Sometimes Insurance Isn't Rocket Science
For those of you who are not affected by the near freezing of the property insurance market (think of Florida primarily, but also southern Louisiana and the entire Gulf Coast, large parts of California, and large portions of the InterMountain West), you may not realize how many property insurance carriers have been declared impaired or insolvent over the past twelve to eighteen months. There are many, but the number seems to vary depending upon how you count them and whether you include those carriers for which it is a foregone conclusion that they are probably insolvent even though no one wants to declare them insolvent.
Really, in many ways, I should be including the old Monte Python “Wink, wink, nudge, nudge” film clip here. Everyone knows it, but no one can say it.
The insurance industry is incredibly complicated on so many levels from regulatory, to legal, to insurance contracts, to licensing, to actuarial. At times, though, it is so unbelievably simple that the required solution is obvious. Although the answer is obvious, it is also pugnacious, so no one wants to admit it.
A great example is that many, maybe all, of the carriers that have colloquially “gone under” recently were losing money even without the occurrence of a hurricane. Simple fact: If a carrier is writing in a hurricane state and cannot make money when hurricanes do not hit, what makes anyone think these companies are going to be sound when a hurricane does hit? Carriers writing in cat prone states should make excessive profits during non-cat years because of the high premium rates in those states. Those profits are needed to pay claims when a severity event, a catastrophe, hits. This is not rocket science.
A recent headline stated, “Flood Maps Are Out of Date Says FEMA” (Daily NewsFlash, Sept 14, 2022). Well, it does not take a rocket scientist to know that this is true. Every good agent I know who sells a lot of flood policies knows this is true. If flood insurance carriers, and particularly the NFIP and WYO markets, depend on flood maps when writing policies, it is a fair conclusion that flood insurance cannot be written correctly if one cannot accurately determine flood probability and severity. Forget the fact that flood rates have historically not been actuarily based and that such actuarial justification is unnecessary because the federal government can always print the money. Again, this is not rocket science.
Another headline from Carrier Management stated, “AM Best Report Shows Florida Insurers Far Out of Line on Reinsurance Dependency.” This week, in Best’s Commentary, a headline stated, “Reinsurers’ Losses Paid to Florida Specialists Increased More than Fourfold in Three-Year Period.” A time period without the occurrence of a really damaging hurricane!
Let us think through this complex point. The Monte Carlo Reinsurance Conference was held this week and as the “Monte Carlo Rendez-Vous Daily Edition” pointed out, “…one of the key themes of the event – namely the relative scarcity of cat/all-risks capacity…” was going to be discussed in depth. So, we have carriers that cannot stay solvent without a hurricane and are too dependent on reinsurance if there is a hurricane, while at the same time there is a lack of reinsurance in the event of a hurricane. How many numbers does someone have to crunch to figure out the real issue here has nothing to do with reinsurance?
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