Insurance Panel in Struggle to Survive
IPods,
This Rebecca Mowbray Times-Picayune story from a couple of weeks ago is about a debate over whether the Louisiana Insurance Rating Commission, the last such price-setting panel in the country, will be abolished as part of post-Katrina insurance reforms. The commission’s opponents include Insurance Commissioner Jim Donelon and business groups, who believe abolishing the panel:
“…would send a powerful signal to insurers that Louisiana is modernizing…and would dissolve an unnecessary bureaucracy that allows insurance rates to be suppressed for political reasons — making insurers loathe to enter the market and making it harder for Louisiana residents to find affordable insurance coverage choices.”
As it turns out, commissioner members — there are five, all appointed by the governor — aren’t happy either:
“While the rating commission may be in charge of rates, some members have expressed growing frustration that they have no power over the deductibles and underwriting guidelines that are key to understanding how much coverage consumers are getting for their money. They’re also frustrated that they’ve been awarding the rate increases that insurance companies said they need to do business in Louisiana, but insurance companies don’t respond by starting to write policies again. Indeed, some rate increases have been followed by the insurance company cutting coverage in Louisiana. ‘We have no enforcement capability. All we do is set rates,’ said Steven ‘Rock’ Ruiz, the commission’s longest-serving and most vociferous member.”
ITP sympathizes with Rock here, if only because it favors nicknames.
But I’d only like quickly to point out the Scholastic quality of the Louisiana insurance debate — this is deck-chair-arrangement level — that mirrors the general gridlock that has left New Orleans and the state on what my pals down there tell me is the brink of despair. ITP will be heading to N.O. Feb. 22 to March 2 to see for itself. We are performing final checks on the ITP/Dodge Charger SRT8 with the 6.1 Liter, 435 hp HEMI(r) right now.
In Mississippi, by contrast, State Farm has already raised the white flag and some policyholders are already getting paid — and not improperly for flood, but properly for wind, just like the policy says, despite the best efforts of Sheila Birnbaum and our nation’s top legal minds at Skadden, Arps, Slate, Meagher & Flom. Next time ITP feels sorry for those first-year associates working until 2 a.m., remind it not to bother.
Listen, this Rating Commission debate is of a piece with what I call the Louisiana Model or the PowerPoint approach, a reference to Governor Blanco and Commissioner Donelon’s dogged efforts to sell the market on the state’s efforts to make itself more attractive by reinforcing levees, stiffening building codes, dropping regulation, allowing price hikes, and what have you.
This is in contrast to the Florida Model, which has the state taking over the wind market, and the Mississippi Model, which incorporates legal sticks, such as mass litigation from Richard Scruggs and other trial specialists and especially, Attorney General Jim Hood, who focussed State Farm’s attention by raising the specter of criminal prosecution of its executives.
(I know many of my insurer pals question the fairness of using criminal process to force civil settlements. For what it’s worth, I’m with you in some respects, but that’s another blurb.)
We don’t know know how well the Louisiana Model will work.
But ITP is still waiting for the argument in favor of keeping insurance risks segregated arbitrarily by state boundaries in first place, while profits Insurance Profits — ‘91 -Q106 (please see CAUTION below) are spread efficiently throughout the country. And how come we don’t know how much insurers pay per policy?
Thanks again to Ida and to Mississippi Heavy Hitter for sending material. Please keep it coming.
CAUTION: the Q106 figure is for a single quarter. Ensure eyeballs are firmly secure in head before clicking; must be over 45 years old and provide proof of health insurance. Also available in streaming video.
P.S. For insurance hard cases, here’s the Insurance Information Institute’s argument on why it’s better to measure return-on-equity than “simple dollar amounts.”
Profits vs. Profitability: An Example
The following example illustrates the advantage of measuring profitability using ROE rather than simple dollar amounts. Assume that there are two companies, both of which earned $1 million in profits last year. The companies are identical in every respect except that Company A had an average net worth of $10 million during the year while Company B had $20 million. The ROE for Company A is 10 percent ($1 million profit divided by $10 million net worth), but for Company B it is just 5 percent ($1 million profit divided by $20 million net worth). The two companies earned exactly the same amount in profit, but Company A was twice as profitable because it earned the same amount in profits with half as much capital (net worth). Company A provided a superior return on investor capital (as measured by ROE) than Company B, even though both companies earned the same profit in when measured in dollar terms.