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Brian Martin
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I think that you know, and even CEI knows, that private insurers are never going to come back and cover all or significantly more of the Florida market. If you took away rate regulation tomorrow, insurers might add a few more cherry-picked policies, but they would not pay the high reinsurance/cat bond costs that would be required if they substantially increased their exposure. It is laughable to blame the states. The Gulf states historically have had the weakest regulation in the country. All the state pools were set up at the demand of the industry. The industry generally gets its way with the regulators, Governors, and legislatures in the South. Don't cry for the insurance industry. They are not the victims here.
Toggle Commented May 16, 2009 on The One about "Research" at RiskProf
Thanks for the information. Of course, the key question about your data is whether the 2004/2005 hurricane losses in Florida are a 1 in 10 event. If they are 1 in 15 or 20 or 25, the numbers change. At least you didn't start your Florida data in 1992 and end it in 2005 as your buddy Hartwig always does to rig the sample in the industry's favor. I suppose I could pick 1994 to 2003 and Florida would beat Kansas, but that is not my point. My point is that the private insurance model will not work for hurricane high-risk areas for the same reason it doesn't work for floods or earthquakes. Insurance for low frequency/high severity events requires insurers to collect much more in premiums than they expect to pay in claims so they can build up reserves and buy reinsurance each year in case this is the year the big one hits. You guys taught me that the premiums have to be high enough to guarantee reinsurance investors very high rates of return so they will invest in reinsurance instead of some other investment bubble. But you only see this from the industry point of view as justification for more premium increases whereas I see it as the reason for unavoidable market failure. It really doesn't matter how much states regulate rates or the structure of state risk pools, those are just your scapegoats. The system does not work and will not work. You can't expect people to pay 5 to 7 times more in premiums than their expected claims. That is what reinsurance costs for high-risk areas according to the pro-industry research that you and the Wharton guys and others have published. I thank you for showing me precisely why only the federal government can provide hurricane insurance in a large enough pool that spreads the risk geographically so that a major hurricane affects only a small portion of it, and that the government can set rates closer to expected losses, with a cushion for timing risk and to build reserves, and keep them there without the deliberate "hard market" manipulation and profiteering of the market by the reinsurance industry after every major disaster.
Toggle Commented May 15, 2009 on RiskProf takes the dare at RiskProf