Insurance Transparency Project

InsHeads,

I know you all think insurance is just about glamour and bling, one big Playboy Mansion party DJ’d by the late Biggie Smalls with the Radio City Rockettes forming a kick line on top of a large actuarial table.

I’m going to indulge myself today and write about why insurance matters. Please feel free to leave now (not so fast, Mom!) But knowing that some of you will follow this item knowing it is long and contains fewer (but not none!) yucks helps me form the ideas that I think are a blog, a book and a major motion picture starring George Clooney as myself. This is also one of the last blurbs before I go “public” and start distributing this to the people who love the industry and the people who love to sue it. (I will try to put something funny at the bottom for those making it all the way through.)

EYTEP (Insurance Tranparency Project) grew out of reporting three stories for my favorite newspaper.

The first was A.I.G. The secretive, innovative, mysterious insurance company was created in post-World War I China by C.V. Starr and made wildly successful by the titan M.R. (they’re into initials) Greenberg, who was toppled by Spitzer last year. A.I.G. reminded me (and I think thought of itself) as sort of a private-sector version of the O.S.S., operated by discrete gentlemen who traveled to exotic locales underwriting the riskiest risks — oil rigs in South American jungles, kidnapping, whatever — and made sure they were paid for them. And A.I.G’s Asian connection is intriguiging. It is a leading insurer — foreign or domestic — in places like Korea, China and the Phillippines, and Hank Greenberg was, and probably still is, one of the most influential figures in the Far East, particularly China.

Greenberg’s A.I.G. was, and is, patently weird. One lawyer told a story of a defense-lawyer friend — the head of his local chamber of commerce in North Carolina — who flew to A.I.G.’s headquarters on Pine Street in Lower Manhattan to discuss a case he was defending on behalf of an AIG insured. After waiting two hours, he was led into a empty conference room with a long table, where he waited alone for another 45 minutes. Three men in suits (I imagine them wearing top hats and morning coats) then entered abruptly, and without a hello, interrogated him like he was a murder suspect for an hour, then got up and walked out. He had no idea who they were. And this was a guy on AIG’s side.

Hank Greenberg is, in my view, responsible to a large degree for the way insurance looks today. I don’t think he would disagree.

The second story that got me going about insurance was what was supposed to be a quick and simple feature about a study done by consumer advocates on medical malpractice insurance. Simple? Quick? Hah! As some out you out there, including the Cool Texan, can testify, the reporting touched off a mini-insurrection in the industry featuring many-thousand-word emails from an insurance executive, whose company, by the way, was not in the story, about why the study was bogus, out-of-context and written by someone who may — or may not! — have done something disreputable in Rhode Island, Missouri or both. I wish I had saved those emails. When I got an after-hours call on my cellphone from Bobby Kennedy’s former press secretary, I knew I was in new territory.

But that wasn’t what intrigued me. What got me was what you couldn’t find out about at what I thought was supposed to be the critically important issue — medical malpractice insurance. The advocates’ study looked at whether insurers did or did not actually pay the the massive med mal losses awarded by “runaway juries” during the “med mal crisis” of the 1980s and early 1990s. They didn’t, but what struck me was that a normal human being (that would be me) couldn’t even find out how much malpractice insurance costs. Now, remember, the high premiums required to cover those massive losses were 1. driving doctors, particularly surgeons and OB-GYNs, out of medicine, and 2. wrecking the health care system. So much so, in fact, that we needed to do something called tort reform – that is change the legal system in 50 states to, among other things, cap punitive damages and otherwise make it harder to sue.

Now, as a Certified Professional Reformer, I’m all for reform. But if you’re going to change the legal system on me, you gotta gimme some data. How many medmal suits are filed a year? What’s the average award? Median award? After appeal? How many suits are filed in relation to the number of actual medical injuries. In other words, to what extent do we need to make hospitals safer? Oh, and by the way, how much does medmal insurance cost, anyway?

Well, don’t ask the regulators. When the regulators’ Kansas City, Mo., -based trade group (Their what? Never mind) referred me to a a newsletter called Medical Liability Monitor, based in Oak Park, Ill., ($399/year) to learn how much the stuff costs — the price of which is ruining the health-care system – well, I knew this industry was different. The fact that MLM wouldn’t call me back and I had to get a few pages faxed from a source only reinforced my sense that, as Gene Taylor would say, somethin’ wuddn’t raht hee-uh (honk).

And the last story that got me was Katrina. I’ll admit, I’ve seen only a few extreme cases, former houses where it was obvious that wind had done somedamage — several of which, for instance, a witness had seen “explode” — and where wind claims were denied entirely. And right, I’ll admit it’s interesting to me that wind claims on the beach were denied outright but others were approved in Tupelo, hundreds of miles inland. Or that next-door neighbors in townhouses built the same year got wildly different outcomes, but none were paid to the limit of their policy. Or that independent engineers are complaining in court papers that their “wind” verdicts were changed to “water.” Or or or.

Katrina made me realize, however, that insurers could — I’m not saying they did — but could simply deny a legitimate claim or pay a few bucks on the dollar, put the money in its pocket and say “sue me.” And they could — theoretically — do this hundreds or even thousands of times. Or they could — not saying they did – assign hurricane losses to “flood,” and divert their losses onto U.S. taxpayers. And they could — repeat, theoretically – meet in Atlanta shortly before Katrina to decide how they would handle flood/wind claims and do so legally under their anti-trust exemption. (See archives; keep up with me, people!)
What about state regulators, you say? That’s a story for another day (Y’all are greedy. Simmer down!)

I will post snippets of interviews with unhappy policyholders, including the super-litigious carpenter, the ignorant customer service rep, the greedy veterinarian, the irresponsible Mississippi State meteorologist and others, who either don’t understand their policies or are trying to cheat their insurers

But here is a question for the imaginary insurance industry executive who sits my shoulder and reminds me that 97% of Katrina claims are settled, that his independent survey says that 80% percent of policyholders are satifisfied and that of more than 1 million Louisiana claims, only 8,000 people filed formal complaints, a success rate, as it were, of 99.9992%:

Those are good. But instead of metrics that don’t matter, how about disclosing the ones that actually document the industry’s performance?

A. How much did your policyholders demand?
B. How much of that did you pay?
C. How many claims did you deny as a percentage of all claims?

Past performance! What a concept!
Let’s start with that. I could also ask a few others, like why do you count formal complaints but not lawsuits (which, to me, is a more-serious complaint)? Why can’t we tell who paid more of what customers demanded, Allstate or State Farm? Why did an internal survey by Gulf-area independent agents and brokers — these are insurance people — report that 75% of them reported that 75% of their customers were unhappy at some point in the process. What did 175,000 people want from their “informal inquiries” to the Louisiana DOI after Katrina. And why, if you report Katrina losses of $45 billion, do insurance departments report you’ve only paid $24.9 billion, with 97% of claims setttled?

And you know what? These are actual questions. They’re not rhetorical. And even if insurers are right in all cases, the answers would help us know the extent to which people aren’t buying enough insurance or are buying the wrong kind.

Ok, so what? Who cares about a few, or even a few thousand or tens of thousand, belly-achers in the Gulf (or California, Oklahoma, Utah, New York City [think 9/11], Florida, etc.)? Even if it hampers Gulf-area reconstruction or makes taxpayers pick up a bigger burden, aren’t there more serious problems. What about Iraq? And what’s the national story if Florida, New Orleans and South Mississippi are experiencing what they’re calling down there an “insurance crisis” — homes and businesses can’t afford new property rates or can’t get coverage at all? And what if the insurance industry had its highest-ever profit year (until this year) in disaster-ridden 2005, while lawsuits clog Louisiana and Mississippi courts, insurance prices are jumping like Mexican jumping beans and the government is taking on more and more insurance burdens? And even if insurance is the third or fourth-biggest expense for every American household, so people won’t buy another PlayStation. Is that a big deal?

Not really, I guess. But as I tiptoe into the subject, I start to think about health insurance. Now, I’m starting to think this matters. If you think the Katrina insurance industry and the Aetna insurance industry occupy some different commercial universe, operate on completely different logics, have wildly different investor bases and are regulated by completely different people, you, my long-suffering insurance nerd, are wrong.

Here’s a quote from Krugman. I’m not saying I know he’s right:

“Every other wealthy nation manages to provide almost all its citizens with guaranteed health insurance, while spending less on health care than we do. And there’s no mystery why: we’re paying the price for pointless, destructive reliance on private insurers. Medicare, which is a universal health insurance program for older Americans, spends less than 2 cents of every dollar on administrative costs, leaving 98 cents to pay for medical care. By contrast, private insurance companies spend only around 80 cents of each dollar in premiums on medical care; much of the remaining 20 cents is spent denying insurance to those who need it” (or, to be non-opinionated, “on overhead”).
How many trillions do we spend on health care premiums again? Twenty percent of that?

And I don’t think he’s even talking about the 46 million people who have no insurance at all.

But are Krugman’s facts right? I think so, but, again, I’m just getting started. And would greater transparency really help insurance buyers create greater efficiencies that would make more premium dollars available for what they’re there for — paying claims? Or would greater disclosure, instead, wreck the industry?

I don’t know. But here’s a prediction: you will be hearing a lot more about insurance in the coming year, and I don’t mean from me.

Okay, an actuary, an underwriter and a duck walk into an HMO ….

I

InsFans,Due to the overwhelming popularity of yesteryday’s Gene Taylor Mizzipuh acksunt Notes! ™, I’m going to do today’s as Bobe, a Joosh grantmattair frum Krrown Hoyts.(1)

“Vat vind? Vat vasser? Ish a fershlugginer hoirricane!Oy!”

In fact, Bobe has a point. Trying to separate wind from water in a hurricane — the key issue in an untold number of Katrina claims disputes — is like trying to take the matzoh out of the ball. Hurricanes are tropical depressions that push water down and cause a storm surge. But, as Notes! readers know, most policies cover water that comes down (aka, “rain”) but exclude water that comes up (”flood”).

Richard Scruggs will give you an hour on why a surge is not a flood, while Insurance Information Institute head Robert Hartwig will probably make a better case that it is. Videos show both perils did a lot of damage.

But I’ll just note again in this pre-shabbes Notes!, that 1. the riskier risks have a tendency to wind up in the lap of taxpayers — floods, California earthquakes, terror (to some degree) and, increasingly, wind, via the various Citizens Corps., FAIR Plans, Wind Pools, or whatever they call them in the Gulf. And the Louisiana Recovery Authority even will pick up what insurers didn’t pay on disputed wind claims (thanks, HUD).

What’s left? Autos in Oregon, etc. Hmm. What were those profit figures from ‘05 and ‘06 again?

But more importantly, the more you chop up risk, the more you defeat the purpose of insurance, which is to spread it as widely as possible. That’s why having 50 separate insurance markets makes no sense, as even some in the insurance industry are starting to recognize. But we have a state-based system, for reasons I’ll get into later, and as Bobe would say: Eyb di bobe volt gehat eyer, volt zi gevezn a zeyde.(2)

(1) Jewish grandmother from Crown Heights in Kings County, N.Y., home to the Lubavitcher Hasidim and numerous dairy restaurants.

(2) If my grandmother had had testicles, she would have been my grandfather.

Void where prohibited. See warranty for details. Tip your waitress.

Private note to Ocean State Big Daddy who jests that I should start “a fascinating reinsurance blog.” Nyuck, nyuck. Don’t tempt me.

InsFans,

If you want to know what I’ve been talking about with these Notes!(TM), give a listen to the first 3:21 of this recent press conference by Rep. Gene Taylor, D-Miss.

Sure, he looks like Robert Redford. Sure, he’s got a cool accent. Sure, he compared the insurance industry to “child molesters,” though not here. Ok, so maybe that wasn’t the most temperate remark.

But I found it very compelling. He seems nervous, but I think he’s just frustated and angry. And, yes, I will give equal time to the insurance folks.

Since it’s a little tricky to cut, paste and play, I’m going to provide a two graf transcript. I was going to include my hilarious phonetic recreation of his ack-sunt, but people would think ah wuz mockin’ the gah. If you think that, you do not understand this blog, so get out. But eventually, I’d like Gulf-area policyholders to be reading this, and I’m afraid they wouldn’t get it. Too bad. Because it was hilarious. (Ok, a small sample: “tote refoam.” I SLAY myself!) He’s talking about his proposal to revoke the insurance industry’s anti-trust exemption. (Say what? See archives to catch up.)

“No one should be above the law. And I’ve got to tell you, I voted for almost every tort refom issue that ever came before Congress, and before that almost every tort reform measure that came before the Mississippi legislature. But this storm, and the way the insurance industry has treated the people of Southern Mississippi, has really caused me to look them in an entrely different light (Ok, can’t resist: “diffrunt laight”).

….Look at your own pay stub – and I guarantee you, if you’re one these young guys or one of these old guys working for me – when you look at your paystub, one of the top four expenditures in your life is insurance. And yet there’s no real competition in the people that sell you that service. And it’s perfectly legal for them to call each other up and say, let’s charge this much. It’s perfectly legal for them to say, ‘let’s provide this kind of coverage.”

And unfortunately, in the case of Katrina, it was perfectly legal apparently for several of them to call each other up and say, ‘I’m not going to pay claims. You don’t pay claims.’ “

I’ll have more to say about the explosive allegation in the last graf, but I don’t think he was speaking hypothetically.

Ok, a hearty Notes! welcome to New York BizNews Duomos, The N.O. Spanish Scholar, the NY PR Mogul, and importantly, the two Bayou Insurance Bengals. This is the only day you’ll receive two (brutal insurance overload).

click raht heah ta see video (sorry Southern brothers and sisters, that’s mah las’ wun, oops, I mean, last one.) Click here to see video, then click “click to start Real Playa” (honk) and then “launch this application.”
http://switchboard.real.com/player/email.html?PV=6.0.12&&title=Katrina%20Task%20Force%20Releases%20Katrina%20Report&link=rtsp%3A%2F%2Fvideo.c%2Dspan.org%2Fproject%2Fhur%2Fhur101906%5Fdems.rm

Good morning from Baton Rouge, InsNerds:

Not to get down on my pals at the AP, but this is a classic case of looking for your keys where the light is better rather than where you dropped them.

The story, which ran in my favorite Southern Mississippi paper, parses the 8,000 post-Katrina complaints filed at the Louisiana DOI, and finds that whites were more likely to file one than blacks. The AP looks at complaints, as it should, because that’s all there is. And if you match the piddling number of complaints versus the one million Katrina claims in La., you figure, not bad, right?

The fact is, ins fans, complaints have little to do with industry performance: how much it paid versus the value of claims.

Here’s a good quote from Doretha Kitchens, an African-American insured. But, trust me, this attitude has nothing to do with race. Practically, no one files complaints because they don’t know they can and wouldn’t bother if they did know. In the realm of meaningless numbers, 175,000 people called the DOI to make an informal inquiry, but they may have been calling to ask about the weather in Baton Rouge.

“Kitchens also didn’t know she could appeal Allstate Corp.’s settlement offer to the state, but doubts it would have changed anything: Her husband, she said, simply lost faith that anyone would help.

“My husband didn’t want to be bothered. I asked him, ‘Why don’t we sue the insurance company?’ He said, ‘They ain’t gonna do nothing no way.’ White just decided they was gonna go file. Black, we just gave up easier.”

Sorry, no yucks today, fans. I gotta meeting with The Man. Stay tuned.

http://www.sunherald.com/mld/sunherald/15839520.htm

Hail Fellow Insureds and Other Excluded Perils (honk):

For those new to the list, my condolences. This is an experimental blog about, yup, insurance. Every day or so I’ll offer riveting news from the insurance industry trade press, along with my own value-added commentary and analysis and strange use of fonts and type face. (Warning: may cause drowsiness, dizziness, nausea and internal bleeding; see our ad in Sports Illustrated for details).

Today’s Insurance Notes! ™ discusses insurance earnings and accounting (booyah):

From the Gray Lady:

“Allstate reported an annual profit in 2005 of $1.8 billion, mostly because of strong earnings on auto insurance, said Kevin Callahan, a portfolio manager at Century Funds in Boston, which owns 40,000 shares of Allstate…

Mr. Liddy (the outgoing CEO) said he expected record annual earnings for Allstate in 2006 of $4.8 billion to $5 billion — about the same as Allstate’s losses from hurricanes in 2005. Altogether, property insurers paid out $61 billion for hurricane damage in 2005. “

Buh, buh…Wait! I hear you say. How can Allstate have posted an “annual profit in 2005 of $1.8 billion” but also suffered ” losses” the same year of $4.8 billion to $5 billion.

That’s the micro question of how the industry suffered all-time record losses of $60 billion in 2005 from Katrina and other storms and all-time record net income of $43 billion the same year.

Couple things here, InsNerds. There are losses, and there are losses : An “insured loss” is a bit of a rhetorical trap door, I think. It’s actually “a claim that must be paid” and something against which you set up a reserve. To me, that’s a “loss” like Ford buying sheet metal is a loss.
In any case, it is certainly different than a GAAP loss on a corporate income statement. Hence the understandable confusion. (You finance people, let me hear from you. That means you, Debonaire Wall Streeter.)
But the insurance debate is part of what the very wise NYU sociologist Steven Lukes calls a “struggle of competing rhetorics.” You have an advantage if you not only control the data, but also the nomenclature.

Now, readers, merely by reading this blurb, you’ve done me a favor because I know who(m? grammar help, please! Calling Terri Rupar!) you are, and most of you are big shots in my book. Most of these will not be this long. And, of course, please tell me, and I’ll take you off the list.

Void where prohibited. All mistakes are my own. It’s not Soros’s fault. Give the guy a break.

http://www.nytimes.com/2006/10/19/business/19insure.html
–

Hello insured masochists and welcome:
Click on “about” for my General Theory of Insurance Transparency.

I’ll keep it short today. Check out the link to today’s news item. I really have no idea what this deal is about, but I use it to point out two salient items from Warren Buffett’s most recent annual report, 2005.

1. Here is the most-successful-company-around’s description of itself: “Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these is the property and casualty insurance business conducted on both a direct and reinsurance bass through a number of subsidiaries. Included in this group of subsidiaries is GEICO, one of the four largest auto insurers in the United States, and two of the largest reinsurers in the world, General Re and the Berkshire Hathaway Reinsurance Group. ”

2. And here is the bottom of a chart not far off comparing the percentage change in Berkshire’s book value to the percent change in the S&P 500, including dividends:

“Average Annual Gain — 1965 to 2005: 21.3 v. 10.3
Overall Gain — 1964 to 2005: 305,134 v. 5,583.”

Ka-ching! Yep, that’s a 305,134% total return.

Now, put your eyes back in your head and ask: Is there anything wrong with that? Honestly? Not as far as I’m concerned. It just shows that insurance is a good businesss for investors.  My favorite Hungarian billionaire might describe it as evidence of an out-of-equillibrium-situation. My MBA-and-economics-degree-toting sister might say it’s evidence of assymetrical information in the market. Me? I dunno.

The question is, is it as good for insurance buyers? And that I really don’t know, yet.

http://www.berkshirehathaway.com/2005arn/2005ar.pdf
www.insurancejournal.com/news/international/2006/10/20/73449.htm

Fellow Insureds, policyholders and other uncovered perils (honk):

People often ask me, ‘Say, Dean, why do you spend so much time on the sexy, sensational aspects of insurance , like claims-handling and crop insurance — but ignore the really hot-buttom issues, the tabloid stuff, like insurance accounting and taxation? Isn’t that irresponsible?”

I tell them, `Patience, Notes! Nation(TM).  All will be revealed.”

Today, though, we’re talking about Katrina-related lawsuits, as reported by my favorite Southern Mississippi paper. A couple things about counting insurance plaintiffs: It’s really hard.  Policyholder suits are generally filed under state law in individual state courthouses and even then are generally not categorized by court officials as “insurance cases,” but rather filed under broader categories, such as “breach of contract” or something else. So no one really knows (except insurers) how often an insurer is sued by its chiseling, gold-digging, suit-happy policyholders, oops, I mean, its customers.

Katrina, however, offers something of an opportunity. So big it was, Grasshopper, that some court officials, for administrative purposes, are keeping track. Also, for legal reasons I’ll spare you, nearly ALL the Mississippi Katrina cases are filed in the federal court in Pascagoula (love writing word.)

But even now, we don’t know how many individual plaintiffs there are.  A single suit, for instance, can, and does, contain hundreds of plaintiffs.  Richard Scruggs, famed tort king, tells me he has nearly 3,000 individual plaintiffs himself.  And, as commonsense tells us, only an (unknown) fraction of unhappy insureds (or unhappy anyone) will sue. And of course each case must be heard individually, according to a recent ruling by the lead judge in the cases, L.T. Senter.

So, even with two visiting judges brought in to help out, at 290 cases a year (see the story), the last of these cases should (conservatively speaking) be headed for trial in 2011, more likely closer to 2014. Oy.

But that’s ok, most of these retired factor workers and customer-service representatives down here are loaded, believe me. Insurers are no match for them.

Coming soon: insurer litigation tactics.

In an effort to widen the circle, I’m going to invite The World’s Hardest Working Economist, The Oklahoma Kid, The Washington Duomos and gulp, funders.

Private note to Foxy Oregonian: Stop reading this far down. I’m not going to mention you!

http://www.insurancejournal.com/news/national/2006/10/20/73450.htm