Insurance Transparency Project

I-Pals,

The last Insurance Notes! ™ dealt with a report by Louisiana Legislative Auditor Steve Theriot who probed the loose operations of Louisiana Citizen’s Property Corp. and found policyholder premiums spent on quail hunts, LSU games, family members’ cheerleader fund-raising drives and unauthorized events whose stated purpose included “bonding.”

Citizens, the state-owned insurer was run under a contract by a third party administrator, the Property Insurance Association of Louisiana, created in 1888 and reorganized in 1960 to set fire insurance rates. All insurers in Louisiana are required to join PIAL, which also administers Louisiana Auto Insurance Co., the auto-insurer of last resort for Louisiana drunks and others.
PIAL hired Terry Lisotta to run both Citizens and LAIC and he comes under the brunt of the report’s criticism. Lisotta chose not to respond to the report.
The Theriot report and attachments make great reading and can be found on ITP’s key document page, first item under “Government Documents.” I recommend it highly. A highlight is a letter from Ernest L. O’Bannon, name partner at Bienvenue, Foster, Ryan & O’Bannon, of New Orleans, hired without a contract as PIAL’s general counsel. A participant in a PIAL-expensed golf tourney, he explains with a quiet dignity:

With respect to the charity golf outing, what I know of it is this. I was invited to play by Mr. Lisotta, I accepted, and I played.

Like the LAIC expense report that called $45,000 spent for “bonding, socializing and strategizing,” these words resonate up here at ITP HQ. When we are invited to something, we accept. And when we accept, we play. That’s just how we do business up here.

Levity aside, I went too far in calling “unconscionable” a decision by Audubon Insurance which was handling claims for Citizens, to pull out half its staff before Katrina hit, in anticipation of Audubon’s contract ending Sept. 15.

That decision was unwise, but not unconscionable, a word that should be reserved for tampering with and shredding engineering reports, firing engineering firms for stating the possibility that wind damaged houses and deciding beforehand to deny wind claims, as has been alleged of State Farm, Allstate and other major carriers, in the Shows complaint.

Worse, probably, was any unintended association of Audubon with corruption at Citizens. There is no evidence of that Audubon had anything to do with it. Indeed, the Theriot report doesn’t not mention Audubon.

So, apologies to American International Group Inc., Audubon’s parent. ITP hopes and expects, however, that its Citizens’ experience be evaluated for possible improvements to service during a natural disaster, which, by many first-hand accounts, was poor, even given the conditions and efforts to restore staffing to levels agreed to under the contract.

I-Fans,

A sad day in Louisiana, as Legislative Auditor Steve Theriot uncorks a stunner of a report on Louisiana Citizens Property Corp., the state-owned insurer of last resort that performed so dismally in the wake of Katrina.

Theriot finds Citizen’s head Terry Lisotta and the two Louisiana insurance-trade groups that operate the company to have run Citizens as some of sort of candy store with no cash register, a slush fund for the all-American pastimes that many of us enjoy but can’t afford.

The report is posted on ITP’s key documents page.

The report details golf outings, fishing excursions, quail hunts, football tickets, gifts, airline tickets, hotel rooms and trips to Bermuda, New York and the beach in Alabama that were billed to the public through Citizens, the Property Insurance Association of Louisiana and Louisiana Automobile Insurance Plan.

Football tickets and quail hunts. Oy.

And don’t forget the relatives:

It also describes improper bonuses and severance packages, and hiring family members and lobbyists.

In all, Theriot (not pronounced “The Riot,” by the way) found Citizen’s spent more than a cool $1 million on expenses in two years, even though by law it’s not supposed to market, as Rebecca Mowbray points out in her excellent account in the Times-Picayune. About a fourth of that went to Lisotta, the lover of Bermuda, and check this out:

Theriot audited only 10 percent of that figure, or $25,702, and found that in each instance “Lisotta was reimbursed for expenses he did not incur, expenses that did not have a legitimate public purpose and expenses that were personal expenditures.”

Every nickel The Riot checked was improperly spent. Each instance. There was, inevitably, the LSU-Florida game:

In October 2004, Lisotta billed his employer $749 for a trip to Gainesville, Fla., to see a Louisiana State University football game with Insurance Department Chief of Staff Chad Brown, even though no business was conducted during the trip.

The golf tourney:

In September 2004, LAIP paid $600 for Lisotta to enter the Wally Pontiff Jr. Foundation Golf Classic. Lisotta was reimbursed $660 and then $720 for participating in the tournament. Even the original entry fee doesn’t count as a “legitimate public purpose,” according to Theriot.

The Mardi Gras party, but at least he took his daughters:

During the 2005 Mardi Gras, Lisotta billed LAIP for two hotel rooms at the Avenue Plaza Hotel in New Orleans for his daughters, and a room for himself at the Hotel InterContinental for a total of $3,227.56, and was reimbursed for $858.27 in expenses that he didn’t incur, according to the report.

A family man, Lisotta helped a daughter’s cheerleading squad:

Lisotta also helped his daughter Rachel in July 2004 meet her cheerleading squad fundraising goal of selling 200 Zephyrs baseball tickets by buying 100 of them for a “staff function.” The tickets then were distributed to PIAL employees.

To be fair, who wants to see minor league baseball? I don’t. You can’t give those tickets away. They should have sold chocolate bars or crates of oranges, like we used to do for the Evanston basketball team. And:

Lisotta used his PIAL credit card to pay for trips in May and July 2005 for his daughter Megan to go to New York, where she attended New York University.

What’s she supposed to do? Walk?

As Mowbray delicately puts it: “Problems existed elsewhere as well.” Read the whole piece. Every paragraph is outrageous, but this is my favorite.

In 2004 and 2005, LAIP spent $45,851 for annual meetings in Sandestin, Fla., that had been held since 1978 for “bonding, socializing and strategizing” purposes.

LAIP: Stop it! You are KILLING us up here at ITP HQ. ITP does that all the time, usually in the ITP sauna. War Eagle and Buck are doing that right now!
I-Fans, can we agree? Should not those three words be stenciled on the door at Citizen’s office in Baton Rouge and printed on the freakin’ stationary? What would we put on the logo? I say, two swizzle sticks crossed over a heart laid over a map of Louisiana, with a goddamn olive in there somewhere! I mean, what?

What kills me, of course, is that this is what Ed Liddy at Allstate spent every year on shoe shines and sushi. It’s also a shame that this behavior opens a government-owned entity to ridicule (and ITP is ever ready to rush through that particular door), discredits the government and takes heat off the private sector, where it belongs.

However, real questions have to be asked. The first one I have is: why is PIAL, a trade group and a former fire-rating agency, and LAIP, an auto insurer, operating this state owned company?

Until recently PIAL, a fire-rating agency, provided all the staff for Citizens and accounted for most of its expenditures; and LAIP, auto insurer of last resort, held Lisotta’s contract even though it accounted for only a tiny portion of his responsibilities. Citizens has not been able to balance its books since Hurricane Katrina because of a massive computer crash. An effort to reconstruct the records is supposed to be completed later this year.

Still unclear and seriously is the role of Audubon Insurance Co., the American International Group Inc. unit, that operated Louisiana Citizen’s until shortly after the hurricane and unconscionably pulled much of staff before the end of its contract, right in the middle of hurricane season.

But here’s what might be the most revealing fact of all:

In May, PIAL hired the law firm of Adams and Reese LLP as its lobbyist. Adams and Reese employs former Insurance Commissioner Robert Wooley, who had set up Louisiana Citizens.

And skipped through insurance’s regulator revolving door shortly after Katrina.
I-Fans: You want to think this is a Louisiana government corruption problem, one of many. That would be a mistake. This is an insurance industry corruption problem, a window onto an insular state-based insurance system utterly out of control.

Congrats to Theriot for another job well done.

And thanks again to Ida.

I-Fans,

ITP faithful will find the above headline familiar. The AP story in the Beaumont Enterprise dwells on a two-year statute of limitations for contract disputes in Texas. Should the clock start at the date of the storm or the date of insurance denial or none action? The answer is the latter. The first scenario gives insurers even more incentive to drag out the process as long as possible.

And even my insurer pals, I think, by this point will acknowledge, that this they will do.

But of course the larger point is that in two weeks 300 people who probably have never sued anyone in their lives are trooping into court to a small Texas hamlet to sue a giant corporation. Can 300 Texans be wrong? Sure. Are they?

War Eagle says: “I doubt it.”

They are probably as wrong as the Websters, who live in Bay St. Louis, Miss., two states away. Last week, a federal jury found that they were right in their lawsuit that alleged USAA wrongfully denied their $1.7 million claim. And that was just for structure. The next phase was to deal with contents.

At the conclusion of the trial, U.S. District Judge L.T. Senter Jr. will be responsible for calculating how much money USAA owes the Websters, based on the jury’s verdicts.

Later, the trial would move to the punitive phase to determine whether USAA acted in bad faith.

The Websters also are seeking unspecified punitive damages for the company’s alleged bad faith, plus attorney’s fees and expenses. But the request for punitive damages couldn’t be considered until later in the trial.

USAA settled before it got that far.

ITP asks: Is anyone on this list keeping score in Louisiana and Mississippi? If so, can you let me know how the cases that have gone to trial have resulted? Thanks!

And thanks to John.

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.