Insurance Transparency Project

I-Pals,

That’s pretty good line from Walter Bell, Alabama’s insurance commissioner who himself is not known as a firebrand. He was talking about the Potemkin regulatory regime overseen by the National Association of Insurance Commissioners, the N.A.I.C., based in Kansas City, Mo.
When your own members are mocking you, Missouri, you have a problem.

But while the NAIC dithers, the gulf states are moving forward toward a consensus that the current system is broken.

In this Rebecca Mowbray story in the Times-Picayune on an insurance conclave of regulators, insurers and others in Mobile last week, non-firebrand Insurance Commissioner Jim Donelon, of Louisiana, describes the relationship between ratings agencies and modeling companies, which purportedly “predict” the likelihood of future hurricanes purportedly based on science, “self-serving and incestuous.” He also calls for greater transparency in the unregulated mostly offshore reinsurance business, which has a big say in setting insurance rates.

That’s new.

Even South Carolina’s Scott Richardson, a self-described free marketeer who says insurance should be regulated as little as possible, says in this situation, “as little government regulation as possible might be a lot.”

And, as Mowbray writes:

But perhaps Florida Insurance Commissioner Kevin McCarty stated it most plainly: “The current policy we have is a failed national policy.”

The question is what to do about it. Reasonable minds disagree. Even the most radical proposals strike ITP as piecemeal, but they are far better than nothing.

This is the backdrop to the apparent momentum gathering around the Taylor Bill, Rep. Gene Taylor, D-Miss., proposal to add wind coverage to the flood program, which would give customers options along the coast.

Insurers are against this, saying it would displace the private market.

ITP says: This is a bed insurers have made.

A tired Rep. Gene Taylor said after Thursday’s hard-fought vote he was “obviously, pleased.”

“We’re grateful for every bid (1) of help we got,” he said. “We also realize we’re only halfway there.”

Looking to the Senate, Taylor says Lott’s support of the multi-peril concept, with backing from GOP Gov. Haley Barbour and possible support from Sen. Thad Cochran, R-Miss., would be “about impossible to beat.”

Asked what timing he had in mind for the legislation, Taylor said, “I sure as heck would like to have it available for consumers before the next hurricane season.”

How was Taylor going to celebrate? “There will be beer and Mexican food,” he said with a laugh.

That is one well-deserved taco, I’m sure.

No word on whether President Bush will sign it.

ITP appreciates the need for a real-world fix for policyholders along the coast. This would be no small achievement.

ITP, however, would urge Taylor and other backers not to lose sight of the transparency imbalance, the once that allows insurers to examine policyholders’ credit as if via an x-ray, while policyholders cannot compare even the rudiments of insurer performance on claims. A transparent, open market would go far toward discouraging bad behavior on claims and squeezing out the crazy inefficiencies in distributing and administering insurance.

ITP’s War Eagle always keeps his eye on the horizon.

1. Sic. ITP is not sure whether that’s a typo or honest effort to capture Rep. Taylor’s accent. We’ah grateful fo’ eva bidda hep wuh got.

I-Fans,

If I can indulge some members of my list for a favor:

For a planned ITP insurance survey/photo-art graphic of a single neighborhood along the Gulf Coast, ITP is seeking a more recent photo to match the one attached, which was taken a couple days after Katrina. The neighborhood is known as “Jordan River Estates,” a subdivision a little ways inland.

The more recent the photo the better.

The photo must be a fairly close match of the survey area. Those with Google Earth, can type in “Janelle Drive, Bay St. Louis, Mississippi,” and you’ll get it under a different name, “Shoreline Park, MS.” The Google photo is pre-storm, and therefore, not terribly relevant.

Zoom in a little and get to these coordinates: 30 (degrees) 19′ 53.67″N and 89 (degrees) 22′ 45.67″W. You should see Elaine, Jannelle, Edith, Helen and Jordan River Drives. I’m not sure how to write proper navigational coordinates, so if you don’t understand, give me a call or mail.

Remember: it has to be as recent as possible.

War Eagle was just about to take the photo but he was startled by the Scruggs private plane passing on its way to Oxford and dropped the camera, losing it in the Jordan River. He feels terrible about it.

Thanks to all seekers of insured information.

And, I-Fans, that’s in a good year:
According to the Government Accountability Office, in a report this month, insurers took 50.4% of all premiums dollars — half — for their own expenses in 2005, which looks terrible until 2006, when insurers took 64%. Where does it go? Let’s start with a 15% sales commission for agents. Nice and fat.
It’s all here in black and white. The title takes the ITP understatement prize.

FEMA’s Management and Oversight of Payments for Insurance Company Services Should Be Improved

If two-thirds of the capital collected to pay claims goes toward administering the program, then, yes, one could say management and oversight “should be improved.”
See page 17 for a handy table. In dollar terms, in 2006, the NFIP collected $2.4 billion in premiums and paid $1.5 billion to private insurers under the so-called Write Your Own program for administering the program itself.

Now that’s what ITP calls “Write Your Own” all right. Wow.

NFIP is part of FEMA, a unit of the Department of Homeland Security. A DHS spokesman makes the point to the Mobile Press-Register that 2005 and 2006 were busy flood years, and that is entirely fair.

The findings drew a mixed reaction from Steven Pecinovsky, an official with the Department of Homeland Security, FEMA’s parent agency. In a three-page letter attached to the report, Pecinovsky conceded the need for better audit oversight but described the big payout to insurers essentially as a fluke caused by a deluge of claims following Hurricane Katrina and a half-dozen other storms in 2004 and 2005.

It is “misleading” to show payments to insurers as a percentage of premium revenues in large loss years, Pecinovsky said. Nonetheless, FEMA is looking at ways to cap payments to insurers for processing claims in such years, he said.

But, wait a minute. The flood program, despite what you may think, has actually paid for itself for the most part since it was created in 1968. This is true despite the crippling drain on premium dollars spent on administration. Almost all prior claims have been paid, that is, with premium dollars, not tax dollars.

The program wasn’t designed to be actuarially sound, however, and didn’t charge enough to both pay those expenses and build up a reserve for the Big One, which has now come.

But the drain presented by the Write Your Own carriers has obviously compounded the problem, as the GAO notes, contributing to the staggering $16 billion spent on handling Katrina claims, which is $14 billion more than the NFIP has paid, total, in its entire history. Those expense fees and commissions spent on something that should be done online, for next to nothing, siphoned away money that could have offset those losses, which must be borne by taxpayers.

But what’s worse, the GAO notes, FEMA does not account for insurer expenses:

Although it has the authority to do so, FEMA does not collect data on actual WYO Flood insurance expenses that could provide a basis for insuring that WYO payments are based on reasonable estimate of actual expenses.

Again, for the 33% it spends on expenses, in a good year, FEMA doesn’t even ask insurers to account for it.

FEMA’s response, well FEMA doesn’t really have one and says it is going to try to improve. Its excuses have a dog-ate-my-homework quality to them.

Check it out:

FEMA officials said that they have considered methodologies other than the current approach for paying WYO, including having the companies submit information on their actual expenses for reimbursement for services rendered to the NFIP.

But…

However, they said that such an approach could create a number of additional challenges that might have an negative impact on the program.

FEMA officials expressed concern that the number of companies that choose to participate in the WYO program would decline dramatically if additional accounting requirements were established for them.

Accounting for expenses would cause insurers to flee the program? I should have tried that one when I was at The Wall Street Journal. If I have to make an expense report, I might quit. Who doesn’t account for expenses?

Remember, this isn’t the Insurance Information Institute talking. This is the government, the party spending the money.

In the end, DHS could only agree to go along with GAO recommendations to perform basic financial oversight.

1. Taking steps to ensure that its operating costs are “based on a reasonable estimate of actual expenses.”

Sounds crazy to ITP, but, hey, why not give that a try?

2. Ensure that “biennial financial statement audits of WYO insurance companies are conducted by independent CPA firms as required by FEMA regulation, and that FEMA reviews the audits to help ensure that payments made are proper and in accordance with program requirements.”

The GAO recommends that FEMA follow its own rules, and FEMA agrees. That is a start.

GAO draws the bottom line:

FEMA’s decision to rely on long-standing practices does not meet federal internal control standards that agencies be held accountable for, among other things, stewardship of government resources.

There is little for the War Eagle to add. FEMA doesn’t perform its most basic function, overseeing the federal money entrusted to it.

What do you say to that?
And remember, this isn’t in just 2005 and 2006. This is the system going back to 1983. No audits. No accounting. Nothing. A candy store. Calling Bob Hunter (1): See what happens when you leave?

And, it must be said, the GAO is actually being polite. GAO doesn’t note that the same contractor, Computer Sciences Corp., has been overseeing NFIP since it was put back in private hands in 1983. CSC, as I’ve noted, is a major vendor to insurers, receiving about $35 million for its government contract, as opposed to $9.5 billion in global commercial revenue, a significant portion of that from insurers.

Add to that the fact that same insurers who underwrite homeowners’ policies also administer flood policies, creating a conflict of interest that you can drive a truck through. Insurers have every incentive to find “flood” damage in the thousands of slab cases and no wind damage, and that is precisely what they did. And those findings are the subject of all the key cases crowding Mississippi and Louisiana courts, including Weiss and Broussard, in which courts in both state have found insurers — in bad faith — assigned water damage to wind-damaged houses.

I know it’s only tax money, but that doesn’t make it free.

If you are wondering, the head of the NFIP is Dave Maurstaad, a former Nebraska insurance broker and Republican lieutenant governor.

But here’s the kicker. The industry takes 33% of premiums, when operating at peak efficiency, for its administration. OK. That’s bad.

So the NFIP is — without question — a candy store.

But listen, and my broker pals, are not going to want to hear this: private property/casualty insurers spent $169 billion on expenses in 2006, much of that on commissions and sales expenses. For what? If you are curious, over five years from 2001 to 2005, total underwriting expenses for the industry were 25.3% of premiums, according to Best’s Aggregates and Averages, 2006 edition.

Think about other financial services, say your mutual fund: a 2% expense ratio is considered huge.

Insurer pals: enjoy it while you can.
Thanks to Ida.

1. The head of the Consumer Federation’s insurance section, Hunter ran the NFIP under Carter and Ford.

That’s the number of lawsuits filed in St. Tammany Parish since Hurricane Katrina, according to the St. Tammany News. That comes to 632/month or 7,584 per year, up 500% since before the Great Windless Hurricane of 2005.

The parish on the northshore of Lake Pontchartrain has a population of 230,000 in 69,000 households, according to the Census Bureau. So, 11% of households is suing someone this year. I wonder whom?

Of those lawsuits, the majority are homeowners who are suing insurance companies claiming they have not been compensated for wind damage sustained during Katrina, state district court Judge Raymond Childress said.

Or as the court clerk says:

Our whole world is more complicated,” Prieto said.

I’ll bet.

No matter where you stand in the insurance debate, are we to believe this is a picture of a system that is working?

I-Fans,

Nice to be back among you as we start a new year of insurance work. I’m counting years by the Jewish/Katrina calendars, which both begin around the same time.

I pass along a rather lengthy bit I wrote for the Columbia Journalism Review about insurance reporting in the business press. It contains a down payment of praise for Becky Mowbray and Anita Lee, as well as a review of some substandard Katrina reporting by Forbes and the WSJ and some high-level work by The New York Times and Bloomberg Markets Magazine.

That’s here

I was largely correct about the business press, too, I’m afraid. Somehow, national outlets devoted to business news, The Wall Street Journal, Forbes, Fortune, Business Week, and the Financial Times barely notice that 2005—year of the worst-ever insured loss in the history of the world—was also the most profitable insurance year ever, by a long shot. No one asked how that could be so.

No one asked, moreoever, how it could be that, according to State Farm Insurance, Allstate Insurance Co. and Nationwide Financial Services Inc., Hurricane Katrina caused no wind damage—none at all—in thousands of cases. Commonsense alone calls that assertion into question.

Worse, though, Forbes and The Wall Street Journal’s editorial page both mischaracterized the nature of the dispute between insurers and Katrina policyholders. Both frame the problem as one in which policyholders are seeking to force insurers to pay for flood damage, which private insurance does not cover. The dispute, according to these outlets, is a natural consequence of insurers’ unavoidable (albeit regrettable) decision to protect their solvency by denying illegitimate claims and to prudently (again regrettably) leave unprofitable coastal markets.

As Forbes writes:

After Katrina, Allstate and other insurers refused to pay for flood damages. Why should they? The policies excluded floods. Many homeowners didn’t buy coverage available from the federal government.Unsurprisingly, the exit from unprofitable markets prompted a lot of anger. People must now scramble for coverage from smaller carriers at much higher rates, if they can get coverage at all. The Mississippi attorney general and irate flood victims have sued Allstate and its peers in a bid to force payments for the water damage.(1)

Audit Readers, this represenation of reality, while hewing closely to a talking point of the Insurance Information Institute, is flatly false. That this mischaracterization has gained saliency among the public is worth billions to insurers. Among its other faults, it falsely portrays policyholders as either too stupid to know what their policies say or too desperate to care.

As even a half-hearted attempt at reporting would have discovered, plaintiffs in the Gulf overwhelmingly are suing for noncoverage of wind damage. Wind. Not water. Hurricane winds are explictly covered in homeowners’ policies, and that’s the basis of the complaints in most all of the key early cases, including Broussard, Guice, Shows, and Weiss. Most were filed at the time of the November 2006 Forbes piece and covered extensively—available online, for free—by the New Orleans Times-Picayune and the Biloxi Sun-Herald.

I look forward to being in touch and reading all my back-email from Ida.