Does the Homeowner Flood Insurance Affordability Act “Gut” Biggert-Waters?

May 20th, 2014

Six months ago we wrote about the 2012 Biggert-Waters Act (BW-12) and people’s reactions to it at that time.  In the intervening six months, a lot of reacting has happened.  Most importantly, the Homeowner Flood Insurance Affordability Act (HFIAA) was passed.

After Biggert-Waters was passed, there was a public outcry.  It was so universal across the political spectrum that Republican governors from three flood-exposed states — Mississippi, Florida, and Alabama — banded together to file a suit against FEMA.  Among their charges were that BW-12 was implemented in an arbitrary and capricious manner, without regard to affordability for the insureds and with a failure to utilize accepted actuarial principles and consider actual risk.  Specifically, these governors cited that the individual risk characteristics of a property were not fully considered.  This lawsuit was withdrawn after the passage of HFIAA, and if we look at the components of HFIAA, it’s clear that it was withdrawn because HFIAA addressed many of the states’ concerns.

What does HFIAA do?  According to a quote from R.J. Lehmann of R Street Institute, it “gut(s) any reform [passed under BW-12].”  Here’s what we gathered from FEMA’s summary:

  • HFIAA provides refunds for new policies in high-risk areas (anything written after 7/6/12) or renewals written after HFIAA whose premium increased more than 18%.
  • The new cap on rate increases for primary residences is 18%. The cap under BW-12 was a 25% increase. This old 25% cap still applies to businesses, non-primary residences, Severe Repetitive Loss Properties, and what I call “risky” Pre-FIRM properties.
  • Essentially, can now carry-forward the prior policy’s rates on your property. That is, if you sell your property, you can transfer the flood policy to the new owner at the subsidized rate. Additionally, if you dropped your policy because of the huge rate increase from BW-12, then you can buy it again at the subsidized rates.
  • In order to offset all this subsidizing, NFIP will now be trying to recoup some of the lost revenue by charging all properties an additional fee. For primary residences this is just $25, but for all other properties it will be $250. These fees will disappear only when subsidization ends.
  • Grandfathering will continue. It will also be expanded to include increases due to re-mapping. That means that the first year rate for properties newly classified as Special Flood Hazard properties will match those outside of the Special Flood Hazard Area. After the first year they will increase at the capped rate.
  • Some other changes from HFIAA include: the appointment of a Flood Insurance Advocate, whose job will be to take consumer complaints and educate the public; allowances for flood mitigation, like residential basement flood-proofing; the establishment of installment plans, higher deductibles, and a broader affordability framework to address consumer affordability issues; the reporting to Congress of premiums greater than 1% of the coverage provided.
  • The rest of HFIAA deals with the mapping issue, and takes a lot of cues from the Mississippi lawsuit: FEMA is charged with evaluating and improving data and mapping approaches used to make the flood maps and rates; accounting for improvements to a property that mitigate flood risk; considering non-structural features that will mitigate flood-risk; removing the $250,000 cap on reimbursements for map appeals, and coordinating first with communities during the re-mapping process and then reporting maps to Congress before implementing the new maps.

That is certainly a lot of targeted changes to BW-12.  Next week we’ll look at how Florida has reacted so far to BW-12, and what it means for the state after the passage of HFIAA.

Reality or Wishful Thinking? Historical Information on P&C Insurance Industry Favorable Development

March 7th, 2012

Financial statements from 2006 through 2010 for property and casualty insurers seem to indicate positive news: in the aggregate, the industry has demonstrated favorable development in each of those years.  “Favorable development” refers to a situation such as the following, involving the fictional XYZ Insurance Company, which began writing business in 1995: 

At 12/31/2009, the total incurred loss and defense and cost containment expense (“DCCE”) for exposures in the 1995 – 2009 years for XYZ was carried at $50 million.  “Incurred” loss is determined by adding total payments to carried reserves (including both case reserves and IBNR).  By 12/31/2010, updated payment information and revised reserve estimates place carried incurred loss and DCCE for the 1995-2009 exposure years at $49 million.  We would say that XYZ has exhibited $1 million of favorable development at 12/31/2010.  This development can fluctuate upwards and downwards, and is dependent on total payments and reserve estimates at a given point in time.

A recent article in Contingencies magazine illustrates that favorable development can be illusory.  For instance, the 1995 exposure year exhibited industry-wide favorable development in 1996, 1997, 1998, 1999, and 2000, but then exhibited adverse development in the subsequent five years.  (“Adverse development” refers to a situation in which the estimate of total incurred loss and DCCE has increased over time).  The adverse development exceeded the favorable development by $5.3 billion.

The author cites a number of explanations for the adverse development in the 1995 exposure year, including asbestos and environmental claims and workers’ compensation claims.  Similar trends of initial favorable development followed by adverse development are exhibited in the 1996 through 1998 exposure years.  The author also compares the favorable development exhibited in recent exposure years – 2005 through 2009 – to that in the 1995 to 1998 exposure years and, at least on the surface, the patterns look similar.

Is this recent favorable development real or illusory?  What are the big surprises awaiting the P&C insurance industry related to recent exposure years?

Be Prepared: 2012 Tornado Season is Almost Here

February 23rd, 2012

After a devastating tornado season that ravaged much of the Southern United States in 2011, we may not be in the clear yet.  According to, we should be gearing up for what could be another record-breaking tornado season in the United States.

Warmer-than-normal temperatures in the Gulf of Mexico are expected to lead to another year of severe storm activity.  Following a year that produced over $25 billion in insured losses related to thunderstorm-tornado-hail activity, insurance companies may want to start battening down the hatches to prepare for what could be another year full of gloomy results.

Not only should insurers be thinking about what the 2012 forecast could mean, but insureds should also consider getting more familiar with their homeowners and auto policies.  It isn’t uncommon for policyholders to identify weaknesses in their coverage after a natural disaster strikes.  Most people likely don’t know whether they have coverage for damage until after attempting to file a claim.  Almost as upsetting as the disaster itself are the stories that pile up about homeowners that are left without a roof over their head because they didn’t have insurance to cover their loss. 

But maybe this year we will be more proactive.  Maybe this year the average consumer will reflect upon the devastation of 2011 and educate themselves about their own insurance coverage.  Or maybe we will just fall back on the norm – it would never, and could never happen to me! 

What are your disaster recovery plans for 2012?  Have you done your homework and know what is and is not covered on your own insurance policies?  What impact do you think the 2012 tornado season will have on both consumers and insurance providers?

Insuring Your Company’s Reputation – Literally

December 1st, 2011

A recent article in Insurance Journal by Amy O’Connor discusses a new wave of insuring reputational risk due to the exposure created by the boom in the social media.  Your first question might be, “What is reputational risk as it pertains to insurance?”  In the article, the author defines reputational risk as “a company’s risk of having its reputation damaged because of certain events or incidents and the fallout that takes place because of these incidents.”  Another article in the same publication by author Seamus Gillen states that pure reputational risk does not exist but that it occurs “when operational risk and reputational risk combine to create a perfect storm.”  Furthermore, the article cites the BP Deepwater Horizon oil leak in the Gulf of Mexico, Toyota’s failing brakes on its cars, and the hacking of Sony’s customer data as illustrations of reputational risk and describes the process as:

  • “Something goes wrong inside a company which is serious enough to threaten some significant aspect of its operations, and a material part of the related revenue generation which underpins the business model. Investors lose confidence – initially because they perceive a threat to the company’s potential for earnings growth, then more substantially when they see no quick fix to the company’s difficulties. These insecurities grow – and this is the important part – when other key stakeholders, whose support is needed to reestablish the equilibrium of the business model, also lose confidence, and leave in droves.”

A second question might be: “Is it an insurable risk?”  The answer: Apparently so.  Ms. O’Connor’s article references three recent programs by Aon with Zurich, Willis, and Chartis that address exposures of reputational risk and offer risk management services to help corporations keep their reputations intact.  Further, an article by Charles Boyle gives a general description of the coverage offered by Aon with Zurich is discussed which offers advice on pre-crisis planning in addition to coverage for losses.  In Ms. O’Connor’s article, Robert Yellen, chief underwriting officer for the executive liability division of Chartis in New York, states that the company’s product provides two categories of coverage.  The first covers “reputation attacks” defined as “a public attack upon a company’s reputation” and the other covers “reputation threats” defined as “acts or events that the company believes, if made public, would have a material impact on the company’s reputation and would be seen as a breach of trust by the company’s stakeholders.”   The Willis product is targeted toward hotels and responds to incidents that lead to, or are likely to lead to, hotel business losses from adverse publicity through any medium and provides cover for lost revenue based on a hotel industry metric that measures revenue per available room.

Do you think reputational risk is the next big thing in insurance coverage?  Can/will the coverage be profitable?  How does one determine that the initial rates are adequate?   What pitfalls do you see in offering this coverage and how susceptible is it to fraudulent claims?  Tell us what you think.

Should Florida Repeal the Personal Injury Protection Requirement for Motorists?

November 29th, 2011

Florida requires drivers to have $10,000 of Personal Injury Protection (PIP) to compensate persons injured in accidents regardless of fault and property damage insurance.  PIP coverage provides reimbursement for 80% of reasonable medical expenses, 60% of loss of income and 100% of replacement services, for bodily injury sustained in a motor vehicle accident without regard to fault.  The property damage liability coverage must provide a $10,000 minimum benefit.  A $5,000 death benefit is also provided.

The Florida Office of Insurance Regulation (OIR) indicates that the number of personal injury protection claims has increased during the past four years even though there is no evidence that the number of crashes or drivers has increased.  According to the OIR, the number of PIP claims has increased 28% since 2006, and the payment of claims also has increased during the same time, spiking in the last two years.  Over a four-year span insurers paid $8.7 billion in claims.  The number of PIP-related lawsuits has also increased during that same time period.

Among reasons for repealing the PIP requirement are the following:

  • PIP is unfair because it causes people with insurance to pay for injuries caused by drivers with no insurance.
  • PIP has serious problems with insurance fraud that make the program too costly.  According to a presentation made by Insurance Consumer Advocate Robin Westcott in November 2011, the amount of fraud in the PIP system totals $910 million annually.

Among reasons for not repealing the PIP requirement are the following:

  • Without the coverage, chaos would ensue and courts would be overburdened with cases.
  • It’s intended to protect Floridians who don’t have health insurance, and to avoid lawsuits and their costs for minor injuries.

Do you think that PIP requirement should be repealed?  How do you think the PIP system should be amended to deal with the fraud issue and control the costs?  Let us know.

What Do Weiss Ratings Mean for Florida Property Insurance?

November 11th, 2011

Recently, the Weiss Ratings for Florida Property Insurance Companies were reported.  After a review of the results, the first question that comes to mind is, “Who uses these ratings?”  But a further review of the ratings paints an interesting picture for the Florida Marketplace, and begs two more important questions: “Where are we now? Where are we going?”

Weiss Ratings is an independent rating organization for the financial sector that covers banks and insurance companies.  These ratings are a summary of Weiss’ judgment of a company’s ability to stay out of regulatory control, pay all the obligations from their insurance contracts, and maintain operations long term.  Weiss maintains its independence by not taking compensation for their ratings.  Additionally, they reach their conclusions and publish results without a preview or influences from the company.  On their Web site they display their track record by showing failed insurance companies over the last four years with the Weiss carried rating at time of failure and one year prior.  They appear to do a solid job in reviewing the financial sector including insurance companies.

For the Florida property market overall, the recent results were scathing.  Below is a table with the Top 25 carriers in terms of policies in force at 6/30/2011 based on QUASAR reports:

Grade Rank Company
A+ 1 Citizens Property Insurance Corporation
E+ 2 Universal Property & Casualty Insurance Company
D 3 State Farm Florida Insurance Company
D 4 St. Johns Insurance Company, Inc.
A+ 5 United Services Automobile Association
B- 6 Castle Key Insurance Company
B- 7 Castle Key Indemnity Company
C 8 Security First Insurance Company
C+ 9 ASI Assurance Corp.
D 10 American Integrity Insurance Company Of Florida
D- 11 Tower Hill Prime Insurance Company
D 12 Florida Peninsula Insurance Company
B- 13 American Bankers Insurance Company Of Florida
E+ 14 Tower Hill Signature Insurance Company
C- 15 United Property & Casualty Insurance Company, Inc.
C 16 Florida Family Insurance Company
C 17 Universal Insurance Company Of North America
D 18 Homewise Insurance Company
B+ 19 American Strategic Insurance Corp.
C 20 Southern Fidelity Insurance Company
U 21 ASI Preferred Insurance Corp.
B- 22 Liberty Mutual Fire Insurance Company
D 23 Olympus Insurance Company
A+ 24 USAA Casualty Insurance Company
D 25 Tower Hill Preferred Insurance Company

These grades should raise alarms that the overall marketplace is in trouble.  But, it really all starts at the top.  The largest carrier in the state is Citizens and, according to Weiss, they are the strongest insurance company in the state.  So let’s examine Citizens for a moment.

Citizens Property Insurance Corporation is a state-run insurance company that is subject to statutory guidelines.  According to their Web site, Citizens is a “not-for-profit, tax-exempt government corporation whose public purpose is to provide insurance protection to Florida property owners throughout the state.  Citizens operates according to statutory requirements created by the Florida Legislature and a Plan of Operation approved by the Florida Financial Services Commission. The corporation is governed by a Board of Governors that administers its Plan of Operation. Florida’s Governor, President of the Florida Senate, Speaker of the Florida House and the state’s Chief Financial Officer each appoint two members to the Board.”

While I am sure that Citizens insures many properties that might not be able to find coverage, there are now tens of thousands of risks in Citizens solely because Citizens provides the lowest cost of insurance; Citizens is a real market competitor.  But, back to the financial ratings: How is Citizens considered the most financially sound insurance company in the state?

The key component of the Weiss ratings is financial stability to maintain operations.  How does Citizens score so well with these criteria?  Citizens operates under the statutory authority with the backing of assessment capability against most insurance contracts in Florida.  The entity is backed by insurance contracts from all carriers for most lines of insurance.  Under Citizens’ original structure, the rates were tied to be in excess of the 20 largest carriers.  When this provision was removed and annual caps were placed on rates, it created this monster corporation in the marketplace.

Now Citizens operates virtually as a full competitor in the market but continues with all the financial guarantees through assessment authority.  The potential assessments Citizens would need in the event of a major catastrophe run into the billions of dollars (Example: $10.2B for a 1 in 100 event at $23.2B).  The Citizens deficit created by a 1 in 100 event would be funded by 15% policy surcharges to Citizens policyholders and assessments up to 10% for Citizens and 16% for all other policy holders in Florida.    About 80% of Citizens deficits for a 1 in 100 event would be funded by assessments coming from non-Citizens policyholders

This all assumes the current marketplace survives a 1 in 100 event.  Going back to the Weiss rankings, you have to question what the market will look like if a 1 in 100 event hits Florida.  There is no doubt that the biggest risk (among many) in Florida is still hurricanes, and a 1 in 100 hurricane is going to impact many to all carriers at once.  How many carriers will not be able to survive a 1 in 100 event?  According to these Weiss ratings it could be a material issue.  Citizens is designed to survive through assessments to policyholder for all companies.

Should Citizens continue to be able to operate in this capacity?  The simplest solution to correct Citizens issues is to raise rates and return the entity to the market of last resort.  Of course this would require rate increases for Citizens in excess of 50% for some policyholders.  The 2011 legislative session started out with hope that Citizens would begin this transformation.  In the end there was little change from the Florida legislature to Citizens’ market position, and the largest carrier in the state continues to grow and the potential deficit grows. 

Insurance rates still remain as a big political issue in Florida.  While the public is mostly blind to the deficits that will result with a major catastrophe, everyone is sensitive to price increases.  Therefore, it is time to start the search for alternative solutions.  Trying to make Citizens the market of last resort is doomed by the political process.  Therefore, it is time to correct the biggest mistake made from when Citizens was first formed under the Florida Residential Property and Casualty Joint Underwriting Association.  It is time to make Citizens the product of last resort.

There is old adage, “You get what you pay for.”  If Citizens policyholders want to continue to pay low prices through legislative restrictions to rate increase, it is time to adjust the product to match the program.  There are many coverage options within the Citizens policies that are not necessary.  It is time to examine all the coverage options in Citizens and make the product cover what is necessary only for the real estate transaction.

Allow the market to decide if they want that product or want to purchase alternatives in the private market.  This will allow the market to compete again based on coverage, service and price versus the current market of an underpriced insurance product from Citizens.  Maybe that will help improve the Weiss ratings for all the carries and put them in a better financial condition to fund potential deficits from Citizens. 

Peter Scourtis, FCAS, MAAA, is a principal and consulting actuary at Merlinos & Associates.



The Power of Dissent in Risk Management

November 2nd, 2011

Enterprise risk management is a hot topic.  The charge of Enterprise Risk Management is to identify and quantify an organization’s current and potential risks and opportunities, determine the company’s risk tolerance, and decide on risk-taking and risk-avoidance strategies.  Insurance professionals are especially attuned to the lessons of risk management.

There is one risk that persists in all enterprises: human error.  No matter how expert or how careful an individual is, there will come a point at which he makes a significant mistake. 

We frequently have people close to us who may notice our errors before serious damage is done – these people may be supervisors, peers, or people who report to us.  Unfortunately, when the person noticing the error is in a junior position, the dissenter’s voice may go unheard.

The book “Sway – The Irresistible Pull of Irrational Behavior,” by Ori and Rom Brafman, discusses the positive power of dissent, especially the dissent of subordinates, whether in a board room, a cockpit, or a surgical suite.

On March 27, 1977, two Boeing 747 passenger aircraft, KLM 4805 and Pam Am Flight 1736, collided on the runway of Los Rodeos Airport in the Canary Islands, killing 583 people.  According to “Sway”, subsequent investigation and review of the black box records show that a mistake by Captain Jacob van Zanten, the pilot of KLM 4805, resulted in the crash.  The runway was foggy and Captain van Zanten had only been granted one of the two types of clearance necessary for takeoff.  The first officer of the flight, Klaas Meurs, tried to point out that Van Zanten did not have the necessary second clearance, but was disregarded.  At the time, Van Zanten was the head of safety for KLM and had an impeccable record.

Several years subsequent to the Canary Islands disaster, NASA initiated a study on “Cockpit Resource Management” (or “Crew Resource Management”).  One finding of the study is that it is essential for subordinates to have effective tools to communicate possible mistakes to their supervisors, and it is essential for supervisors to tune in and listen.  Since then, several commercial airlines have implemented communication protocols to be used by the copilot or staff when they see a mistake in progress.  The crew is trained in how to make their statements most effective, and the pilots are trained to stop and listen.  Similar initiatives are being implemented in hospitals and other health care facilities, such that the concerns of a nurse or resident will be considered by the attending physicians and surgeons.

What do you think?  How would you grade your organization on “tuning in” to sources of concern?  Are they considered on the merit of the argument or on the basis of who is speaking?  If you work in the insurance or risk management field, how can your organization create an environment in which legitimate concerns are heard, no matter what the source?  The answers to these questions can make a difference in any industry, and certainly in the risk management industry.