Archive for December, 2006

Ohio Insurance Department Reaccredited by Regulators

Posted in General | Wednesday, December 13th, 2006 | 3 Comments »

Insureds,      

This press release says an independent review team of the National Association of Insurance Commissioners has reaffirmed that Ohio’s insurance department has “adequate statutory and administrative authority” to do its job.

“To be reaccredited – and with a high score(1) – reaffirms that effective systems are in place at the Ohio Department of Insurance to protect Ohio insurance consumers and to ensure that a healthy and competitive insurance marketplace is maintained,” Ohio Insurance Director Ann Womer Benjamin said.

I offer it to point up the circularity of state-based insurance regulation. The headline says “regulators” reaccredited the department, but in fact the NAIC is a trade group, based in Kansas City, Mo. Its members are the commissioners of the 50 states, D.C.(2) and the U.S. territories.  So, on some level, the commissioners are policing each other.  And while NASDAQ and the Big Board are also self-regulatory organizations, at least they report to a higher authority, the SEC.  But that’s not really the main problem.

Also not necessarily the (main) problem is the absence of ethics rules to slow the revolving door between regulated and regulator. I have cited the 1996 Money Magazine story (by necessity because, until I do it myself, I can’t find anything newer) that found more than 100 former commissioners working in the industry. I’ve noted that Louisiana’s Katrina-era commissioner, Robert Wooley, resigned last February to work for a law and lobbying firm with insurer clients, and that in 2004 then-South Carolina Commissioner and NAIC head Ernest Csiszar resigned both posts to become head of the Property Casualty Insurers Association, a major trade group. The current NAIC president-elect, is Alabama’s commissioner, Walter Bell, who worked for 19 years at MONY Group, now a unit of France’s Axa Group(FC).      

This is not to impugn the integrity of anybody, but just to point out that given this kind of insularity some assumptions seem to have wandered off base.  I have a sneaking suspicion, for instance, that Mississippi and Louisiana’s DOIs are also accredited by the NAIC-sanctioned process, and with all respect to Commissioners Dale and Donelon, I’m not sure even they would say their offices were anywhere near capable of policing insurer market-conduct after Hurricane Katrina.

Commissioner Donelon’s top priority, as Notes! has noted, isn’t making sure Allstate pays, but making sure it stays.  How does that work? 

But even if “availability” weren’t an issue, Commissioners Dale and Donelon will be the first to tell you they aren’t capable — or even allowed, really — to help policyholders with claims. Their post-Katrina role has been essentially that of traffic cop, waving thousands of (the most extremely) unhappy insureds over to court.  What did the courts do to deserve this? And,  really, why are taxpayers funding an insurance-claims-resolution system?

I know both states have set up mediation processes, but, again, even my two commissioner pals will tell you that mediators’ powers are nothing more than hortative, to use a big word that I had to look up. 

What would we think of the FDIC if it said it couldn’t help a bank depositor if a bank unilaterally declined to authorize a withdrawal? If you don’t agree that withdrawals and claims are at all analogous, I would like to hear why.      

Right now, Jefferson, Orleans, St. Tammany and St. Bernard Parish courts, the Eastern District of Louisiana and the Southern District of MIssissippi are swamped.  And, I’m (a bit) sorry to be critical, but don’t ask the commissioners or the NAIC how many Katrina-related lawsuits have been filed against insurers.  The only person who has that is me.(3)

I’ll leave it there and put an Appendix on www.insurancetransparencyproject.com for hardcore ITP readers.

(1) A bit further down it says:  “All scores are confidential.” That’s, I’m sorry, stoopid.

(2) Okay, Cool Texan?

(3) And ITP only has a rough idea. And if you think it was easy for ITP to collect this data, you clearly do not appreciate what ITP had to go through. ITP is a registered trademark(4). Void where prohibited. All claims referred to ITP Mediation Inc.

(4) Not really.
FC=Fairness Corner:  Not all commissioners are insurance industry products.  George Dale of Mississippi isn’t, though he has been commissioner there since the U.S.S. Monitor took on the C.S.S. Merrimack.  Neither is current NAIC president, Alessandro A. Iuppa, of Maine, a former Nevada commissioner and consultant to state insurance departments on financially impaired insurers.
APPENDIX I:

Founded in 1871, the NAIC is made up of the insurance commissioners of the 50 states, the massively important D.C. market and the five U.S. territories. Its purpose is to “provide a forum for the development of uniformity when uniformity is appropriate.” To me, this is an attempt to perpetuate the fiction that somehow insurance is a local business. Nobody believes that.

The NAIC (very kindly) allowed me to attend its fall conference in D.C. as a registered press person. The NAIC is made up of nice people and its press operation led by Scott Holeman is first-rate. I will say, to tease my hosts a bit, the NAIC general conclave resembled a cross between a UNESCO conference and opening ceremonies of the Olympics – the flags, the massive U-shaped table, the blue bunting, the pitchers of water, the hundreds and hundreds of attendees. Having covered Providence City Hall, I suspect there are a few jobs at stake here.
Not surprisingly, NAIC is a vigorous proponent of state-based regulation and vigorous opponent of the National Insurance Act of 2006, proposed by Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D., which would create a federal insurance regulator and allow insurers to pick. But that doesn’t make NIA good.
Regulation aside, the advantages* (see below) of state-based markets seem weak, to say the least, particularly when balanced against the massive inefficiencies created by 50 artificially small insurance pools compared to a big rich national market.
*Here’s a short version of the NAIC’s rationale for state regulation. “Unlike banking and securities products, which are about access to credit and risk taking, insurance is a legal promise—a guarantee—to pay benefits if and when a certain event occurs. Insurance products are rooted in the separate contract, tort, and social policy laws of each state where they are sold and require a more accountable, accessible type of protection that states can best provide. Congress endorsed state oversight of insurance in 1945 with the McCarran-Ferguson Act and specifically recognized and reaffirmed the benefits of the state system in 1999 when it modernized federal financial supervision laws in the Gramm-Leach-Bliley Act (GLBA). Since then, however, insurance industry Washington lobbyists have pushed for a federal insurance charter and a new regulatory regime in Washington that would diminish or supplant successful and effective state-based consumer protections.”   

 

 

 

 

Recovery czar speaks with insurer

Posted in General | Tuesday, December 12th, 2006 | 5 Comments »

Insureds,

I know I’ve covered St. Paul Travelers Cos.’ decision to pull out of the coastal Louisiana commerical market — and there’s a lot else going on — but I offer these remarks from the President Bush’s recovery chief, Donald Powell, as a means of broadening the discourse about insurance, a big theme here at ITP Global. In this case, “broadening the discourse” really means “cutting the monkeyshine.”
“In a speech Wednesday, President Bush’s recovery czar Donald Powell said he spoke at length with executives from St. Paul Travelers, an insurance carrier poised to cancel New Orleans area coverage, but Powell persisted in his opposition to federal intervention in what he called a “state” and “free-market” issue.“

I-Friends, I’m don’t know exactly where insurance stands on the free-market spectrum, but I suspect it is one of the least free markets in the U.S. economy. As noted yesterday, the government intervenes all over the place, often — in fact, usually — to take risk off the hands of insurers (see: Louisiana Citizens, National Flood Insurance Program, TRIA, California Earthquake Authority, Pennsylvania “Mcare” Fund, etc. etc.) and in some cases to pay directly what insurers should be paying (”The Road Home” program of the Louisiana Recovery Authority will pay up to $150,000 to individuals, including amounts not received from insurers, among other things).

But it gets worse. I will have an item soon on insurance-industry taxation (you’ll want to gather the kids together for that one), but suffice it to say that insurers pay substantially less — and I mean much less — in federal taxes on a percentage basis than the rest of the S&P 500, that is, the rest of the economy. And, as I’ve noted, insurers are exempt from aspects of U.S. anti-trust laws, laws that the rest of the economy, except Major League Baseball, must obey.

And with all respect to Mr. Powell, what other industry by federal law (see: McCarran-Feguson Act of 1945) requires its free markets to be divided into 50 separate sub-free-markets, sealing off profits in 49 markets so they cannot, by law, be used to offset risks and losses in Louisiana? The question is rhetorical, but I’ll answer it anyway: No other industry.

So insurance isn’t a “state” and “free market” issue. Its being a state issue makes it an artificial, chopped up and highly protected market.

Ok, a little nachtmusik please as we lower the tattered Insurer Free Market Banner, and somebody put on “Clamp Down” as the rippling ITP War Eagle Battle Flag rises over the reinforced levees.

Oh, and I-Fans, we’re not done. As Jack Nicholson might say to Tom Cruise, “The free market? You can’t handle the free market.”

ITP is all about the market, Mr. Powell, a market of free-flowing information — and I mean flowing both ways, to sellers and buyers. The irreplaceable Amy Bach of United Policyholders sent me a funny blurb about the annual Christmas party by Allstate’s “data-mining” programmers in Northern Ireland.

“A Night at the Northbrook Oscars“

I told her I couldn’t make it because I’d be at the State Farm data-mining party in Machu Pichu.

The point is that, to insurers, policyholders are as naked as jaybirds, naked-er, in fact. I don’t know what those miners are doing over there in Northern Ireland, but I’m thinking they are going over policyholders’ personal financial and credit data like an MRI. Whereas, insurance buyers can’t learn the first thing about insurers, namely: Who pays?

Expose Insurer-Payout Ratios(c)(1), prices and the like to the market, and watch insurance buyers very quickly figure out where to place their business. If they can figure out mortgage refinancing within a quarter of a point, they can figure out insurance, no sweat.

Then, I suggest, you will see the market work it’s magic: bad behavior will be punished, good behavior rewarded, inefficiencies squeezed out. And yes, you will see insurer P/E ratios fall, stock prices sag and many many insurance brokers, agents and other intermediaries out of jobs, joining travel agents, linotype operators and newspaper reporters on capitalism’s scrap heap.

How am I so sure? I’m not. But I want to hear other ideas, because the current insurance discussion is going in circles.

(1) That’s ITP’s idea. Don’t steal it.

For the strong, I’m going append a few more quotes from the story, which, to my ear, seem pitiful but illustrate how distorted the insurance discourse has become.

“As thousands of homeowners and businesses face dramatic rate hikes and cancellations, Powell expressed a vague optimism the situation would be resolved. “I’m convinced that a solution is forthcoming; I’m not sure what that is,” Powell told a Bureau of Governmental Research luncheon at the Sheraton Hotel.”

ITP comment: “Oy”.

Powell said he talked for 45 minutes Tuesday with Jay Fishman, chief executive officer and president of Minnesota-based St. Paul Travelers, the largest commercial insurer in Louisiana. While the company reported last week that it is not confident in the levee system, Powell said in an interview that Fishman told him levees are not the central issue, that Travelers’ plans reflect a risk assessment.

“He’s a standup guy,” Powell said of Fishman. “I asked him to think about ways that they could enter this market.”

ITP comment: (Sigh)

“While there has been discussion of using federally backed catastrophic insurance or tax incentives for insurance companies, Powell said at this point he doesn’t favor the idea of stronger federal intervention.

“I think our role is simply to identify that it is an issue,” he said. “Historically, it’s always been a state issue, it’s always been the marketplace.”

ITP comment: (head shaking sadly)

“Publicly, Powell has repeatedly expressed sympathy for policy-holders but maintained there’s little he can do because insurance is regulated at the state level.”

ITP comment: “ITP must go lie down.”


http://www.nola.com/search/index.ssf?/base/news-4/1165474878197240.xml?NSBR&coll=1

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Report Recommends Phase-Out of Pa. Med Mal Abatement Program

Posted in General | Monday, December 11th, 2006 | 4 Comments »

Insureds,

As Louisiana legislators trudge up to the State House this weeks to grapple with the insurance crisis there, and as Mississippi and Florida, continue to work on their – completely separate — insurance crises, I offer this press release about a Pennsylvania commission report on how to solve that state’s insurance crisis — this particular crisis having to do with medical malpractice insurance.

I’ll just quote a paragraph or two, comment and let the La. legislature get to work. It’s going to be a long.week. Better put some extra chicory in that coffee down there.

Long-time Notes!(TM) readers might guess where this is heading, but bear with me. I’ll try to include a funny surprise at the end.(1)

Over in Pennsylvania, which is in the same country as Mississippi and Louisiana, Insurance Commissioner Diane Koken released a report that calls for phasing out a state-funded program that helps pay certain “catastrophic” malpractice claims for doctors and other health-care providers. Most doctors there must buy $1 million in malpractice coverage – the first $500,000 from the private market and the remaining $500,000 from the state program.

Proposed by Gov. Rendell and known as the Medical Availability and Reduction of Error (Mcare) Fund, the program has “defrayed” nearly $1 billion of malpractice expenses for Pennsylvania doctors since 2003. More details in Appendix I. These are claims that would be paid by the private sector if the private sector was working.

I’m no expert on Pennsylvania’s med mal problems (not yet anyway — and don’t make me come over there), but I ask, somewhat rhetorically:

Is there another industry that is hit with more crises and gets more government help than, well, I have to say it, our insurer pals?(2)

I mean, I don’t see Michigan “defraying” costs of the nation’s car buyers, even though the U.S. auto industry is clearly in crisis. Actually, I could make a better case for subsidizing the automakers since a big part of their problem stems from the government’s inability to hold down in the skyrocketing cost of health insura…health insur…health insh….

Hmm… Does anyone else have the feeling we already passed that spooky old farm house over there?

The point: If you are a legislator in Baton Rouge this morning and preparing to approve Gov. Blanco’s suggestions that taxpayers (not exactly living large these days) pay for a “cat fund” to subsidize insurers’ reinsurance bills and Louisiana Citizens’ bills and for Louisiana Citizens’ customers left stranded while A.I.G.’s Audubon unit administered the company, I could not blame you. Myself, I’d rather eat every meal for the rest of my life at Gray’s Papaya, but I understand the problem.

However, if you are lucky enough not to be a Louisiana legislator, consider the spectacle of anybody, but especially Louisiana, subsidizing an industry that posted net income of … please, don’t make me say it again.(3)

The bigger point: If there is a convincing argument for state-based insurance markets, I (honestly) would like to hear it.

(1) See “Rider” for details.

(2) One day, ITP will put on its ITP protective rubber suit, ITP goggles, gather its ITP forceps and ITP/Cray SuperComputer, and add up the cost to the public of backing up, taking over for, or directly subsidizing the U.S. insurance industry — the National Flood Insurance Program, Louisiana Citizens, the Mississippi Wind Pool, Florida Citizens, the other dozens of citizens, the California Earthquake Authority, the Terrorism Risk Insurance Act, Pennsylvania’s “Mcare” and all the rest. I’m afraid ITP would need its ITP front-end loader.(4) How about subsidizing Dow Jones & Co. (ticker: DJ)? The newspaper industry is experiencing an advertising crisis. It’s hurting the stock, and I own way too much of it.

(3) …(sigh. Ok, last time) $43 billion, all-time record until this year’s $60 billion. Allstate’s ‘05 (Katrina year) net: $1.77 billion. Travelers’ ‘05 third quarter: $162 million net income (not even a loss for the Katrina quarter).

(4) And don’t get me started on insurance industry taxation or the industry’s anti-trust exemption.
Appendix I: Other recommendations of the Pa. commission’s report:

“To continue the state’s Mcare abatement program which subsidizes health care providers’ catastrophic malpractice claims payments until Mcare coverage has been phased out.”

To privatize Mcare malpractice coverage … as soon as is feasible, ideally in the period between 2008 and 2011.”

Etc. Etc.

*Rider: Somebody remind me to tell the “Retiring Mohel” joke at the annual ITP party/Final Exam at the Last Exit.

Welcome to the former Budapest Barbecuer and the former Costa Rican Hotel Switchboard Operator

click here to read article

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La. Lawmakers See Little Hope for Insurance Reform

Posted in General | Friday, December 8th, 2006 | No Comments »

I-Friends,

It pains me to see smart, well-intentioned public officials, some of whom I have met, scrambling to solve a “crisis” that is utterly artificial and should not be. It hurts even worse to see that all the “reforms” now on the table involve some sort of taxpayer bailout for an industry that posted record net income last year — Katrina year — until this year’s new record.

Insureds, the insurance industry needs taxpayer support like my favorite Hungarian billionaire, George Soros, needs a block of free government cheese. The State of Louisiana supporting insurers is like me giving Soros a grant. What the hell would he do with it?

And remember, Sens. Julie Quinn and James David Cain, two Republicans leading efforts to alleviate the crisis, are hardly industry hacks — quite the opposite. Quinn led the fight in earlier sessions against an absurdity known as the “anti-concurrent causation clause.”(1) Cain was the more “populist,” unsuccessful candidate in the recent special election for insurance commissioner. They, along with Gov. Blanco, are just trying to figure out a way to get insurance coverage in a state-based system in which states need insurers much more than insurers need any particular state, and that goes double for small states like Louisiana and Mississippi.

Here are the reforms as outlined in this AP story:
1. A taxpayer-supported “Cat Fund” that would help insurers with their reinsurance bills.
2. Using $162 million from the general fund to pay down the $1billion in bonds that the state-owned insurer, Louisiana Citizens, had to run up because the private sector had retreated from the gulf, keeping all the good “risks” inland.
3. Cash for homeowners left stranded by problems at Citizens, which was then administered by an A.I.G. unit.

In these blurbs, Quinn and Cain are criticizing Blanco for not leaving enough time before a special session beginning today, Dec. 8, to set up this cat fund. Blanco argues that the “rudiments” of the fund can be set up during the session. We join the debate already in progress:

“But several lawmakers said the 10-day session is too short to handle the complexities of the other items on Blanco’s agenda, including the idea of creating of a state-run “catastrophe fund'’ that would make it easier for insurance firms to do business in Louisiana.

Sen. Julie Quinn, a member of the Senate Insurance Committee, complained that lawmakers hadn’t had enough time to research such a plan, adding that she only found out this week that creation of such a fund would be included in the session. Sen. James David Cain, chairman of the Senate’s insurance panel, said the governor’s staff did not discuss insurance issues with him before Blanco released her agenda last weekend.

“We’re in the complete dark,'’ said Quinn, R-Metairie.”

The AP story goes on, and makes a huge — mistaken — assumption:

A catastrophe fund, or “cat fund,'’ would address the rising cost of reinsurance, a major reason that homeowners’ insurance rates are rising. Insurance companies take out reinsurance policies to cover themselves in case a major disaster forces them to pay out thousands of claims. The firms say their reinsurance rates have skyrocketed since hurricanes Katrina and Rita, an indication that issuing new homeowners policies in Louisiana might not be worth the risk anymore.

Florida created a state-run catastrophe fund in 1993 after Hurricane Andrew. That state’s cat fund has sold billions of dollars in bonds to create a pool to pay claims filed by insurance companies after a hurricane, to offset the money the companies must pay out in customer claims.

Hey, Swiss Re, Munich Re, Reinsurance Association of America: It’s your fault. The AP says so. Anyone care to explain why it’s not? Feel free to email me anonymously, and I will post it. Don’t worry. I’m very careful with my sources.

I’ll leave it there except to note, as I have before, chopping up markets 50 different ways is inefficient and leads to pockets of disaster that need not be. We have a big, rich national market with plenty of capacity to handle Katrina, Wilma, Dennis, Rita and all their windy relatives. Allstate, super-exposed to the gulf and not-reinsured, just did fine last year.

“Little hope” for reform? In the long run, that’s fine with me. But Louisiana is living in the here and now.
That’s my view. I’d love to hear the merits of a state-based insurance system, and I’m seriously open to counter-argument.

(1)Policy language that, under some interpretations, excluded wind damage if water damage also occurred, even if water damage occurred long after the wind.
click here to read the story

http://www.insurancejournal.com/news/southcentral/2006/12/08/74821.htm
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McCarran-Ferguson and Its Discontents

Posted in General | Thursday, December 7th, 2006 | 2 Comments »

I-Fans,
I realize that a discussion of post-war state-based insurance regulation in the United States is, I dunno, maybe not for everyone. Please let me know if you want off this list. It only hurts (me) a minute.Today we begin a look at the 1945 law that underpins the U.S. insurance system. And while its relevance may seem obscure, I don’t think many thoughtful insurance people would argue that it directly relates to what people in Louisiana, Mississippi and Florida each are, separately, calling their current “insurance crisis.” That’s at a minimum. I have a feeling this law is also implicated in the current state of health and other forms of insurance nationally.

I got this thoughtful post from someone who forgot more about insurance than I will ever know and prefers to remain anonymous. At the WSJ, these folks are referred to as a “person familiar with the situation.” He was responding to a blog item, “Letter from an Irked Louisianan,” a cri de coeur by a Times-Picayune editor who complained that his homeowners’ premiums were tripling, despite the fact that his previous carrier didn’t pay his wind claim. The editor further noted that the carrier, Travelers, wouldn’t write a new policy and as a result he would be consigned to the state-run Louisiana Citizens, which has a few disadvantages, including higher costs.

The full reply is below, but I’ll break out a couple points and comment. The bold face is mine:
Person Familiar: “One might ask why
an insurer, which is in the business of spreading risk as far and wide as
possible, can’t stay in a badly hit market, drawing on the strength of its
much more numerous stable (and these days largely profitable) markets.

The answer is state-based regulation.”
ITP: Right. Without putting words in PF’s mouth, the answer is, there is no answer. The logic behind state-based regulation, a 19-century holdover, is that it makes no sense for suburban Chicagoans to subsidize coastal Mississippians. But if it makes no sense for Chicago to subsidize Pascagoula, why does it make sense for Jackson to subsidize Pascagoula? And why should middle-class people in Buffalo subsidize the Hamptons? Soon, tornadoes will hit Lake County in the northwest suburbs of Chicago, as they do every other year, so why should people along the lakefront, like my hometown of Evanston, which never gets hit, subsidize those in the outer suburbs?
Because it’s insurance, that’s why, and we’re spreading risk. If wide is good, wider is better. What do state boundaries have to do with anything? Now, if you want to charge people on the coast a higher premium, fine. But the wider the risk is spread, the more efficient — and cheaper — insurance becomes for all.
PF: “It’s all about the
McCarran-Ferguson act, which mandated that states should regulate insurers
since insurance in the old days was dominated by local mutuals — regional
organizations of property owners agreeing to share one another’s risks.”
ITP: Yup. Passed in 1945, with vigorous industry lobbying, I might add, McCarran-Ferguson forbids the federal government to regulate insurance. It essentially overturns a U.S. Supreme Court decision of the previous year that found insurance was in fact interstate commerce and subject to U.S. anti-trust laws.
PF: “This uniquely American regulatory
structure essentially prohibits an insurer from subsidizing losses in one
state with profits from another, which is why some insurers like to have
single-state subsidiaries with separate and distinct balance sheets. It
makes it easier to exit a state altogether when profitability in that state
becomes chronically elusive. Examples include New Jersey auto insurance in
2000-2001 and Florida homeowners in 2004-???. “
ITP: Thank you, Person Familar. There will be much more on McCarran-Ferguson and efforts in the current Congress to amend it. I want to hear from insurers and state regulators: What policy reason justifies chopping the U.S. into 50 small markets, particularly now that insurance is about as “local” as banking, which is to say, not local at all? And why should insurance be exempt from some aspects of U.S. anti-trust laws? These question are not rhetorical.
Full post is here:
“Without referring specifically to St. Paul
Travelers, it’s natural for any insurer to do whatever it must to
drastically reduce its exposure to a market where it just lost multiples of
the total aggregated profit it ever earned in that market.(1) One might ask why
an insurer, which is in the business of spreading risk as far and wide as
possible, can’t stay in a badly hit market, drawing on the strength of its
much more numerous stable (and these days largely profitable) markets. The
answer is state-based regulation. This uniquely American regulatory
structure essentially prohibits an insurer from subsidizing losses in one
state with profits from another, which is why some insurers like to have
single-state subsidiaries with separate and distinct balance sheets. It
makes it easier to exit a state altogether when profitability in that state
becomes chronically elusive. Examples include New Jersey auto insurance in
2000-2001 and Florida homeowners in 2004-???. Large national insurers in
both states have state-specific entities with their own capital and limited
access to parent-company assets to recapitalize in the event of a
catastrophe. Instead, an insurer in a devastated state has to replenish its
state-specific reserves with state-specific tactics — higher deductibles,
lower limits, more exclusions, greater use of state-specific reinsurance
programs, non-renewals, or leaving the market altogether. It’s all about the
McCarren-Ferguson act, which mandated that states should regulate insurers
since insurance in the old days was dominated by local mutuals — regional
organizations of property owners agreeing to share one another’s risks. It’s
actually a pretty good concept. After all, no one wants their premium to go
up because of something that happened a thousand miles away. As Katrina has
shown, we’re only slightly more willing to pay a higher premium because of
something that happened next door.”

(1) ITP responds: Travelers reported after-tax charges of $1.5 billion for catastrophes in ‘05. I frankly don’t know how much it earned in premiums in the Katrina-affected markets over the years. For the sake of argument, let’s assume Katrina wiped out years’ worth of homeowners’ profits from the area. However, as I have pointed out, the well-run insurer says it posted net income of $1.622 billion overall in ‘05 and $162 million in the third, Katrina quarter, ended Sept. 30, 2005.Also, Travelers’ post-Katrina claims-handling performance has triggered a market-conduct investigation by the La. DOI.

Sorry, ITP always gets the last word. It’s my site!

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Blanco pitches key property insurance company

Posted in General | Wednesday, December 6th, 2006 | 6 Comments »

Insurance Afficionados,

Just a reminder of the power relationship between a company like St. Paul Travelers Cos. and a state like Louisiana. Read these two paragraphs, please:

“St. Paul Travelers officials sat through hours of presentations from state officials who argued that southeast Louisiana’s infrastructure has been strengthened since Hurricane Katrina, with sturdier homes, expectations of improved levees and plans to preserve the coastline.

Insurance Commissioner Jim Donelon said Travelers officials promised to relay highlights of the discussion to company chiefs at the company’s St. Paul, Minn., headquarters.”

To catch you up, “Blanco” is the governor of Louisiana, Kathleen Blanco. Travelers has said it intends to essentially leave the commercial market around New Orleans, a move that dramatically reduces insurance supply, pressuring rates upward and forcing the state-owned insurer to take on the riskiest commercial risk. These risks, I’m guessing here, include oil rigs, commercial fishing operations, hospitals, the basics of the economy. That would leave Travelers with the good stuff inland in the rest of the country.

So, Travelers agreed to sit for hours to consider pleas that it sell its products in Louisiana again. I thought it was generous of its executives to offer to “relay highlights of the discussion” back to the “chiefs” up in bustling St. Paul, Minn., way up the Mississippi River, hundreds of miles away, practically another country. The chairman and CEO is someone named Jay Fishman, who headed Travelers when it still belong to Citigroup Inc. The board includes Ken Duberstein, who was Reagan’s chief of staff in 1988 and 1989, a bunch of Wall Street guys, along with, for some reason, a doctor, plus the woman, I mean, a woman.

More seriously, a rhetorical question: Who has the leverage here 1. Regulated or regulator? 2. Seller or buyers, who need state intervention to win the ability just to buy the product, never mind the price or the terms?
And remember, Travelers(1) is one of three insurers (the others are Allstate and Louisiana Citizens, administered then by an A.I.G. unit) whose post-Katrina behavior triggered so many complaints that Donelon (the guy up there pitching Travelers for hours) ordered a rare market-conduct exam conducted by an outside firm. That report is due in February. I don’t know who the contractor is, but I’ll find out. I’m afraid I don’t want to know.

http://www.nola.com/newsflash/louisiana/index.ssf?/base/business-4/1165367398247340.xml&storylist=louisiana

click here to read the story
(1) ‘05 net income: $1.622 billion.
‘05 third (Katrina) quarter net: $162 million.
‘06 third quarter net: $1.043 billion (2).

(2) Sometimes I think Insurance Notes! is turning into a tip sheet for insurance stocks.

Private note to Alabama Alum: Still wondering what’s wrong with state-based insurance markets?

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And Now, a Word from the American Academy of Actuaries

Posted in General | Tuesday, December 5th, 2006 | No Comments »

InsNerds,

A quick one today since you’ve probably all already leafed through the November/December edition of Contingencies, the Academy’s answer to Maxim.

At first, I was a bit offended by this rather flip commentary:

“Why Bother With Going-Concern Pension Plan Valuations? ”

But when you think about: it’s true: Why bother?
Plus I liked the yarn about principles-based reserves up North

“PBR: The Canadian Experience.“

And, I appreciated the opportunity to buy the Irwin Vanderhoof collection:
“Through an Actuarial Looking Glass.” It is indeed a “ Treasury of Vanderhoof,” for only $16.

But the magazine isn’t bad, in fact. Check out this paragraph on medical malpractice insurance:

The current system is incredibly inefficient. For purposes of
this article, inefficient means that the insurance mechanism
doesn’t deliver a large enough portion of the insurance carriers’
expenditures to the injured patient. As Figure 1 shows,
medical malpractice insurance currently delivers less than
40 cents per dollar of insurance company expenditures to
injured patients. This is a much lower percentage than the
60 cents per dollar delivered to injured workers by workers’
compensation insurance or the almost 80 cents delivered to
group health insurance claimants.

You know it’s bad when “almost” 80 cents per dollar going to pay claims looks good. We are talking about “more than” 20 percent of trillions, for what?

http://www.contingencies.org/

And find:
“Having to Say You’re Sorry: A More Efficient Medical Malpractice Insurance Model”
Robert J. Walling and Shawna S. Ackerman

Thanks to Cool Texan.

–

“The Great Risk Shift”

Posted in General | Monday, December 4th, 2006 | 1 Comment »

Fellow Perils,

The above-titled book by Jacob Hacker, a Yale political scientist, shows that the frames of the debate are beginning to widen very nicely indeed. As we pull the camera back from Katrina, from the Gulf, from homeowners’ insurance and from property-casualty insurance entirely, we see something larger happening in the insurance industry and, as Hacker argues, in society.

Here’s a thought from an online debate between Hacker and other big brains at the American Prospect.

“We all know instinctively that health insurance, pensions, jobs, and family finances have become less secure. But often we look at these issues in isolation, failing to see the big picture: a massive transfer of economic risk from the broad structures of insurance, both corporate and governmental, onto the fragile balance sheets of American families.”

He goes on to make the invaluable point that financial security and risk-taking aren’t at odds — indeed quite the contrary is true.

But keep the risk-shift idea in mind when reading this big Mowbray scoop from Saturday’s Times-Pic:

Commercial insurer to pull out of area

Businesses fear Travelers’ move will put the brakes on recovery



St. Paul Travelers Cos., the biggest commercial underwriter in the market, stunned — and I mean stunned — political and business leaders by deciding to pull out of much of the commercial market (that is, to cancel policies when they expire) in New Orleans and its environs. Mowbray dug it out from area brokers.

And I know many of you Bayou Bengals aren’t fans of Insurance Commissioner Jim Donelon, but he sounds like he was hit by a two-by-four. Note the double “stunned” here:

“Donelon, who was tipped off about Travelers’ plans Wednesday night by the Business Council of New Orleans and the River Region, said he was stunned by the news. When he met with Travelers on Thursday, he was equally stunned by the stated reason for the company’s retrenchment.

‘They cited the state of the rebuilding of our levee system as the primary reason for their decision,’ Donelon said.”

Read the full story for an account on why Travelers, which doesn’t cover floods, cited anti-flooding infrastructure as a big reason for leaving. But besides high prices and less coverage, and less recovery, the departure means the state-owned insurer, Louisiana Citizens, takes on even more of the worst risks.

“Citizens traditionally has not done much commercial insurance business. In anticipation of doing more, Citizens plans to raise its coverage limits from $2 million per business building to $5 million per building. It also is seeking permission from the Louisiana Insurance Rating Commission this month to raise rates by a statewide average of 129.6 percent. While that rate increase may seem astronomical, it’s not as high as prices that many business are reporting from private carriers. Donelon said this week that he is concerned the state could end up taking on too much commercial insurance liability with inadequate premiums if it’s priced wrong.”

Ok. Hacker says risk is shifting onto American families. I would have no trouble finding families in Slidell, Gretna, Bay St. Louis, Gulfport and Biloxi who would agree with him. And while I haven’t seen their passports, I believe they are American. Risk is certainly being off-loaded from insurance companies, which is their job, in a way, and it’s landing on both residential and commercial policyholders and the government, both the federal flood program and state-owned insurers.

And let me make two final points about St. Paul Travelers (ticker: STA).

1. It posted net income of $1.62 billion in ‘05, the industry’s worst-ever year, including $162 million on the plus side, in the third quarter — Katrina time.

2. Its conduct after Katrina and Rita triggered so many complaints, the La. DOI — not exactly a tiger in this regard — took the rare step of hiring an outside contractors to perform a so-called “market-conduct” exam. (Allstate and Citizens, which was then administered by an A.I.G unit, are also under this microscope, Mowbray says). Those reports are due in February.

The point: If insurance is about sharing risk, I’m not sure we’re sharing very well.

What to do? Close ITP readers already know. But not to worry. There will be an optional review session before the annual party/final exam at the Last Exit.


 http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=12159

http://www.nola.com/news/t-p/frontpage/index.ssf?/base/news-7/1165042332198320.xml&coll=1

“Without it, we would be in the meltdown that Florida and Mississippi are in today.”

Posted in General | Friday, December 1st, 2006 | No Comments »

Insureds,

First, I say again I appreciate your patience in receiving these Notes! I realize they are not everybody’s thing. If you want off the list, please ask and do not feel bad. Leave that to me.

Today, I’d like to take just a few items from the indominable Mowbray’s Times-Pic piece about the run-up to a special insurance session of the Louisiana legislature called by Gov. Blanco for Dec. 8 - 17.

The problem is dwindling supply, as private insurers attempt to flee the state, and big demand, leading to sharply rising prices. (As my favorite economist Dominick Salvatore of Fordham puts it — he was raised in Italy, by the way — “We don’ havea de teeory of supply an’ deman’. We don’t havea de hypoteesis of supply an’ deman’. We havea de law of supply and deman‘.”)

One consequence is that the state-owned insurer, Louisiana Citizens, has been forced to take on many thousands of new policyholders and would take on many more if not for the Three-Year Rule, a populist state law that forbids insurers to drop policyholders of three years or more, “unless they commit fraud, don’t pay their premiums, have made more than two claims in three years, or unless the company is in danger of going bankrupt or discovers ‘a material change in risk’ in the profile of the property.”

And the problem with that — besides having the state be in the insurance business, covering all the bad risks — is that Citizens customers by law must pay 10% more than the private market.

We caught up now? So the debate features Sen. Reggie Dupre Jr., a Democrat from Houma, who wants to at least temporarily drop the surcharge to give homeowners a break. Insurance Commissioner Jim Donelon opposes the move, saying it would “only discourage private insurers from coming back to the market and could force the state to take on insurance responsibilities great enough to bankrupt it,” as Mowbray puts it.

The point of all this, of course, is to point up the folly of insisting on chopping up markets into states — whose borders have nothing to do with anything – when we have a big rich national market that could easily spread this risk more efficiently. Later, I will explain how we got stuck with this unexcellent state-based “system,” which, fortunately for the rest of the world, is unique, and why we can’t get rid of it.

But let’s join the debate in Baton Rouge. What’s especially interesting about it: Both men are right.

“The question becomes, do we put Citizens in the insurance business to compete with the private market? If we do it, will we ever have a private market? Do we want the state to be in the insurance business?” Donelon said.…

“In the short run, I don’t see we have a choice,” Dupre said. “They want to dictate how much Citizens can charge, but they don’t want to cover the people of Louisiana. It’s a hell of a dilemma.”

Hmm. Sure is.

Last point from Mowbray:

“An estimated 60,000 to 100,000 people with unrepaired (Hmm. I wonder why?) or vacant properties are expected to lose their private insurance coverage March 1 under the material change in risk clause, and most of them will end up in Citizens, but growth in the program is expected to be limited after that.

“Because of our three-year protection statute, there is a market,” Donelon said. “The majority of insureds still get their insurance through the private market.

“That statute is the most important consumer protection rule we have. Without it, we would be in the meltdown that Florida and Mississippi are in today,” he said.

So, the only way we keep a “private” market is through a state law that tells vendors when and where they can sell something. I suppose I could come up with ideas to help here, but I’m above this kind of thing (plus I have no idea what to do). Oh, and note he refers to a “meltdown” in neighboring states. I wonder what that’s about?
But the larger point is, there is plenty of capacity in this great big country of ours to deal with Katrina, Rita, Dennis, Wilma and all their windy relatives. The industry, I say again, posted net income of $43 billion in ‘05, its highest (until this year) since insurance began on the London docks in the 18th century. And even the most-Katrina exposed Allstate posted net of $1.77 billion in ‘05, a very nice year.

Ok, I’ll give two hints as to why we still have a state system. One is the above paragraph. The other is four letters; it’s an anagram: SBOJ.

Figure it out and qualify(1) for a free(2) drink at the annual party/final exam at the Last Exit.

(1) (2) See “Rider*” for details.

*Rider: There are no free drinks.

Thanks to Mississippi Meteorologist

http://www.nola.com/news/t-p/frontpage/index.ssf?/base/news-7/11648736058010.xml&coll=1

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