY HOMEOWNERS RESULTS
Homeowners Return on Net Worth: 2000-2009
Louisiana
Mississippi
Missouri
Kentucky
Alabama
Arkansas
Georgia
Nebraska
Tennessee
Texas
Oklahoma
Florida
W. Virginia
Virginia
N. Carolina
S. Carolina
-32%
-29%
-12%
-9%
-8%
-7%
-7%
-7%
-5%
-2%
-2%
0%
+5%
+10%
+15%
+21%
Countrywide
+5%
AL DOI Slide 14
26
INDUSTRY HOMEOWNERS RESULTS
•
Alabama’s -8% average Homeowners ROE over the last 10 years means that if a company had
started with $1 billion in net worth 10 years ago, today the company would only have $434
million net worth remaining.
•
Companies must deploy their capital / net worth where they can achieve a reasonable return
for their investors. Clearly a -8% average ROE does not make Alabama an attractive
investment for companies.
•
On the Coast, approximately 70% - 80% of the Homeowners policy premium is required to
cover wind losses. Upstate it is only about 20% - 35%.
•
A company’s Homeowners ROE can be improved in several ways:
– Raise rates
– Reduce the company’s exposure to loss by raising deductibles or excluding wind
coverage
– Shift to writing more policies Upstate and fewer policies on the Coast
– Focus their coastal writings on homes that have been fortified; Improve building codes
to lower the damageability of houses; retrofit homes to higher building standards
DOI Slide
27
COASTAL
STATE
Maine
New Hampshire
Massachusetts
Rhode Island
Connecticut
New Jersey
New York
Delaware
Maryland
Virginia
North Carolina
South Carolina
Georgia
Florida
Alabama
Mississippi
Louisiana
Texas
Average Coastal
Home Ins.
2001/10
Return NW
12.7%
9.2%
17.6%
20.6%
20.2%
12.5%
18.1%
18.4%
9.4%
12.2%
15.4%
22.3%
-7.1%
-13.1%
-7.2%
-29.2%
-25.4%
0.4%
5.9%
Would you say the SC profits are excessive?
Would you say the AL profits are inadequate?
Are Coastal profits near right, even in a decade with Katrina?
28
Question for DOI
• The Alabama DOI claims that the April 27 tragedy was a 1-in-250
year is based on tornado models run on a “countrywide basis,”
according to AON slide #5. Is the AON statement correct? If so, why
did DOI run tornado models on a countrywide basis, and does it
require hurricane modeling to be run on a countrywide basis?
• News articles suggested that the April tornadoes represented a 1in-20 year event. Aon explained to the DOI that this was based on
the probability of another similar event happening somewhere in
the country. When the DOI asked what the probability would be
of the April tornadoes re-occurring in Alabama, Aon told the DOI
that the AIR tornado model suggested it was a 1-in-250 year
event, and the RMS model suggested it was a 1-in-10,000 year
event. So the DOI result was based on the Alabama model, not
the countrywide model. Aon has acknowledged that their slide
was incorrect regarding this issue.
29
Question for DOI:
• Accuracy of premium rates being used is questionable since
they were developed based upon modeled projected
hurricane costs which the modelers have admitted are
erroneous and overstated by over 40% for coastal Alabama.
• The DOI doesn’t believe modelers have said the models
are erroneous…..they have said that based on new data
they have revised their models, which, in the case of RMS,
has lowered the estimated losses on the coast. In the past,
RMS estimates on the coast have been substantially
higher than the AIR estimates; now they are lower than
AIR estimates. Each insurer must decide whether the AIR
or RMS models better reflect their exposure to loss. Some
insurers use an average of the two models since they are
not sure which model is better, while some insurers only
use one model.
30
Question for DOI:
• Public has little access to insurer data in order
to make a meaningful appeal to a rate
increase.
• Current statute maintains that all actuarial
data, projections, estimates, etc. are
proprietary trade secrets.
31
Rate for $150,000 home -- HO-3
Company
AL Market
Birmingham
Mobile w/ wind
Tuscaloosa
35216
36608
35401
$917
$2,079
$1,206
30.2%
Alfa Mut Ins
$1,043
$4,169
$1,047
15.6%
Allstate Ind
$1,026
$1,193
$994
6.4%
Travelers Home
$473
$2,766
$545
3.4%
Cotton States
$734 NA
$772
3.0%
Unt Serv Auto A
$498
$1,837
$450
2.9%
Allstate Ins
NA
NA
NA
2.6%
Fire Ins Exch
1177
$2,282
$1,372
2.6%
NA
NA
NA
2.4%
$529
$1,061
$614
2.3%
$1,838
$5,211
$1,845
2.2%
State FarmF&C
Foremost
Farmers Ins Exch
Alfa Mut Gen
Share
32
From DOI Homeowners Insurance Rate
Comparison Page
Homeowners Premium Comparisons
The Alabama Department of Insurance now offers
consumers the opportunity to
compare homeowners rates of insurance
companies. The information provided is for
comparison purposes only. Even though these are
real rates, rates vary considerably depending on the
circumstances. At this time we do not have every
insurance company's rates, just a few.
33
SOME OTHER SLIDES TO CONSIDER
1. III Presentation
2. DOI Presentation
3. Raymond James Presentation
34
THE FINANCIAL
FLORIDA HURRICANE
MARKET UPDATE
CATASTROPHE FUND
 The FHCF provides significant economic benefits to Florida, and has been
exceptionally reliable
 The FHCF has a projected 2011 year-end fund balance of over $7 billion
• The FHCF is not
primarily intended to
be a rate-reducing
entity, but its
structure (even with
actuarially sound
rates) saves Florida
policyholders several
billion dollars
annually, and has a
high ROI
Fiscal
FHCF
Savings to
Year Reimbursement
Florida
(06/30)
Premiums
Policyholders
2000
$438
$876
2001
$439
$878
2002
$478
$956
2003
$498
$996
2004
$488
$976
2005
$617
$1,234
2006
$735
$1,470
2007
$1,189
$2,378
2008
$1,320
$2,641
2009
$1,276
$2,553
2010
$1,440
$2,880
2011
$1,388
$2,775
Total
$10,306
$20,613
FHCF
Hurricane
Losses
$3,950
$5,700
$9,650
Actual Return on Investment (2000-2011)
Projected Long-Term Return on Investment
Raymond James Slide
Total FHCF
Emergency
Assessments
$0
$0
$0
$0
$0
$0
$1,350
$0
$0
$625
$675
$0
$2,650
678%
100%
Overall Return
USA
Homeowners Return
AL
USA
USA
AL
HO Net ROE
1985
2.4%
-1.1%
0.0%
-22.9%
4.4%
1986
13.7%
15.3%
12.6%
8.2%
11.6%
1987
16.0%
22.6%
20.2%
20.9%
18.7%
1988
13.5%
9.2%
15.3%
-5.2%
14.1%
1989
6.0%
3.4%
-9.6%
-22.4%
-2.0%
1990
7.7%
-2.9%
-0.9%
-18.1%
-0.7%
1991
8.8%
11.0%
-6.6%
-9.9%
-5.3%
1992
5.6%
15.7%
-54.3%
17.8%
-44.5%
1993
11.8%
13.1%
2.5%
7.5%
-0.7%
1994
7.8%
12.0%
-1.7%
6.4%
-7.1%
1995
9.8%
-1.0%
3.7%
-45.0%
-90.0%
1996
9.9%
7.7%
-4.2%
3.6%
-8.1%
1997
12.6%
5.8%
12.4%
3.7%
8.9%
1998
8.8%
0.1%
5.4%
-10.1%
3.1%
1999
6.6%
3.9%
5.4%
11.3%
3.1%
2000
6.5%
4.6%
3.8%
-2.0%
1.3%
36
Overall Return Homeowners Return
USA
AL
USA
2001 -0.5%
1.0% -7.2%
2002
3.3%
3.9%
2003
9.5%
USA
AL
HO Net ROE
-2.3%
-9.5%
1.4%
5.8%
-2.2%
6.5%
9.7%
4.5%
7.8%
2004 10.0% -7.3%
3.7%
-67.1%
7.2%
5.3% -7.0% -2.8%
16.0%
6.5%
2006 14.4% 13.6% 18.5%
7.0%
13.9%
2007 12.5% 12.2% 16.0%
11.5%
9.0%
4.2%
-7.3%
2005
2008
2.4%
3.9% -2.6%
2009
6.3%
1.2%
6.2%
-24.1%
0.7%
2010
8.0%
7.5%
7.2%
4.6%
1.3%
26-year Average
8.4%
6.0%
2.1%
-3.7%
-2.5%
Source: NAIC Profitability Report By Line By State, various Editions.
37
SOME OTHER SLIDES TO CONSIDER
1.
2.
3.
4.
III Presentation
DOI Presentation
Raymond James Presentation
RMS Presentation
38
Absolute Loss Cost Changes vs. Percent Differences
• Percent change can demonstrate different
message than absolute changes.
• Even after inland increases, risk is still far greater
for coastal counties than inland counties.
Loss Cost
($ / $1000 exposure)
State
County
v10
v11
$ Difference
% Change
AL
Baldwin
4.43
2.31
-2.12
-48%
AL
Franklin
0.00
0.03
0.03
15,627
AL
Crenshaw
0.17
0.25
0.08
48%
RMS Slide
Losses based on Gross average annual loss,
historical event rates; include loss amplification
39
Hypothetical
Total
Premium
Impact
 If model results are used for direct pricing, change in modeled hurricane loss is
muted by degree to which hurricane losses contribute to total premium.
Premium Component
v10
Absolute
Difference
v11
Percent
Difference
Baldwin County
Hurricane
Other Pricing
Total
Franklin County
Hurricane
Other Pricing
Total
Crenshaw County
Hurricane
Other Pricing
Total
4.43
1.80
6.23
2.31
1.80
4.11
-2.12
0.00
-2.12
-48%
0.00
1.80
1.80
0.03
1.80
1.83
0.03
0.00
0.03
15627%
0.17
1.80
1.97
0.25
1.80
2.05
0.08
0.00
0.08
48%
-34%
2%
4%
Hypothetical rate example: Losses based on Gross average annual loss, historical
event rates; include loss amplification
RMS Slide
40
WHY COMPETITION FAILS TO
CONTROL P/C PRICES ADEQUATELY
Why Regulation is required.
41
WHY COMPETITION FAILS TO CONTROL HOME INSURANCE PRICES
1. Complex Legal Documents – customers can’t understand (post Katrina proves it)
2. Comparison Shopping is Difficult
 Price complex (tiers, classes, running mates)
 Service Quality hard to determine
 Solvency requires research
3. People rarely shop and rarely change carriers – Inertia in the market. (Especially
in a stressed market like home insurance in Alabama)
4. Lenders Require Insurance – inelastic demand
5. Underwriters free to refuse client – totally elastic supply
6. Antitrust exemption – insurers collude on aspects of pricing
1. and 2. above show lack of informed consumer. 3. shows market stagnation. 4.
and 5. show lack of normal free market conditions. 6. Is not compatable with a free
market.
And, the homeowners insurance market in Alabama is also moderately
concentrated, with an HHI of 1,472. Surely, the Baldwin and Mobile areas are even
more concentrated with many homes insured in the AIUA.
42
CONSUMERS FARE BETTER UNDER STRICTER REGULATION
PRIVATE PASSENGER AUTO INSURANCE
Regulatory
# of
States
System
State Set
89/05
97/05
Change in
Return on
Expenditure Net Worth
HHI
Index
1
52.8%
6.4%
1,371
Prior Approval
15
54.0%
8.6%
984
File & Use
23
68.1%
9.0%
1,016
Use & File
8
70.0%
9.7%
935
Flex
2
70.8%
7.0%
1,292
Competitive
2
73.9%
9.6%
1,111
Report available at:
http://www.consumerfed.org/elements/www.consumerfed.org/file/finance/state_auto_insurance_report.pdf
43
RECOMMENDATIONS
44
The Al legislature should:
*join together to form an interstate compact to deal with common issues
stemming from their shared hurricane risk (such as resisting jointly
coercive efforts by insurers to weaken consumer protections; spread risk
across the entire coast; create Florida-like reinsurance mechanism – which
might open the door to federal assistance; develop a regulatory model for
determining CAT risk to test insurer assumptions; develop model language
that would be required as a minimum homeowners insurance policy sold
in the coastal regions) THIS IS THE MOST IMPORTANT IDEA TO PURSUE!
*make all filings public and post them on the web. Many states make rate
filings public. Rate filings are simply not trade secrets.
*adopt the California approach to consumer participation in regulatory
proceedings, where consumers can receive reimbursement from the filing
insurer to hire experts (like actuaries, lawyers and economists) if they
make a “substantial contribution” to a case
Note: The stand-by reinsurance mechanism we envision would sell reinsurance to
insurers at 50 percent more than actuarial rates developed by the model, which
would keep premiums in check during the non-competitive phase of the insurer
cycle or after hurricane events when reinsurers often gouge. When private
reinsurance is reasonably priced at or near the actuarial level, the state back-up
would not kick in.
45
The AL Insurance Department should:
*carefully examine national data on limited catastrophe losses and
excessive surplus before approving any insurer requested rate increases
*revisit hurricane pricing in recognition of the fact that the industry has
mastered hurricanes
* review the reasons why insurers are dumping risks into state pools and
take action to stop insurers from unjustifiably refusing to cover
qualified homeowners
*ban use of anti-concurrent causation clauses and any other attempt by
insurers to build a “trap-door” hidden in the policy, through which
coverage can unexpectedly fall when policyholders most need help
*not allow hurricane deductibles to apply unless a storm is classified as a
hurricane throughout its journey through the state, from entry to exit
*make sure that AL has all the data they need to monitor the home
insurance market, including data by census track on who is writing
and where, non-renewal patterns, etc.
46
The AL Insurance Department also should:
*every insurer should be required to have home insurance price info on the
DOI web site.
*require every insurer to use the average of all available models in pricing
(some modelers compete for market share by offering high price answers)
*require insurers to reveal things they select rather than the modeler selects
for use in the model, such as demand surge
*every home insurance policy sold should be accompanied by a written
bill of rights. I suggest the Texas bill of rights as a model.
47
Ideas for a possible federal role:
The federal government is not going to move to help the coastal states, as
Evidenced by failed attempts for decades to get wind and earthquake
Insurance as part of the federal insurance approach. States like Iowa will never
support these proposals.
But innovative thinking might move the federal government to help. For example,
the new Federal Insurance Office has a data collection authority. FIO might
Undertake research on why certain markets are stressed, which insurers are doing
their best to serve markets in stressed areas and which are causing problems.
CFA has suggested that the federal government take steps such as:
*Offering the expertise of the federal government (entities like FEMA, NOAA, etc.)
to the group of coastal states. These experts could help develop the regulatory
hurricane model for states to use in regulating insurance and in developing
stand-by reinsurance pricing.
Offering bridge loans at low-interest when stand-by reinsurance is used, if such
use suffers losses due to timing risk (such as a large storm in the early years of the
development of reserves.) These loans would be required to be fully repaid over
48
reasonable time periods.
OTHER THOUGHTS
• Do NOT move regulation of home insurance in
Alabama’s non-competitive market away from
prior approval. AL must control Prices with
thoughtful regulation that is fair to insurers and
consumers.
• Mitigation is critical. Building and land use codes
are vital and need tough enforcement. Finding
ways to match mitigation with insurance
discounts that are a real incentive is an important
effort that should be undertaken.
49