Slabbed Daily July 22-24. Lets tie a few things together

ying-yangThere have been a good number of news tidbits that do not necessarily constitute a post here on Slabbed on their own but when taken together tie up several loose ends and lend context to a story that does merit it’s own post in Mike Chaney’s recent insurance forum held last Thursday and Friday here on the coast.  So let’s backtrack a week and shake us up slabbed insurance cocktail by beginning with Anita Lee’s coverage of day 2:

Gov. Haley Barbour joined the coastal insurance debate Friday, telling an audience he believes regional compacts would be the best way to regulate wind coverage in coastal zones from Texas to Maine.

Barbour introduced The Travelers Insurance Cos. president, Brian MacLean, to explain the company’s proposal for improving the coast insurance market. Insurers have pulled back from coastlines in recent years, leaving state-run wind pools to fill the void.

Wind pools were intended as insurers of last resort, but their market shares have grown to levels that experts agree are unsustainable. Insurance works by spreading risk, not concentrating it.

Haley has been conspicuously absent from the insurance scene refusing to comment on the litigation while offering cheap lip service to Gene Taylor’s multi peril bill. I suspect he and the State GOP has been searching for a way to throw a bone to the people on the coast that helped elect him while working hard to preserve GOP big business bonafides with the campaign money machine that is big insurance. To that end Haley has latched onto the Travelers 4 Pillars plan which is underpinned by the Federal Government going into the reinsurance business. Given the massive financial problems a similar industry backed program has experienced in Florida along with problems we highlighted in the Cat Bond market (reinsurance securitized) I have my doubts and actually think the proposal has no chance with the Obama administration. Some of the State Insurance Commissioners present also had their doubts but not for any of the reasons I listed, rather I suspect the fear of the end of the revolving door and the associated financial benefits is foremost on the minds of Mike Chaney and his commish buds that were in attendance. Jim Donelon in particular had a clownish quote about consumer protection that I’m certain Bob Weiss would find amusing:

Federal coverage for mega-disasters is key to the plan. Insurance companies would buy that coverage at cost, which would help keep down rates. Two state insurance commissioners were skeptical.

“There would be nobody there to protect consumers except the lobbyists for the insurance companies,” Louisiana Insurance Commissioner James Donelon said. “That’s how federal regulation works.

He and others pointed to the financial collapse of AIG Inc. under federal regulation. AIG insurance companies under state regulation remained solvent.

What Donelon did not say of course was that State Insurance Regulators along with the NAIC changed what counted as regulatory capital including silly things like deferred income taxes, for instance, as resources available to pay claims. We covered the changing of the solvency definition here, here, here, here, here, here and here. I’ll also note the State Insurance Commissioners were MIA on the Gen Re $500 million dollar sham reinsurance scandal involving AIG. Simply put these state commissioners are not equipped to regulate global insurance concerns.

South Carolina Commish Scott Richardson, like our own Commish is an unabashed free insurance market true believer was blunt if not ideologically inconsistent on what the industry wants in profits with little risk while dumping the losers on the Federal Government:

South Carolina Insurance Commissioner Scott Richardson said, “I think their end game is to take that risk and put it on the federal government’s back and off insurance companies.”

Of course like I illustrated with Jim Donelon above many in the insurance industry remain firmly in denial, especially on the topic of claims dumping despite overwhelming evidence to the contrary so it should come as no surprise Gene Taylor was treated rudely by the industry attendees:

U.S. Rep. Gene Taylor spoke earlier in the day about his plan to include wind coverage in the National Flood Insurance Program. “We would spread the risk around the country, which is the point of insurance,” Taylor said. Rates, he said, would be set high enough to cover losses. Richardson countered that a sound rate would be much higher than most people could afford.

Taylor sees combining wind and flood insurance as the only way to resolve the conflict over who pays for hurricane damage when the cause is difficult or impossible to discern.

When he said private insurance companies stuck the NFIP with the bill for Katrina damage, one audience member booed. Another said, “That’s absurd.”

I debunked Richartdson’s arguments in a post I retrieved from the archives and stuck to our front page this past weekend which in turn attracted some additional insightful commentary from our own Brian Martin. Simply put Richardson is all wet.

In reality this is a fight over money, as in more money for insurers that generally post huge and consistent profits:

Richardson said it’s time to stop talking and act on solutions. One that’s been discussed for years would allow insurance companies to build tax-deferred reserves.

So while the merry gang of captured state insurance commissioners were blowing hot air in Biloxi, the good people at Artimis focused on the warm seas and the impacts of El Nino, just not on reduction of Atlantic tropical cyclonic activity. Rather for every benefit there is a cost, in this case the failure of the annual Indian Monsoons:

It’s been widely reported in the last few weeks that an El Nino weather pattern is developing in the Pacific. The phenomenon causes a warming of the Pacific ocean which in turn affects weather patterns globally, although the worst affected are those surrounding the Pacific. El Nino conditions are thought to cause a weaker monsoon in India than normal with lower rainfall levels than are required to irrigate land and crops. It also impacts India’s supply of electricity as a lot of their electricity production comes from hydropower plants and these are currently running below 40% capacity.

The biggest and most obvious impact of El Nino in India is of course the impact to farmers as crops will fail and sadly people can starve due to a weaker monsoon season. That’s where index based crop weather insurance comes into it’s own.

Most of the index based weather products available through microfinance schemes pay out both for too much and for too little rain. In the case of a weak monsoon claims could potentially run into the region of a 100%+ claims ratio for the first time, making this an unprofitable venture. That’s the concerning factor in India; microinsurance schemes are highly subsidised in order to attract reinsurers to these markets and if the profitability becomes even less likely then we may see some of the larger players pull out.

Of course, the savvy global reinsurers will have a portfolio of weather risk products themselves to hedge the risks of the microinsurance schemes going south, and while that may help some to stay interested, somewhere the loss will catch up with somebody. Climate change and patterns of weather such as El Nino make it extremely difficult to attempt to ‘yield’ manage weather insurance, some other solution needs to be found to provide a backstop to those running these schemes. An answer could be found by utilising instruments such as cat bonds as the final backstop for a bucket of reinsurers microinsurance policies, allowing investors to take the final risk in return for a healthy interest on their coupon.

They like Cat Bonds at Artimis but as our very good friend Mr CLS has repeatedly pointed out these securitized reinsurance contracts have drawbacks including issues in 2006 through 2008 being stuffed full of toxic paper. We’ve covered the problems in the Cat Bond market (along with the experts at Artimis) and those wanting to catch up can find our posts on that topic here, here, here, and here. There are still problems with the older issues that were stuffed with subprime toxic paper as the Insurance Journal reports:

Standard & Poor’s Ratings Services announced that it has lowered its ratings on six natural peril catastrophe bonds issued in 2007 and 2008, as listed below.

The bulletin said: “We lowered our ratings by one notch to reflect the adjusted probability of attachment for each bond that resulted from applying our criteria to the information we recently received in the annual reset reports.

“In addition, we placed our ratings on four catastrophe bonds, all related to the Residential Reinsurance 2007 Ltd. issuance, on CreditWatch with negative implications. We are awaiting updated occurrence and aggregate exceedence probability curves from the transaction modeling agent, AIR.

“Because the notes will mature on June 7, 2010, and there are no subsequent portfolio resets, the passage of time during the remaining risk period has lowered the probability of attachment. Given the information we have, if we do lower the ratings, it likely would be by one notch for the class 2, 3, and 4 notes and up to two notches for the class 5 notes. We expect to receive the updated curves shortly and will then resolve the CreditWatch.

“The criteria article “Methodology And Assumptions For Rating Natural Catastrophe Bonds,” published by S&P on May 12, 2009 “provides indicative stress levels that we apply to each transaction’s occurrence (or aggregate) exceedence probability curve. Applying these stress levels, which per our criteria can vary from the indicative levels, to the applicable occurrence (or aggregate) exceedence curves generated a probability of attachment greater than in the annual reset reports presented to Standard & Poor’s. As a result, the adjusted probability of attachment on each bond, when compared with the default table used to rate natural peril catastrophe bonds, indicates a rating different than the current rating.”

“The ratings on the remaining natural peril catastrophe bonds for which we have received reset reports are not affected.

Ratings Lowered:
— Caelus Re Ltd. Series 2008-1 Class A to BB from BB+
— Carillon Ltd. Series 2 Class E to B- fom B
— East Lane Re II Ltd. Series 2008-1 Class C to CCC+ from B-
— East Lane Re Ltd. Series 2007-1 Class B to BB from BB+
— Residential Reinsurance 2008 Ltd. Class 1 to BB- from BB
— Residential Reinsurance 2008 Ltd. Class 2 to B- from B

Ratings Placed On CreditWatch Negative:
— Residential Reinsurance 2007 Ltd. Class 2 B+/Watch Neg B+
— Residential Reinsurance 2007 Ltd. Class 3 B/Watch Neg B
— Residential Reinsurance 2007 Ltd. Class 4 BB+/Watch Neg BB+
— Residential Reinsurance 2007 Ltd. Class 5 BB+/Watch Neg BB+

That problems of the recent past hasn’t scared investors off, however. As Mr CLS is fond of saying “you can’t beat those yields” and the folks at Artimis see the facts in the numbers and the numbers don’t lie:

Institutional investors seem to be increasingly confident about the cat bond market as they start to pour funds back into the asset class. After the blip in the market caused by the failure of Lehman Brothers the market appears to be back in favor as investors realise that the returns and low correlation still make it an attractive place to be.

Nephila Capital are one of the success stories of the year as they announce that they have raised around $980m from institutional investors seeking to put their money into catastrophe bonds in the second quarter of this year. Greg Hagood, co-founder of Nephila Capital, says the investors range from pension funds, to hedge funds and fund of funds, all are said to be seeking non-correlated investments such as cat bonds and insurance linked securities.

More encouraging signs of the health of the market; when investors return in droves it can help to drive prices down a little as demand increases, which in turn could help issuers get new transactions off the ground which is currently proving tricky due to price.

As the Clarion Ledger editorial board noted long ago “the key” that unlocks the solution to the coastal insurance crisis “is in the reinsurance”. Both the Travelers plan and Ron Klein’s Homeowner’s Defense Act take us further into that realm than ever before. Because of the complexities this is ground that needs to be carefully considered before we take the plunge. Here at Slabbed we give props to the Traveler’s for coming forward with ideas to solve the coastal insurance crisis. Unfortunately for coastal consumers we have a lot more “visiting” to do on these issues before a solution is found.

sop

11 thoughts on “Slabbed Daily July 22-24. Lets tie a few things together”

  1. If I read your post correctly, like that of most of your previous posts, you’re not really interested in answers to coastal insurance problems? Instead, you want to say that a forum that pulled in 300 of the most influential insurance, mitgation, real estate, banking and finance and elected leaders is simply a way, as yet unidentified, for our insurance commissioner and others to get money from big insurance companies?
    Pray tell, what is your solution, short of attempting to reinvent the United States and the way business is done? Why not spend one fourth of the time you spend libelling elected officials with coming up with workable – the emphasis on workable -ways to deal with the insurance costs that are crippling the coast’s economy? That is what the insurance commissioners are trying to do.

  2. What’s wrong with reinventing the way the insurance business is done? I don’t know what state you’re from Mr. Bullstroke, but I know our Commissioner is smart enough to come up with innovative options if he wasn’t being smothered by industry insiders.

    The current insurance model is outdated – designed for a very different world than the one we live in today. Thus, whether 3 or 300 in number, stakeholders have a stake to protect.

    Mitigation is key – mitigating all risks – not just the physical and fiscal but the political, too. It’s well known that systems are resistive to change and skilled at assimilating forced change to the extent that actual change is illusory.

  3. What a treat Robert Bullstroke has dropped in. Please feel free Robert to call me Doug.

    I hate you didn’t address the points I made in the post. You are right the Dave Truetel got a stellar group of folks together besides the Commishes. We are equal opportunity in calling out pols from both political parties.

    I actually have some out of the box ideas but since I’m pounding this reply out on my blackberry you’ll have to wait a bit longer to find out.

    You gotta admit Jimbo the clown provided me a wide open shot. And don’t blame me for the revolving door. My main man Sam Friedman introduced me to it.

    Please don’t be a stranger. We miss your perspective.

    Sop

  4. I just spent a 1/2 hr writing a reply and somehow “lost it.” I must have (obviously) hit the wrong button. Anyway, I was almost finished w/it. So if yall see my reply “floating around in space” w/o a signature and w/o my concluding paragraph, I’d like to finish it.

    This is so aggravating, but it’s my fault and, unlike some insurance companies, I can accept fault where fault is due. lol

    SHIRLEY HEFLIN

  5. Shirley I’m sorry you list that reply but it did not fall into our spam folder. Given the subject matter I hope you can at least give us the abbreviated version. Having lost a reply or two through time I understand your angst.

    sop

  6. SOP: Ok, but only because I was so upset by Mr. Bullstroke’s “attack” on you.

    First, he refers to a forum that “pulled in 300 of the most influential insurance, mitgation…and elected leaders” and that you (in a way yet unidentified) believes said forum is a way

    “…for our insurance commissioner and others to get money from big insurance companies?”

    PLEASE!! I’ll bet these 300 or so “influential people” didn’t spend the p.m. @ a Motel 6 or a tent city. Further, some of them most likely received Continuing Education Credits for the event and, at the very least, wrote it off as a business expense.

    Further, Mr. Bullstroke invites you to spend at least 1/4 of your time re-inventing the U.S. and/or the way business is conducted. ISN’T THAT WHAT ALOT OF SLABBED IS ALL ABOUT? RAISING PUBLIC AWARENESS ABOUT THE UNETHICAL (AND OFTEN ILLEGAL) WAYS INS. COMPANIES CONDUCT BUSINESS? Soon insurance companies will tire of this educational forum and start changing their behavior(s), pay their policyholder’s claims and then – now this is a stretch – the insured FINALLY having the financial means to flee these tent cities and moving back into a dwelling that resembles something like a “home.” Also, if you are the guardian angel entrusted with “changing business” for the good, THANK YOU for doing so!

    I personally don’t see you “libeling elected officials.” Rather, I see elected officials being called to the carpet for, among other things, their lobbying activities with big $ ins. companies.

    Ok, enough of Bullstroke. I’m a single mom in Tampa, FL, w/a 13 y.o. son – I’m his sole supporter. I cringe every time I receive a premium notice for my Homeowner’s cvg. from STATE FARM. I literally live 4 blocks from the entrance gate to MacDill A.F.B. (right on Tampa Bay – i.e., water). State Farm dropped my Flood coverage last year. Do you think they (or their State Farm Agent) helped me find flood ins. despite me being their loyal customer since 1988? OF COURSE NOT! Further, I’ve never had a Homeowner’s claim w/State Farm. As a Legal Secretary for an Attorney who represented insured’s for 20 yrs., I’ve worked ALOT of files. Most insureds have never submitted a Homeowner’s claim w/their carrier for fear that their rates will go up – even when they had the opportunity to submit one. Usually, the only time they do was when they sustain a loss that is beyond their financial means to repair w/o making a claim. It is then – AND ONLY THEN – that they see and experience firsthand not only that (a) their claim is going to be DENIED, but that (b) they are going to be the “ENEMY” in a long, drawn out process of pursuing a claim that SHOULD HAVE BEEN PAID UPON SUBMISSION – not AFTER PUBLIC ADJUSTERS AND ATTORNEYS FOR BOTH SIDES BECAME INVOLVED!! Oh, and let’s not forget the years of litigation.

    Finally, the “policy limits” that an insured pays premiums for in the above-scenario will not be paid to the insured – the limits may ultimately (AND FINALLY) be obtained on behalf of the insured, but after the deduction of attorney’s fees, costs, expert fees, and maybe a Public Adjuster’s Fee, the insured will only receive a “net recovery” after said deductions – AND THAT’S NOT WHAT THEIR INSURANCE COMPANY PROMISED THEM IN THEIR INSURANCE POLICY/CONTRACT.

    BOTTOM LINE: THE TRUST IS NOT THERE. IT WAS NEVER THERE – NOT TO SAY THAT THERE ARE NOT SOME GOOD INS. COMPANIES THAT PAY CLAIMS THAT SHOULD BE PAID; BUT YOUR AVERAGE CITIZEN DOES NOT HAVE THE RESOURCES TO TAKE SUCH A CHANCE W/THEIR INS. COMPANY. THE INSURED TRUSTS THEIR INSURER FROM THE GET GO.

    SHIRLEY

  7. Shirley I’ve had the privledge of meeting Mr Bullstroke in person on three occasions. He smiles big and greets me with a warm welcome then runs away as fast as he can prefering not to engage me substantive conversation. Fair enough I’m not the type of guy who has to have that type interaction to self validate my beliefs.

    What Mr Bullstroke didn’t understand is I am as bright as any of those bright minds to which he refered and I’m the type of guy who has no trouble confronting the CEOs of the publicly traded companies in which I invest……it takes no more guts to call out the insurance types that peddle fluff over substance – these people, just like me, put their pants on in the morning one leg at a time.

    Before any problem can be solved you first have to identify exactly what the problem is that needs solving. When I see insurance commissioners spout propadanga as fact despite overwhelming evidence to the contrary I hold no hope that bunch can solve anything, especially something as complex as the coastal insurance crisis thus my hot air remark which I stand by 100%. They are in denial, blinded by money and a financial stake in the very industry they are charged to regulate.

    So while Bullstoke and his ilk live in a stange, weird fantasyland where State Farm was “fair” to their insured on the coast after Katrina and actually cite that “fact” as proof private markets work I prefer to deal in reality because it is there a lasting solution will be found.

    My clients keep me around because I have the ability to stand up to the best and brightest in the business world on their behalf, including $500/hour corporate lawyers and consultants who seem to forget we all put our pants on one leg at a time. Ego is the ultimate cognative bias and achilles heel.

    The Sun Herald has been very kind to our insurance commish. I will not stop until I’ve convinced them that not only was their prior endorsement of Mike Chaney a mistake, it was contrary to the interests of their readership. Then we’ll begin working on the folks that pull the lever for the “R” regardless of whether that R stands for Retarded.

    sop

  8. A genius whose head isn’t so big that it can fit through a door frame….how refreshing. You certainly have a firm grasp on “everything.”

    If there’s anything I can do for Slabbed (even though I’m in Tampa), I’d love to do it.

    Until then, I’m gonna smother yall w/comments. :)

    SHIRLEY

    P.S. The difference between Slabbed and other ins. Blogs (in my humble opinion) is that your average citizen can read it and learn something. Slabbed speaks to the reader – not AT THEM. That’s also refreshing.

  9. Now you are too kind Shirley. I have several knots on my genius head as testiment to how I learned that wisdom.

    Believe me if there is anything you can do besides commenting we’ll be asking. Nowdy and I will visit on that when we both return to Mississippi next week.

    sop

  10. Well, let me see where to begin. First of all, Doug, methinks you have me confused with someone else. I don’t recall ever meeting you anywhere and if I did, I damn sure didn’t run away from any substantive conversation with you. So, maybe it was some other Robert Bullstroke.
    Secondly, I’ve never made any comment as to your “brightness” that I can recall, and I’m interested in your comment that you’re not afraid to confront CEOs and others in power. Confrontation is a great tactic in warfare, but if you think that you’re going to gain an inch from insurance companies or anyone else by initiating a conversation with a confrontation, I believe you’re mistaken.
    Would Commissioner Chaney like to confront the big insurers on the way some of them acted after Katrina? You’d have to ask him but I believe he would say yes. Unfortunately, confrontation is not going to solve the insurance crisis on the Mississippi Gulf Coast. There are ways other than confrontation to solve the problem and he has been working on those ways since he took office.
    Thiirdly, when you say insurance commissioners are spouting propoganda as fact despite overwhelming evidence to the contrary, I’d like to see what you’re labeling propoganda and the compelling evidence that makes it so.
    Fourthly, what financial stake in the industry are you referring to? Commissioner Chaney has no financial interest in the insurance industry, and, to set the record straight, has never worked as an agent nor owned a company despite the ill-founded rumors to the contrary.
    Let me also add along thoselines that it is my belief that he took pretty substantial financial “hit” when he took office.
    Fifthly, me and my “ilk” do not live in any fantasyland, we leave that mostly to others. We deal in the reality you claim to deal in. I know that never have you heard me say State Farm was either fair or unfair to their policyholders and I’ve never cited that fact to prove any point.
    As to the Sun Herald being kind to Mr. Chaney, I believe that would be in the eye of the beholder. I have seen plenty of critical musings coming from the Sun Herald ed board. So I’d like to close by asking you why their endorsement of Mr. Chaney was a mistake and a disservice to their readers and who you would prefer to see in the commissioner’s position that would bring better ideas to the crisis short of a full-blown government give-away?

  11. Fair enough Robert if you say we haven’t met then I’ll take you at your word.

    You never did comment on my level of intellect but my talking about that was not in response to your comment rather our new friend Shirley. The bottom line there is the bullshit purveyed by insurance execs and their shills as fact doesn’t impress me one bit but you already knew that from being a loyal reader.

    And while it is true “in your face” isn’t a way to initiate a conversation my interest does not lie in cheap talk. Rather I’m very content to lay out verifiable facts to empower the press and help arm those pols that actually care about the people here as they fight this battle on our behalf. As Shirley pointed out we do enough with the massive amounts of time and personal money spent right here on this blog.

    Walter Bell isn’t slumming after he left office early and went through the revolving door to Swiss Re. In fact I rather suspect the ca$h he now makes would make Chaney’s pre commish pay package look rather puny.

    I can tell that linking financial self interest to these “regulators” makes you uncomfortable Robert. That does not give me pleasure from a Dan Airely Behavioral economics standpoint, rather it actually gives me hope that even you can free yourself from the chains of denial.

    We have more coming on Mr Chaney as I’ll be taking another look back at the State Farm market conduct study that was overseen by Lee Harrell who (also passed through the revolving door) now works at a law firm that does legal work for the ‘good neighbor’. Mr Chaney signed off on some very curious conclusions including an assertions regarding the cooperation of the trial lawyers here on the coast that I’m told reliably are flat out lies.

    Finally speaking of full blown government giveaways allowing insurers to dump billions of dollars of their wind obligations on the taxpayers via the NFIP sure was a great one if you were an insurance company.

    sop

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