My brother Darryl and my brother Darryl – and we’re all in this together

Remember Larry from Newhart? I think about him and his brother Darryl and brother Darryl – both of whom were mute, btw – when I look at these graphs of the changing picture of investors in insurance linked securities (ILS).

A look at who securitizes insurance risks as of July 2007 shows insurance and reinsurance are the leading ILS sponsors.

Another view of the changing picture is seen in the ILS natural catastrophe investor base is illustrated in the companion graphic below.

In the first graphic, the percentage of government-sponsored insurance linked securities doubled when the years 2001-2007 are segregated from the total ten-year period 1997-2007. However, the percentages represent an average indicating government sponsored ILS accounted for a larger percentage in one or more years.

A h/t to Brian Martin for the link to what is a thought provoking comment in light of these data and current events.

Government is also not subject to the private-sector factors that produce large swings in premiums around expected loss in private insurance markets. Thus, compared with the private sector, government should be able to set insurance prices closer to expected loss for hurricanes and other catastrophic risks, and keep those prices closer to expected loss over time.

While most in this country would expect government to protect taxpayers from the investment loss in the private insurance market, take note of today’s breaking news.

A massive foreclosure rescue bill cleared a key Senate test Tuesday by an overwhelming margin, with Democrats and Republicans both eager to claim election-year credit for helping hard-pressed homeowners.

However, opponents like Senator Mike Enzi (R-Wyoming) claim the bill is bailout that supports those who created the crisis.

They expect the federal government to turn their backs on responsible lenders and borrowers and renters waiting — waiting — to become first-time homeowners, and support those groups that have pushed our housing market into decline with bad loans and bad investments…

Although it too collapsed, one of those in the group was the Bear according to this story tying the collapse of two hedge funds to the collapse of the sub-prime mortgage market.

The change in the funding base of insurance linked securities during this period depicted in the second set of graphs gives cause to question the possibility of a link – a lack of transparency precludes an answer.

However, with the government now investigating off-shore investments, transparency may come sooner than later – and for that information, a h/t to cominglatersooner who likely has some idea if the banks and hedge funds that invested in sub-prime mortgages are the brother Darryl to some of those in the funding base of ILS.

If nothing else, all of this suggests Brian Martin is correct and that wind coverage will be added to NFIP  by design or default as the case may be”

19 thoughts on “My brother Darryl and my brother Darryl – and we’re all in this together”

  1. “government should be able to set insurance prices closer to expected loss for hurricanes and other catastrophic risks, and keep those prices closer to expected loss over time.”

    Sounds good in theory. In reality, the government sets prices below expected loss and taxes policyholders to make up the deficit. Florida homeowners already pay a 2-3% surcharge. God forbid a CAT 5 storm makes landfall this summer and the state has to back up the reinsurance it has been selling…

  2. IATW, the common reality in all theories seems to be that the bottom line is always on the taxpayers dime.

    Consequently, the most cost-effective and efficient way to provide the needed protection seems to be a single government backed multi-peril program with payments calculated on a sliding fee scale.

    I’m not at all in favor of these state-backed programs – as Brian Martin pointed out the other day, it’s impossible for them to build up the reserves needed.

  3. “the most cost-effective and efficient way to provide the needed protection seems to be a single government backed multi-peril program ”

    Can any government program be cost-effective and efficient? Look at the National Flood Insurance program…

    In any government backed insurance program the rates will be artificially low and high-risk policyholders will be subsidized. Why should Indiana’s tax dollars be re-distributed to Florida homeowners?

    I’m kind of surprised to see support for a federal program on this website. Allstate, State Farm & Nationwide are leading the charge. Large insurance companies will gladly right 70% of the risks along the coast if they know the government will provide stop-loss protection. Personal Auto is where they make their profits.

  4. Different meaning of federal program – I was speaking of an expanded NFIP i.e., our government running the program not the insurance industry becoming a new form of government.

    More on that later…

  5. Quote:

    “Consequently, the most cost-effective and efficient way to provide the needed protection seems to be a single government backed multi-peril program with payments calculated on a sliding fee scale. ”

    In other words, welfare. A handout.

    If “sliding fee scale” means something else, I would like to hear it.

    And the fanatasy of governement appropriately pricing Cat coverage is just that: a fantasy. The political pressure on them to give the free lunch (subsidized coverage) would be impossible to resist.

    Exhibit A: looked at state and local government pension funds lately? Take a motivated client class (public employees) add politicians who see the cost of placating that class as being a deferred one that they won’t have to pay for, and you end up with a giant fiscal mess. Socialized cat coverage would be exactly the same thing, and the end result would be taxpayers from non-Cat areas having to subsidize the lifestyle choices of Gulf Coast residents. That is unfair by any measure.

  6. Actually, I have looked at pension funds lately – but just close enough to notice they’ve been investing in insurance linked securities.

    I realize you could care less about the cost of insurance pricing low-to-moderate income families out of the housing and rental market – and not just in the coastal states – as long as the industry’s making money.

    A sliding fee scale, however, is no more a form of welfare than the public money spent covering bad private sector investments.

  7. I entirely agree that public money spent covering bad private sector investments is a mistake, but two wrongs don’t make a right.

    I am sympathetic to those that live beyond their means, but welfare is not the answer. But I give you credit for not ducking the characterization: most of those who shill for socializing the Cat risk business deny that it is welfare they are selling.

    Finally, pension funds investing in Cat bonds seems like a really bad idea to me, given that the bond doesn’t get repaid if the Cat triggers are met. That seems like an awfully risky investment for a pension fund. I always thought they were supposed to be conservative investors. Cat bonds are the antithesis of the conservative investment.

  8. A reasoned comment deserves a reasoned response – and I’ll be back with same shortly.

  9. claimsguy, “welfare” is one of those words that triggers a block to understanding and outdated as well; so, let’s drop that in favor of “assistance”

    Assistance is associated with short-term support for working families – the idea being the temporary support needed to achieve self-sufficiency.

    In today’s economy, we’re moving beyond just low and moderate income families in need of temporary assistance – and it’s not a question of living above their means but the means to live.

    Housing is the do-or-die of the local tax base that stabilizes a local economy – and the cost and availability of property insurance is the do-or-die of the housing market.

    Here Blue Cross manages our State’s CHIP program. That’s a good example IMO of the way multi-peril should and could work – a federal program that gives states some flexibility in actual coverage available and the option of operating the program directly or contracting with a provider such as Blue Cross.

  10. “Temporary”?

    There is nothing temporary in what you propose. You propose a forever entitlement program that is a pure transfer of wealth between regions of our country.

  11. Temporary, claimsguy, in that as income goes up, assistance goes down to the point the property owner carries the load. As to transfer of wealth among various regions, it happens every day in more ways than you can count.

    It’s the most fundamental aspect of “these united states” – btw, this region tried pulling out about 150 years ago and it didn’t work out.

    Now, considering that, don’t you think you’d get more votes for transferring between regions than transferring it offshore.

    I’m all for wealth, btw, just not at the expense of making more poor.

  12. “as income goes up”

    What, exactly, gives you any idea that the income of any given recipient of this new welfare program of yours will go up over time, or that to the extent that it does, that person won’t simply be replaced by another welfare recipient?

    As I noted ealrier, this is a blueprint for another permanent entitlement program. You would have thought we would have learned the lessons of the others: they never get smaller and they never go away.

    I note you refuse to defend the inter-region transfer in any way other than “this isn’t the first”. That is hardly a defense. I am not saying it is the first. I am saying it is wrong and unprincipled. What gives you the right to take money by force from someone in (for example) New Hampshire to pay for your insurance costs? If you don’t want to pay for the costs of living where you do, move. What is it about your lifestyle choice that gives you the right to compel others to pay for it?

  13. It’s so funny how one who calls himself “claimsguy,” clearly labeling himself as an insurance shill, throws the word “welfare” into just about every comment.

    How hard is it to understand that an insurance giant is now the biggest welfare recipient in our Country’s history?

  14. I am not completely sold on the All-Cat idea.

    But using welfare as the reason? We could all be partying in the streets if they gave us the money that had been and is further planned for corporate bailouts.

    And until Bermuda sinks back under the waves like a latter day R’lyeh it is us who will be paying the debt.

  15. I am not necessarily a fan of the Florida reinsurance program, but which reinsurance do you think is more likely to pay all its obligations if a major hurricane hits Florida this year:

    The State of Florida’s reinsurance whose megacat capacity has been questioned by the industry but has very open books and a public backstop;

    or Willow Re and other offshore special purpose vehicles and sidecars whose assets are uncertain and unknown, who have exposure to unrealized losses in unmarketable financial instruments, and who include noncash accounting gimmicks such as deferred tax breaks as capital?

    Ask Freddie Mac how well all those deferred tax breaks worked when it came time to pay obligations.

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