I’ve been hanging onto Anita Lee’s story from June 27th (H/t Editilla for the ease in finding the link) on Insurance Commish Mike Chaney’s upcoming insurance forum for almost 2 weeks now trying to figure out how to make all the puzzle pieces fit. Puzzle pieces? Now our readers are confused too but perhaps not as temporarily disoriented as I was left after seeing the Commish that same weekend being interviewed by WLOX’s Dave Elliot late that Sunday night. It was only this week that I figured out the Mike Chaney dichotomy to the point where I can convey the man’s fundamental contradictions and the differences between Mike Chaney the politician and Mike Chaney the ideologue. I’ll begin with Mike Chaney the politician and his upcoming forum designed to coincide with the National Governor’s conference scheduled for later this month in Biloxi as we visit with Anita Lee and the Sun Herald:
A wide variety of measures aimed at improving the coastal insurance market will be explored at a multi-state insurance forum scheduled on the eve of the National Governor’s Association conference.
Mississippi Insurance Commissioner Mike Chaney expects key stakeholders at the conference, including insurance commissioners from coastal states, insurance industry representatives and mitigation specialists. Chaney also hopes Gov. Haley Barbour, who is on the agenda, will bring coastal governors with him.
“It’s top-notch,” said Joseph Ammerman, a spokesman for the Mississippi Insurance Department, the host of the two-day forum July 16 and 17 at IP Casino Resort. “We’ve got a great lineup of speakers. The commissioner has been telling everybody who has agreed to speak, ‘We want answers.’
“We want to come away from this conference with some strategies about how to make things better on the Coast. We’re looking for solutions.”
I’d submit Mr Chaney and MID isn’t looking too hard for answers because the speaker lineup, while impressive, does not include a single consumer advocate. Mr Chaney is an industry guy who evidently doesn’t see the need for a consumer perspective at his forums. Mike Chaney the pol is always quick to take credit for the state funds given the windpool by the legislature to reduce premiums and that is what left me confused. You see, Mike Chaney the ideologue doesn’t believe in insurance subsidies for consumers nor any solution that involves governmental involvement beyond providing a free government backstop to for profit insurers …at least according to the 14th draft of the National; Association of Insurance Commissioner’s whitepaper titled: Natural Catastrophe Risk: Creating a Comprehensive National Plan. I’ll start with the AM Best story on the whitepaper before we delve deeper into Mssrs. Chaney and Richardson’s dissent:
The National Association of Insurance Commissioners’ natural disaster white paper stops at 15 drafts. At its Summer Meeting in Minneapolis, the NAIC Property and Casualty Insurance Committee adopted the paper — “Natural Catastrophe Risk: Creating a Comprehensive National Plan” — after accepting the fact committee members were simply never going to reach one unified idea on how best to deal with natural catastrophes…….
The committee elected to compromise, allowing the differing views of several states to stand on their own. Critics of the last draft of the paper were permitted to write in. Mississippi, South Carolina, Louisiana and Connecticut chose to send in corrections and/or clarifications as they saw them. Each viewpoint was included in the back of the last draft as opposed to attempting to rework the paper once again.
“I don’t want to diminish it by saying we stuck them on the back,” McRaith said. “The truth is this is an important public policy discussion for our country to have so it is not surprising there is a diversity of opinion.”
For instance, McRaith said contributions made by Mississippi and South Carolina “move the viewpoint to the other side,” away from pro-public participation.
Pro-public participation? It’s a fancy word for government market intervention like Gene’s Taylor’s Multi-peril bill or Ron Klein’s Homeowner’s Defense Act, or ostensibly giving the Mississippi’s insurer of last resort over $100 million dollars in taxpayer subsidies.
I’m a while paper sort of guy so I immediately nabbed my own copy for use here on slabbed and it is there we go next so we can let Mr Chaney speak for himself. The preamble was evidently written before the arguments insurers made in Corban, including the admissions of claims dumping by Nationwide and USAA hit the press:
With a few exceptions, all of the insured losses related to wind-damage have been handled by the insurance industry. The uninsured losses associated with these events have been paid by the states and the federal government using taxpayer funds.
Of course after the arguments in Corban we now know legitimate wind losses private insurers refused to cover were paid by the states and the federal government using taxpayer funds. The NAICS lives in denial so don’t look for a 15th draft that changes the language since most of that group are the finest regulators insurance money can buy. That said I thought the whitepaper has some very interesting information in it such as this blurb from pdf page 4:
While Hurricane Katrina was devastating, catastrophe modelers have identified a number of possible natural disasters that would dwarf the damages caused by this event. These are not fantastic scenarios, but instead, have already occurred in our nation’s history – just not at current exposures, and structure values. The 1906 San Francisco earthquake would create damage of $400 billion with over $200 billion in uninsured property losses if it had occurred today; a repeat of the 1900 Galveston hurricane would cause $36 billion in possible damages; a repeat of the 1938 Category 3 hurricane that reached landfall in the Northeast would cause damage exceeding $300 billion; a repeat of the series of earthquakes that struck the New Madrid Fault in 1811 and 1812 would cause potential economic damage of up to $275 billion with insured losses reaching $100 billion. All of these scenarios have occurred in the past, and could potentially occur again in the future. The current structure to handle catastrophe losses may be overwhelmed by an event of this magnitude.
I noted this blurb on pdf page 11:
No other issue in the current debate has polarized the regulatory community, the industry, consumer groups, legislators and other parties as much as how to finance and insure against future catastrophic risks.
On one hand, many in the insurance and reinsurance industry aver there is sufficient capital capacity to meet the current demand for natural disaster insurance, and there is no need for public sector involvement. They suggest that any type of government intervention may have the unintended consequence of undermining the private market.
On the other hand, some experts suggest there could be a level of catastrophic natural disaster losses that are of sufficient magnitude to impair, if not implode, the private insurance market. These experts advocate a level of optional state or regional support, via catastrophe funds, and then a level of federal reinsurance back to these state or regional funds.
The debate is whether there is a sufficient ongoing supply of capital available in the private insurance/reinsurance market to provide coverage for natural disasters without significant market disruptions or failures. The answer to this question is complicated by the fact that the “size” of the market is not well defined and information needed to develop a reasonable answer has been difficult to acquire.
At the June 2006 meeting of the NAIC CIWG, reinsurance industry survey data was presented that demonstrated there was approximately $55 billion total capital available to support catastrophic risk, exclusive of individual insurer retentions. With the inclusion of primary insurer retentions, the estimated available capacity is about $95 billion globally.
Under the current system and types of coverage, it appears the industry has sufficient capital to support the current risks.
Now I’m a numbers guy so I was quick to notice that the estimated available global Cat capacity of $95 billion dollars is less than half of estimated insured losses in today’s dollars of the cost of the San Fransisco earthquake let alone major Hurricanes yet the Commishes call private capital adequate. I’d submit they reside in LaLa land as I also wondered how much of that capacity included subprime toxic paper stuffed reinsurance SPE’s like Allstate’s Willow Re or State Farm’s Merna Re . As a whole the NAICS has suggested a multi layered approach that in essence preserves the private market middle man while the costs to the taxpayers increases to pay for the middle man’s cut of the action.
It’s not that I blame the insurers for wanting that current setup where underwriting is federally backstopped and insurers get to use taxpayer provided capital for free. It is a great setup for everyone but the taxpayers and that brings us to Mr Chaney and Mr Richardson’s dissent which begins on pdf page 25 where the guys put in a plug for keeping US taxation off Bermudan reinsurers which Mr Chaney supports as well as essentially making insurance a tax free enterprise. In any event they follow calls for amending the tax code to encourage more private underwriting with this whopper on pdf page 26 amending the NAIC consensus language that I quoted above (emphasis Sop):
With a few exceptions, all of the insured losses related to wind-damage have been handled by the insurance and reinsurance industries. This speaks well to the ability of the private market to handle most catastrophe events. However, proponents for government involvement point to the fact that some of the uninsured losses associated with these events have been paid by the states and the federal government using taxpayer funds.
Somebody needs to tell Mrs Politz that Mr Chaney thinks her claim is uninsured. As arguments in Corban proved, the private markets ability to dump their losses on the NFIP is what is impressive, not Mr Chaney’s fantasyland version of events but it gets better as we continue:
The current plan envisions risk bearing by private market insurance participants supplemented by optional state facilities before federal government resources are utilized. The Federal government would become financially involved through a backstop program if the catastrophic losses exceed the private market and state capacity.
And the translation? The current plan envisions preserving the status quo wherever possible to be supplemented by a taxpayer subsidy to for profit insurers so that the insurers can underwrite and profit from issuing policies without having to take any risk for their underwriting decisions. And while we said there was enough private capacity to make the market that really isn’t true since we acknowledge a Government backstop is needed for extreme Cat events.
I believe in private markets – I must because I compete in one each and every day. Businesses with a viable self sustaining business model don’t need a government handout in order to provide the products and services to the public. And when a market, such as property and casualty insurance for extreme risks can’t provide a product consumers need without a government handout, it doesn’t make sense to keep a middle man in the equation sucking up scare tax dollars, especially unregulated reinsurers based in tax havens like Bermuda that have never paid a dime in US tax to begin with.
This brings us back to Anita Lee’s story on Mr Chaney’s insurance forum. Judging from the comments left on the report the policy paying public isn’t buying the fact that the forum is anything other than useless dog and pony show designed to make Mike Chaney the pol look as if he is actually doing something. The $95 dollar fee to attend and weekday scheduling will help insure the unwanted, unwashed masses do not attend. It is with one of those comments to Anita Lee’s story that I close this post.
This is a laugh, insurance companys are going to do what makes them the most money. What issue’s are you going to educate them on. Barbour was a lobbyiest in DC. at one time. Send tax dollars to Jackson and see what you get back it return.
$95 billion of global capacity does not mean there is $95 billion for a Florida hurricane, $95 billion for a California earthquake, $95 billion for (name that megacatastophe). They don’t bet it all on one event, so the insurance and reinsurance capacity is well below even a $50 billion event. That is why even though premiums are way up and Mississippi, South Carolina, Louisiana, Alabama, Texas Commissioners do not put up any resistance to further increases, the supply of insurance continues to contract. When supply does not respond to high demand and high prices, the problem is in the industry. The reinsurance cartel is managing the limits on exposure to major events. When the Mississippi wind pool recently bought $600 million reinsurance cover at rates much higher than the expected claims, there was no competition. Forty-six reinsurers divided up the profits, taking layers of $10 million to $25 million. The whole system is rigged against homeowners and taxpayers.
Excellent points Brian. I didn’t delve that deeply into the detail because the raw numbers themselves speak to the folly of the NAICS’ conclusions there is enough private market capital to meet the needs of consumers here in the US.
There are several nuggets I didn’t cover that may end up in a second post. The bottom line here IMHO is that Mr Chaney has a problem with the consistency of viewpoints.
For instance I wonder how the taxpaying public would react to finding out the Commish is advocating giving government handouts to the poor to use in paying their insurance bills. The contortions he goes through to maintain the current, flawed system is simply stunning.
I’m not throwing stones but perhaps next time before Dave Elliot interviews Mr Chaney he’ll arm himself with better information from which to ask questions that are on point, not questions designed to accentuate Mr Chaney’s political talking points.
sop