- Louisiana Insurance Commissioner Jim Donelon
Folks rarely does a business writer nail and explain a very complex subject in the interplay between our fragmented insurance markets here in the US and the world of high finance but Paige St John over at the Herald Tribune explains how State Farm really didn’t pull out of Florida’s hurricane insurance market, how they game the anti trust exemption insurers enjoy and how they are able to price gouge as a result. These same forces are at work in Mississippi, Alabama, Texas and Louisiana.
We last featured Paige’s work last October in our post It’s a ‘Bermudan’ day in the neightborhood…Paige St John at the Herald Tribune exposes why ‘buying Bermuda’ is like being hooked on crack and it is clear Paige is on track for a big time business journalism award for her work in this area. Finally it was our post on Paige’s reporting on the Allstate McKinsey papers that literally landed us on the national blawg scene as Victoria Pynchon covered our coverage.
Here are a few excerpts:
When State Farm stepped up its march out of Florida, it loudly and publicly claimed hurricanes were pushing it toward financial disaster.
The company argued it had to leave the Florida coast — and drop nearly half a million customers — because it could not profit in a state wracked by so many storms.
But State Farm never really left Florida.
A Herald-Tribune investigation finds Florida’s largest insurer has instead found an easier way to profit from homeowners desperate for coverage. And the desperation State Farm helped create allows it to command some of the highest rates in the world.
The conduit for this back-door insurance is DaVinci Reinsurance Ltd., an offshore company with no physical office or employees of its own that sells policies to insurers to cover their storm losses.
Perhaps this is why retail property and casualty insurers are so dead set against any sort of multiperil insurance solution. We’ve followed the insurance money several times here on Slabbed as we explored State Farm’s tangled web of operations. It is a great feeling to see this subject fleshed out so neatly as we continue:
Through DaVinci, State Farm quietly continues to collect money from thousands of former customers who were told their homes were too risky to insure.
Collectively, these customers have paid hundreds of millions of dollars to State Farm’s offshore reinsurance venture. Without a hurricane, the $300 million in Florida premium paid to DaVinci from 2006 through 2009 has been largely profit. Florida’s payments for 2010 are not yet available.
The advantages to State Farm are clear.
In Florida, the insurance rates State Farm can charge are regulated by the government. Profits are controlled and taxed. The potential loss from a major hurricane is measured in billions of dollars.
DaVinci’s premiums, on the other hand, are as high as the market will bear. Based in Bermuda, it avoids U.S. taxes and faces no limit on profits. If a hurricane strikes, State Farm would lose no more than its investment in DaVinci — $350 million at the end of last year.
Insurers love to stress how the McCarran-Ferguson act constitutes a “limited anti trust exemption” and indeed former ACE guy turned RAND consultant James Mcdonald stressed those very words when he answered a university professor’s question at the recent RAND Gulf Coast Insurance forum on the topic. Property and Casualty insurance is an oligopoly in the US thanks to that anti-trust exemption and the universe of those that do reinsurance is especially small as we continue:
Interviews and documents examined by the Herald-Tribune show DaVinci focused on selling the riskiest, hardest-to-get coverage most critical to Florida’s weakest property insurers.
There is little competition in that niche, and reinsurance brokers said the price for such protection is among the highest in the world, sometimes more than 50 cents for $1 in coverage.
” ‘Opportunistic’ is the absolute key word,” said John DeMartini, vice president at Towers Watson, a national reinsurance brokerage. “DaVinci cleverly stepped into the void.”
What’s more, State Farm organized its withdrawal in a way that helped it keep control of its most profitable business — car insurance.
It created a list of insurers to which State Farm agents could direct dropped customers. Homeowners who switched to those companies could retain their multi-policy discounts.
State Farm agents also keep their clients if they move them into the state-created Citizens, or to the pre-approved companies — most of which are backed by DaVinci reinsurance coverage.
Details about DaVinci were kept quiet enough that several longtime Florida State Farm agents told the Herald-Tribune they were not aware most of the pre-approved companies had a connection to State Farm.
Absent that anti trust exemption such collusion would constitute criminal behavior under our anti trust laws and it is easy to see the massive self-service as State Farm and other insurers have fought any sort of legislative action to alleviate the coastal insurance crisis. And let’s face it, on this subject President Obama is about as useless as President Bush and the feckless state insurance commissioners as it should lost on no one the 2 companies which have dominated the american retail property and casualty insurance markets for the last 50 years in State Farm and Allstate hail from his home state of Illinois.
So is State Farm really profiting from virtually every HO policy sold in Florida? You betcha they are as we conclude:
By 2009, DaVinci, in partnership with RenRe, had provided some hurricane protection for 54 Florida insurers, including Allstate and fast-growing Universal Property & Casualty……..
According to financial contracts reviewed by the Herald-Tribune, DaVinci was the third-largest commercial provider of hurricane reinsurance in Florida by the end of 2009…….
Northern Capital paid DaVinci as much as 40 cents for every $1 in protection it received, akin to paying $80,000 a year to insure a $200,000 home.
A risk assessment done for state regulators shows Northern Capital’s coverage from DaVinci had a technical value — the average annual expected hurricane loss — of no more than 4 cents per $1 insured.
But DaVinci demanded to be paid 10 times the actual risk. That cost landed on homeowners.
A Herald-Tribune review of scores of reinsurance contracts found similar terms for other companies.
In 2009, Southern Fidelity paid 52 cents for every $1 of protection bought from DaVinci and RenRe. Homeowners Choice paid the two companies 43 cents per $1 of protection. Capitol Preferred also bought high-risk coverage last year at 57 cents on the dollar; Gulfstream paid 32 cents for every $1 of coverage.
As Northern Capital illustrates, the contracts worked out better for State Farm than for companies that bought the coverage. With no hurricanes, DaVinci kept the $20 million it collected from Northern Capital.
It is amazing how the politicians of this country, including our own Congressman elect Steven Palazzo can be so against the citizens that elected them professing faith in a system that is hopeless gamed by big money interests. There is no magical free market fairy that can fix a manipulated marketplace made possible by a government conferred anti trust exemption. I would $ubmit the blindne$$ to reality ha$ a main root cau$e and thing$ won’t get better for the citizenry until we elect folks that represent the people who elected them instead of big money interest based in tax haven$ like Bermuda.
Speaking of Bermudan reinsurers they have lots of ideas for the National Flood Insurance Program too as this bunch just can’t seem to keep their hands out of the US Treasury. It’s bad enough insurers defrauded the NFIP after the 2004 and 2005 hurricane seasons dumping their wind losses on the program repeatedly, but now they want to take the whole enchalada. Grab yer ankles folks because another financial rape is on the way.
sop
Florida is to State Farm what California (rolling blackouts) was to Enron.
Got youz hangin’.
Ironically, Bozo is of the top 10 copyright enforcers in the nation.
What a “good neighbor”! State Farm is there alright – anywhere there’s money to be scammed from policyholders1
Why would a company with a motto of ” Honesty is not the best policy, it is the ONLY policy” retain a business partnership with a company of known crooks? Because the CEO of State is dirty too? Money ends up where it is easier to steal?
Neill Currie, the softly spoken president and chief executive officer of Bermudian reinsurer RenaissanceRe, describes 2009 as a
It is at this point that I wish every major media outlet would go back to March/April and examine their coverage of the predictions for the upcoming Hurricane season, which stories are never complete without quotes from shill Bob Hartwig at III and his predictions of doom and accompanying implication that rates must go up in advance of the storms which never hit. For instance all the predictions of gloom and doom which accompanied what did turn out to be an above average season were in reality nothing but hot air. Its not the number of storms that is important, rather their strength when and where they hit. It is a fools game to think that A (the number of storms) is the same as B (the number of relavent storms).
When it comes to such “Saly” (same as last year) reporting on the predictions for the upcoming Hurricane season I feel as though I’m trapped in a post Katrina version of the movie groundhog day.
sop
Strength of the storms indeed because the “Named Storm Deductibles” save the carriers from paying damages contemplated by anything up to a Cat 2.
Sock notice how the bogus modeling employed by State Farm and Allstate in Florida yields roughly the same answer in terms of what DaVinci Re is charging for reinsurance?
Karen Clark, the lady who pioneered Catastrophe modeling left or was forced out of the company she founded in AIR Worldwide and immediately began criticizing how insurers were misusing the models to justify massive rate ups.
There is really no math or actuary science involvd with the trend involving insurers leaving coastal america. This is all about gaming the system to maximize returns for the insiders, whether it is Tom Wilson or Ed Rust.
sop
For hurricane insurance to work efficiently you have to save the profits from the years with no catastrophic storms to build the reserved to cover the catastrophes. The industry is not willing to do that. They have rigged a system that cashes out the profits to investors and executives every year, evades even the weak oversight and regulation by state commissioners, evades taxes and transparency, gouges policyholders for rates much higher than expected losses, yet still leaves federal and state taxpayers on the hook when a major storm hits.
They also have bought all the economists, most of the Senate, and The NAIC, and captured FEMA/NFIP and other federal agencies on the cheap by exploiting the gross mismanagement.
I’ll add that retaining or raising capital is not the same as paying out losses. The industry argument about government provided catastrophe insurance being some sort of massive taxpayer subsidy where by folks in the middle of no where (ie the midwest) are somehow providing a direct subsidy to folks that live in beachside mansions or that we can’t afford it in today’s day and age of massive deficits ignores the fact that paying losses (an expenditure of funds) is not the same thing as providing the capacity to pay losses (a capital base).
Under the current setup, sending the net premium overseas precludes the possibility that we’ll ever be able to insure ourselves as it becomes impossible to build capital reserves. This makes the screwing of the coastal residents an evergreen proposition.
The lessons of the California earthquakes is that most residents run naked for coverage since uncle sam will pick up the tab ultimately anyhow. I know folks here that run naked for the same reason, especially since we’re just 5 year out from our massive infusion of federal cash which continues to this day.
When you step back and look at it such behavior is gaming the system just the same way the Bermudian moneychangers do, just from a different direction. The insures don’t like that which is why you hear talk about making people buy mandatory coverage effectively making the populace slaves to overseas moneied interests.
To the extent our elected officials as a group are bought along the lines of what Brian mentioned and are likely to keep the current $y$tem such behavior is the economically smart thing IMHO. Even better for the local residents is the money saved can be spent locally or saved at the local bank instead of being shipped out to Bermuda and other tax havens overseas.
FEMA does not have a comprehensive disaster plan. Instead it is a patchwork of federal agencies like the Army Corp of Engineers, FEMA, HUD, etc etc etc. The COE buyouts of low lying areas should have been out front and center early on for example instead of couple of years after the fact, when some folks had rebuilt in areas that should have never been developed to begin with. Of course such development was made possible by federal grants for water and sanitary sewer years before. The entire system is a clusterfuck.
sop