Time is short for me today but one thing that stood out in the State Farm rate increase application was the use of models to calculate the cat risk assumptions that drive the rate up (and the rate app is woefully short on the assumptions used in these models). In Florida Allstate used very short term models that have proven highly inaccurate to justify rate increases there that Commissioner McCarty turned down. Additionally I highly recommend you contact Beatrice Garcia of the Miami Herald as she reported extensively on the use of those unapproved models back in early 2008. I’d also track down Karen Clark, the person who pioneered the use of weather modeling for insurance for additonal info. You guys need facts, not industry spin to challenge Mike Chaney and this bogus rate up from State Farm.
Weather modeling posts we’ve done on Slabbed:
How’s the weather model – December 2007
Insurance Weather Modeling – Others have questions too – December 2007
On the fallacies of the science behind statistical modeling – April 2008 Continue reading “Attention Mississippi Coast Media: Yes Dave Elliot and Doug Walker you guys too”
Special thanks to Chris Sposato. If memory serves there were a dirty (half) dozen “guaranteed” Cat Bond issues connected to Lehman. The second to come tumbling down belongs to Bermuda based Aspen Insurance Holdings, Ltd. and their special purpose entity Ajax Re Ltd. The associated ri$k to take a hit is covered earthquake damage in California. The story itself begs additional research as this deal sounds as if there might be Cat Bonds stuck inside Cat Bonds with a (subprime) Mortgage Backed Security twist. The list of players per the article is very convoluted as well. The Royal Gazette has the Bloomberg story:
Ajax Re Ltd., a catastrophe bond sold by Bermuda-based Aspen Insurance Holdings Ltd., is likely to default on an interest payment this month, Standard & Poor’s said, the second such security hurt by Lehman Brothers Holdings Inc.’s collapse.
S&P said it may downgrade $100 million of debt issued through Ajax Re Ltd. to D, the lowest grade, from CC, citing an “imminent interest payment default”, according to a statement from the New York-based ratings company yesterday.
Aspen sold the bonds in 2007 to protect against claims from Californian earthquakes.
“The issuer has notified us that it will not have sufficient funds available in the collateral payment account to make the scheduled interest payment,” S&P said. “We anticipate the transaction will default.” Continue reading “Slabbed finds Ajax’s Achilles Heel: Rock Mountain High or Just Stoned in Bermuda?”
Time is short so I’ll not offer much analysis and what analysis I offer is in the form of the questions I asked myself while reading it?
- What money “made the market” and how and to whom are the bonds placed (ie sold)? See this lengthy post I did a week or so back to understand why that question is important.
- What role is TARP playing in financing this deal? Inquiring minds in policymaking positions what to know. (See first bullet point)
- Who are the players making money from the act of doing the deal and how is it structured to avoid past mistakes?
Reuters has the story:
LONDON, Feb 27 (Reuters) – Standard & Poor’s has assigned a preliminary BB rating to U.S. insurer Liberty Mutual’s planned $200 million catastrophe bond, to be issued via special purpose vehicle Mystic Re II, the credit rating agency said.
In a pre-sales report published late on Thursday, S&P said Mystic Re II’s Series 2009-1 notes will transfer some potential losses by Liberty Mutual and affiliates from U.S. hurricanes and earthquakes to capital markets investors. Continue reading “News from the cat house……”
I’ve had the pleasure of chatting with Sup offline and the last email he sent me deserved a guest post on its own. Never let it be said we leave out a point of view. Our offer to Mr. Chaney to join former Louisiana Insurance Commissioner Jim Brown authoring guest post here stands as well. – sop
It is my desire to provide readers of “Slabbed” an unemotional and, hopefully, logical perspective from the industry viewpoint. I recognize the MS Gulf Coast is so different from other coastal areas. In fact, I work on the SC Coast and that is a different world. The MS Coast has always been “blue collar” and the gaming industry must be considered a “blue collar” industry for the great majority of workers. Therein is where the dilemma is.
If you allow me I will try to give you some insight as to how the industry looks at the situation. My first management position was in Underwriting in the early 1970’s. Part of our responsibility was MS and LA. We spent most of our time concerned with the LA coast as at that point the MS Gulf Coast was still trying to recover from Camille. LA was happening because of the oil business. My company began growing like crazy in coastal LA and we had a “worst nightmare” scenario. It was exactly the track Katrina took and we were right over thirty years ago. Continue reading “Sup chips in with the evolution of private market wind coverage on the Gulf Coast”
Yep it’s official ladies and gents, short term modeling doesn’t work too well according to Karen Clark:
Karen Clark & Company, independent experts in catastrophe risk, catastrophe models, and catastrophe risk management, today released a report on the performance of near term hurricane models. The report finds the models, designed to predict insured losses in the U.S. from Atlantic hurricanes for the five-year period ending in 2010, significantly overestimated these losses for the cumulative 2006 through 2008 hurricane seasons.
Slabbed readers can obtain a pdf of the report here. The press release continues:
Near term models were introduced in 2006 by the three major catastrophe modelers − AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS). AIR initially predicted an overall annualized increase in hurricane losses of 40 percent above the long term average, but later lowered that figure to 16 percent in 2007. EQECAT predicted increases of between 35 and 37 percent, and RMS consistently predicted an overall increase of 40 percent above the long term average.
Assuming long term average annual hurricane losses of $10 billion for each year, these figures translate into cumulative insured losses for 2006 through 2008 of $37.2 billion, $40.8 billion, and $42 billion respectively, for the AIR, EQECAT and RMS models. The actual cumulative losses were $13.3 billion, far lower than the model predictions, and more than 50% below the long term cumulative average of $30 billion. Continue reading “Weather Modeling Pioneer Karen Clark Slams Use of Short Term Models”
Rebecca Mowbray’s latest story – Winds more widespread in Gustav – confirms what many were guessing.
Although Gustav was not as severe as Katrina, more Louisiana households experienced hurricane-force winds this week than in the 2005 storm, a researcher who has done work for Entergy said Friday, as the utility remained under fire for widespread power outages.
Researcher Greg Rigamer said 51.4 percent of Louisiana residents experienced hurricane-force winds during Gustav’s wide-ranging trek across the state, compared with 39 percent of residents during Katrina.
“The impact of Gustav was far greater in the state of Louisiana than Katrina. While Katrina was more severe, Gustav was more expansive,” Rigamer said. “Gustav had a significant footprint.”
With much of Louisiana literally still in the dark, those of us outside the state are better able to see the extent of wind damage. I’ll add links to some of the reports I’ve read in comments; but, first, more from Mowbray’s story and how Gustav makes the case for immediate passage of HR3121. Continue reading “Gustav sets up next round of wind v water cases”
I’ve been holding off posting on Gustav but the latest forecast track has caused quite a stir down in Bay-Waveland according to Steve who called me a few minutes ago.
Just a few years removed from the effects of Katrina the populace is understandably nervous.
I suspect the mood is similar with our neighbors to the west in Louisiana. Belle tells me friends of hers from the City are already making reservations with her in Natchez.
My own thoughts (and hopefully not just wishful thinking) is it is better to be smack in the middle of the cone of uncertainty at this point than Sunday night. Throw in Ivan from 2004 and we really need this storm to track east of Fort Walton so the joy can be more evenly spread. And with $4 dollar a gallon gas a recent memory the oil rigs could stand the break too. We’ll see soon enough. Continue reading “Gustav Forecast Track Changes…..(Updated 3X)”
Admittedly, there’s a lot more interest in the legal climate around insurance than the climate itself; but, that’s what some think the legal issues of the future will be about; so here’s a quick look at the current discussions.
After Hurricanes Dennis, Katrina, Rita, and Wilma, insurance companies are withdrawing from coastal markets in the United States. They fear the financially disastrous combination of severe weather trends with population growth in urban areas. One recent news report stated, “Some believe the two are creating a risk of losses so large that insurers could be pushed to the breaking point…”.
The industry has three primary methods of responding to “excessive” risk: by raising prices for what it sells; by withdrawing from product lines and markets; and by changing the financial, legal, organizational, and political practices of the industry. All three serve to protect the bottom line of insurers but may or may not serve a wider public interest.
Insurers often withdraw from a particular geographic or product market, either temporarily or permanently, when losses are too high. This leaves people and property without any recourse in a disaster except to draw on the public treasury. In coastal areas of the United States, state-backed insurance plans are being overwhelmed by new applications.
When one person loses their house and has no insurance, they must dig into their own personal resources to rebuild. But when thousands of people lose their houses in a disaster, then government must step in to provide the resources to rebuild entire communities. Insurers may raise their prices to recover from severe losses and rebuild their own reserves, but this will drive people away from purchasing insurance. Again, the gap in coverage may need to be filled by public spending. Continue reading “Insurance talks heat up on global warming”
Insurance has a steep learning curve – and understanding what a policy covers, believe it or not, is the bottom of the curve. Some say learning is more caught than taught; and, if that’s the case, I caught a lot more than I bargained for last week – and learned even more from research over the weekend.
Before I explain why you need to invest your sweet potatoes on the weather, you need to take a look at this picture of the the insurance industry. It’s the one I had in my head – although far more developed (understatement) – when I posted this link on the ALL Board in response to a comment from Slabbed’s friend cominglatersooner.
Now. about those sweet potatoes – or commodities as they’re known when they’re not groceries. Continue reading “Bet your sweet potatoes on the weather and take the pot!”
Sam Friedman’s blog is a frequent stop of mine when I surf the internet for insurance issues. He is the editor of the National Underwriter, a trade publication serving the property and casualty segment of the insurance industry. I like Mr Friedman, he is a journalist first and foremost, one who examines the issues with great attention to balance in his reporting. He has opinions on insurance issues though, for instance he is against Gene Taylor’s multi peril bill HR 3121. However our offline conversations on that issue tell me his opinions do not stand in the way of doing the topic justice as he is open to reporting all sides of the issue in his blog and trade publication.
It was his post on weather modeling and it’s use in the industry for setting rates and determining the amount of risk to take on that got me interesting in the topic. In fact my first blog post dealt with that subject and featured one of Sam’s earlier posts on the topic. Featured was Karen Clark, who literally helped write the book on weather modeling:
One big problem is that catastrophe models are not reliable predictors of when or where a monster hurricane is going to strike, according to Karen Clark, vice chair of AIR Worldwide, one of the leading modeling firms. Continue reading “Sam Friedman Checks in with Another Fantastic Post on Weather Modeling and Insurance”