Actuaries Oppose Wind Addition to National Flood Insurance
National News • September 28, 2007
The National Flood Insurance Program is over $17 billion in debt according to the American Academy of Actuaries, adding further anxiety to a proposal to add wind peril coverage to the national ...
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Subject: Reinsurance by Feds on Wind / Flood
Posted On: October 1, 2007, 1:24 pm CDT
Posted By: umpiire
Comment:
Am I too simple minded, or can't we flip this to a fed reinsurance method, and then create surplus with longer term investments at tax advantages?
If admitted private insurers want to write in coastal areas, they are required to offer wind and flood within their basic fire policy coverage (whatever form that is). It is a simple "check box" option. One policy contains the perils and conditions... and one adjuster and decision process to go with it.
Then the feds set the coverage language for what they will reinsure. The private carrier may choose to have "enhancement coverage" outside that reinsurance backstop minimum. The private insurer selects their level of reinsurance at their option, up to 95% (if the rates are decent, the private carriers will enjoy taking some of this). Insurers get to change their participation percentage quarterly (automatically 95% at inception and remains at previous quarter value, unless a form is filed to change it). The fed reinsurance is treated no differently than if a huge private reinsurer was willing to write such a deal.
The fed reinsurance program would indeed need excellent actuarial input, and to charge proper rates in detailed location separation. Such data is available... just needs to be employed without "marketing pressure" to screw it up (which we solve here automatically). Of course, politicians would have to be removed from the rate-making structure, because they would surely screw it up by trying to reduce rates within their jurisdiction for favors, rather than logic.
The funding surplus is sold as 3, 4, or 5 year investments (longer ones get better return ratios). This helps reduce the volatility... because you cannot be "in" for one hurricane season. There are no more claims of huge profits for a calendar year -- or huge losses for the year the hurricane strikes. Instead, you get to have the power of all capital resources, not just insurance sector capital. Sell these investments as you would commodities, stocks, etc. Give them a nifty tax-free status, and while the feds miss some tax money, they solve a huge capital consistency problem in the bargain... and lots of capital can be drawn to potentially tax-free income sources. Now, instead of buying Treasury Bonds, Florida residents can buy "Catastrophe Bonds" instead... cuz if they think their insurance rates are too darned high, then they'll get their money back by buying the investment based on those "excess rates" in their insurance policy. But if the rates are set properly... then the "Cat Bonds" will produce a normal return on investment, have a nice net yield because of tax rate, and property owners will be paying the appropriate rate for these perils. Rates too low... then capital leaves, feds are more exposed, poor return on investment -- but Florida homeowners get a great deal, but insurers don't suffer nor profit -- because the reinsurer has taken that loss.
Part of the buy in is a superfund build up, similar to an override (1% load?). The superfund is capped at the value of the single largest loss year from the previous 5 years. When the superfund cap is reached, the load isn't removed (unfair return to investors), but instead used to reduce rates for the interim period until a bad year causes bleeding from the superfund.
While this sounds complicated, it's really pretty simple math once you get it rolling. Insurers either want permission to charge the right rates, or not to have to give something for free. Everyone wants consistency. The fed is the only place large enough, with the proper interest, to play backstop. And let's face it... if the feds don't pay for it in a targeted program, we're (all taxpayers) are going to pay for it under federal loans, grants, FEMA, court costs, or whatever when it happens. We cannot afford to take a damaged section of the country and just leave it that way for long... so this is going to get funded somehow. Might as well make it an investment opportunity, and create long term thinking, rather than this calendar year nonsense we've been doing.
Subject: Reinsurance by Feds on Wind / Flood
If admitted private insurers want to write in coastal areas, they are required to offer wind and flood within their basic fire policy coverage (whatever form that is). It is a simple "check box" option. One policy contains the perils and conditions... and one adjuster and decision process to go with it.
Then the feds set the coverage language for what they will reinsure. The private carrier may choose to have "enhancement coverage" outside that reinsurance backstop minimum. The private insurer selects their level of reinsurance at their option, up to 95% (if the rates are decent, the private carriers will enjoy taking some of this). Insurers get to change their participation percentage quarterly (automatically 95% at inception and remains at previous quarter value, unless a form is filed to change it). The fed reinsurance is treated no differently than if a huge private reinsurer was willing to write such a deal.
The fed reinsurance program would indeed need excellent actuarial input, and to charge proper rates in detailed location separation. Such data is available... just needs to be employed without "marketing pressure" to screw it up (which we solve here automatically). Of course, politicians would have to be removed from the rate-making structure, because they would surely screw it up by trying to reduce rates within their jurisdiction for favors, rather than logic.
The funding surplus is sold as 3, 4, or 5 year investments (longer ones get better return ratios). This helps reduce the volatility... because you cannot be "in" for one hurricane season. There are no more claims of huge profits for a calendar year -- or huge losses for the year the hurricane strikes. Instead, you get to have the power of all capital resources, not just insurance sector capital. Sell these investments as you would commodities, stocks, etc. Give them a nifty tax-free status, and while the feds miss some tax money, they solve a huge capital consistency problem in the bargain... and lots of capital can be drawn to potentially tax-free income sources. Now, instead of buying Treasury Bonds, Florida residents can buy "Catastrophe Bonds" instead... cuz if they think their insurance rates are too darned high, then they'll get their money back by buying the investment based on those "excess rates" in their insurance policy. But if the rates are set properly... then the "Cat Bonds" will produce a normal return on investment, have a nice net yield because of tax rate, and property owners will be paying the appropriate rate for these perils. Rates too low... then capital leaves, feds are more exposed, poor return on investment -- but Florida homeowners get a great deal, but insurers don't suffer nor profit -- because the reinsurer has taken that loss.
Part of the buy in is a superfund build up, similar to an override (1% load?). The superfund is capped at the value of the single largest loss year from the previous 5 years. When the superfund cap is reached, the load isn't removed (unfair return to investors), but instead used to reduce rates for the interim period until a bad year causes bleeding from the superfund.
While this sounds complicated, it's really pretty simple math once you get it rolling. Insurers either want permission to charge the right rates, or not to have to give something for free. Everyone wants consistency. The fed is the only place large enough, with the proper interest, to play backstop. And let's face it... if the feds don't pay for it in a targeted program, we're (all taxpayers) are going to pay for it under federal loans, grants, FEMA, court costs, or whatever when it happens. We cannot afford to take a damaged section of the country and just leave it that way for long... so this is going to get funded somehow. Might as well make it an investment opportunity, and create long term thinking, rather than this calendar year nonsense we've been doing.