It isn’t greedy CEOs, global warming, or even a really bad, really expensive decade of hurricanes in the Gulf of Mexico that is the cause of high insurance rates in the state of Florida. The real reason is uncertainty. That insurance companies are now holding their collective breath, waiting to find out if Governor Crist will put down his scepter and pick up a pen to sign a bill allowing private insurers to raise rates–that is the reason insurance will remain more expensive than it needs to be.
On Friday state lawmakers passed reforms that would allow the struggling property insurance market to raise rates, allowing the companies to charge rates that get a little closer to reflecting actual risks. But even if Charlie does sign the bill (unlikely) it doesn’t change the fact that it would have been a hard, really hard-won victory for the private companies.
The bill, SB 2044, now goes to Gov. Charlie Crist, who can sign or veto the bill. He has said that he doesn’t support anything to allow rate increases but he hasn’t made a decision on the bill, according to his staff.
It’s another bill that Crist — who is running for the U.S. Senate — can “hit out of the park” with a veto, said Bill Newton, executive director of the Florida Consumer Action Network said, referring to the governor’s recent veto of a teachers merit-pay measure. “He probably needs money and insurance companies have a lot of money so you never know what he might do.”
Yes, location has something to do with it (living near the beach is more risky) and yes, the hurricanes of the past contribute as well, but really the higher costs can be linked to regulatory uncertainty. It takes such teeth pulling for insurers to earn the sanction of the governor in order to set rates that, of course, they are going to high-ball the estimate knowing full-well that any increase in rates will be just as hard to get, if not impossible. It is the job of an insurer to foresee the future and plan as best as he can for the worst-case scenario. When the regulators continual change the rules on a whim insurers have no choice but to assume the very worst and the very worst is the most expensive for everyone.
It will take a much bigger overhaul to improve the economy of Florida [and the rest of the country].
It seems that insurance companies can do no right. This is especially true when it comes to setting rates. Customers demand high quality insurance coverage, but don’t want companies to be able to factor in certain personal details about policy holders that would allow them to charge higher rates to higher-risk policy holders while giving a discount to customers that represent less of a risk–all of which simply means that everyone gets charged more.
One of the most controversial factors insurers use in rate-setting is credit history. Most policy holders can’t understand what their credit score has to do with their ability to drive a car and many states, such as Maryland and Michigan, are on the verge of passing laws or courts rulings that would ban or limit an insurance company’s ability to use credit-based rates. Perhaps it is so controversial because even the insurance companies themselves do not understand why there is a correlation between low credit and higher rates of losses, but there is.
Insurance companies work like forecasters. They predict the number of accidents and how many people will make claims on their policies and how much of it they will use. In order to predict the likely amount of loss each insured represents they use a wide range of factors that together add up to the most accurate assessment of risk. The more accurately an insurer can predict the less they need to charge-the less of a financial cushion they need for unforeseen accidents. The less clearly the prediction, the more they need to charge to make sure they can pay claims. Despite what many consumers believe, insurance companies aren’t looking to make a profit by charging exorbitant rates for safe drivers who never get in an accident-on the contrary. Insurance companies simply want to get as close to breaking even as they can; this allows them to charge less than the competition, keep customers, and invest their funds in interest bearing assets. The more customers they have, the more money they have to invest and the more profit they can take in…so long as they don’t lose money by miscalculating how many accidents a policy holder gets into.
Some consumer advocates and insurance commissioners argue that use of credit history or scoring unfairly discriminates against minorities and low-income policy holders-though the insurance companies insist that they are “blind” to income and ethnicity because they do not ask about those factors when writing a policy. Some argue for a ban on rates based on credit not because it is inaccurate or flawed, but simple because insurers can’t identify why poor credit history correlates with a higher insurance losses. In fact in Florida insurance companies were told that they would need to prove that the use of credit scoring did not disproportionately affect consumers of a specific race, religion, marital status, age, gender, income, national origin, or place of residence-regardless of whether or not there was a correlation between any of these factors and poor credit history.
If consumer advocates want to convince insurance companies to stop using credit history and they want them to offer lower rates the only way to do this is by showing them a way to more accurately predict the risk of each customer. Simply forcing companies to ignore evidence that allows them to get closer to accurate predictions will simply raise the premiums and rates for everyone-good credit or bad.
Supporters of the health care bill spend a lot of time attacking health insurance companies.
The health care bill, by the way, would legally require people to give a lot of money to those same insurance companies. A lot of money. It would be the largest corporate gift Washington has ever given out — as much as $1.5 trillion over ten years by one estimate.
Health insurers’ loudest detractors are actually their best friends, and they don’t even seem to realize it. Apparently, regulatory capture is not always a conscious process.
On Monday, the RAND Corporation released a comprehensive overview of the no-fault insurance system and documented how the one-time darling of insurance systems has fallen so far out of favor, simply because it failed to do what it set out to accomplish: higher availability of insurance with lower premium costs. The study, “The U.S. Experience with No-Fault Automobile Insurance: A Retrospective,” can be read in full at the RAND website.
The idea behind a no fault insurance scheme is that if you are in a car accident with another motorist, both of your insurance companies will pay out to their policy holders, regardless of who was at fault for the accident. The hope was that this would allow people immediate access to their insurance dollars without the months or years of costly legal wrangling that occurs in tort-based insurance states. No fault, however, limits an insurers ability to determine who was at fault, recoup loses from the guilty party, and makes determining the risk of individual policy holders very difficult (even if an insurer can approximate the likelihood of his insured causing an accident how are they supposed to gauge the riskiness of all the other drivers on the road that they’ll end up paying for?).
In the 1970s, many policymakers and analysts believed that no-fault automobile insurance was a superior innovation that would displace conventional, tort-based automobile insurance policies. Today, however, no-fault has lost much of its popularity among insurers and consumer groups, according to the report…
Policymakers believed no-fault insurance would minimize litigation and administrative costs, more fairly compensate victims of automobile accidents and be less expensive than tort-based insurance. In practice, however, premium cost reductions never materialized, in large part because of increased medical costs.
Injury costs under no-fault were only 12 percent higher in 1987 relative to tort-based insurance, but by 2004 costs were 73 percent more expensive under no-fault plans. In addition, those states that restricted lawsuits against other drivers actually had higher claim costs than states that permitted lawsuits.
Anderson said he and his colleagues believe medical costs increased largely because consumers who have no fault policies tend to use more specialized types of medical treatment and because medical costs may be more likely to be covered by auto insurance rather than medical insurance in no-fault states. There also is evidence of greater medical cost inflation in no-fault states.
While the study does call for more research before concluding why medical costs seem to have skyrocketed under the no-fault system, it is clear that forcing insurance companies and consumers into a one-size fits all policy that forces certain coverage and prevents legal recourse has not resulted in cost savings, but rather in unintended consequences.
Richard Morrison, Marc Scribner and Josh Barro join forces to being you Episode 79 of the LibertyWeek podcast. We take on barriers to job creation, anti-capitalist murmurs in Davos, the iPad’s unapproved technology, laws against motorized texting and why it’s all or nothing in the healthcare debate.
One could consider it ironic that the buildings in Haiti most likely to receive insurance money are those that experienced the least amount of damage. It is more likely that those buildings experiencing the heaviest amounts of damage during the 7.0 magnitude earthquake had no insurance coverage at all.
However, it is not irony; it’s the logical consequence of profit-minded insurance principles. As a condition of writing policies many insurers require buildings to meet certain standards or building codes in order to mitigate the amount of possible losses. As a result of the codes structures are sturdier and less likely to result in damage and death. While state-run insurance policies might eventually require certain standards, they aren’t incentivized in the same way private insurers are to guarantee that consumers are holding to the building codes and to make sure the codes actually prevent or mitigate against damage. Haiti has no national building code despite its participation in a Caribbean-wide insurance pool for hurricanes and earthquakes
Haiti has no national building code. Risk modeling firm Eqecat of Oakland, Calif., said it expects to find that insured buildings have fared slightly better, because insurers likely insist that structures be reinforced as a requirement for getting coverage.
Eqecat pointed out that poor construction contributed to the heavy losses, with most of the concrete or masonry buildings featuring “little or none of the lateral reinforcing needed for earthquake resistance.”
But Haiti does have government-run insurance via the Caribbean Catastrophe Risk Insurance Facility, an insurance pool to reimburse the governments of Caribbean nations. The problem with government provided insurance is that they are not motivated by profit and are, therefore ,not motivated to reduce losses. Unlike the private insurance companies the CCRIF does not require adherence to building codes as a precondition of coverage. Additionally, Haiti is covered by the CCRIF only up to $8 million while losses are expected to reach into the billions.
The problem in Haiti is that few of the buildings are covered by private insurance. One obvious reason that Haiti lacks availability of insurance is the long history of political instability.
There is a bright side to the tragedy in Haiti. As noted by Robert Hartwig of the Insurance Information Institute, Haitians can revitalize their insurance market if they adhere to certain codes as they rebuild structures.
At home in America, insurance has been a hot topic for the past year. If we can take anything away from the tragedy in Haiti as we observe their efforts to rebuild, it should be the benefits that accompany the availability of private insurance.
Some Michigan residents are boiling mad that their mortgage lenders are forcing them to purchase flood insurance. The notifications were sent out to residents as a result of FEMA’s adoption of updated flood maps. There is, however, good news here.
Consumers have options. FEMA is certainly not infallible. The maps may not be accurate (I know it’s hard to believe) and homeowners can hire their own property surveyors to determine if they are in a floodplain and how likely it is that a flood will occur on their property. With these actions they may be able to avoid the mandatory purchase of flood insurance or at least they can reduce the cost by giving details about the risk of flood (as I wrote in an earlier blog post insurers can charge less when they are more certain of the risks). Additionally, the more residents who assess the risks associated with their property provide more thorough details for their insurance companies which means that these companies can come closer to risk-based-rates for all of their customers and potentially charge less for everyone as the result of higher profits.
In addition, some consumers who have their property surveyed might find out that they are not in a flood zone though they thought they were and had already purchased flood insurance–in which case they can have their premiums refunded from the previous and current year.
On the flip side, some residents who have their properties surveyed might just find out that they are indeed in a flood plain and they may have to purchase flood insurance. But how “bad” is it really when people are forced to calculate and prepare for a hazard that is very likely to occur?
Insurance commissioner of Washington State, Mike Kreidler wants the legislature to ban the use of credit scores from the measurements insurers use in determining the rates they charge for home and auto insurance.
“It doesn’t have anything to do with how you drive your car or maintain your home,” said state Insurance Commissioner Mike Kreidler.
While there is actually evidence that low credit scores do correlate with higher risks when it comes to insurance claims (not necessarily that consumers with poor credit are more likely to have accidents, but that they more likely to file claims rather than “eating” the cost), that isn’t the reason that insurers should be allowed to use credit ratings.
The simple fact is that insurance companies succeed or fail (you know, barring a federal bailout of some variety) based on their ability to assess risk and charge the appropriate rates to compensate their consumers while still keeping rates low enough to attract new customers. They utilize any and all information they can to guess as accurately as possible which consumers are likely to file claims and how much they will need. Political appointees or elected officials do not have the same impetus for accuracy when it comes to insurance rates. Their only motivation is to keep their constituents happy long enough to keep them in office.
In the long-run though these happy constituents will see their rates rise, even those with good credit ratings, because if insurers are banned from acquiring the details that they believe get them closer to adequately pricing insurance premiums then they will err on the side of caution–meaning higher than necessary rates for everyone.
Coastal residents in NC are trying to fight a deal that would allow insurance companies to increase the rates for property insurance in these high risk regions. Of course, the flip side of the deal is that residents living far from the coast in the west of the state will see their premiums cut by a third.
The municipalities argued Long approved the increases before coastal residents knew insurers had requested them and set rates at unreasonably high levels.
…The General Assembly last summer was forced to shore up the overextended Beach Plan by capping potential costs to insurers and putting every property owner in the state on the hook from a disastrous hurricane season. Some insurers had threatened to quit doing business in the state to limit their exposure to Beach Plan losses unless the program was bolstered, current Insurance Commissioner Wayne Goodwin warned last summer.
Sure it will hurt those living along the coast when their rates go up, but really, they should have been that high (perhaps higher) from the start. When insurers can’t charge rates that truly reflect the risk of the properties they insure they have to charge everyone more. So safer folks far away from the beach end up paying for the riskier decisions of beach homeowners.
If the rates hadn’t been artificially suppressed by interventionist government policy for political reasons, the need for an increase might not be necessary. In fact, had the rates been higher to begin with some of the coastal residents now complaining that they can’t afford the increase might never have purchased homes on the beach in the first place.
Louisiana drivers pay the third highest expenditures for auto insurance in the country (with N.J. taking second and D.C. taking the top honor). On average, consumers pay $1,096 a year for their insurance. This Friday it will get even more expensive as the new minimum coverage mandate is adjusted. The reason for the increase, among other things is due to the rising costs for medical care and accidents.
While the actual amount of increase is likely to be minimal (an additional $71 per year per policy according to the chief actuary for LA’s dept. ) the unintended consequence (as noted in the NYT article) could be the reduction in auto coverage state-wide not an increase. The folks who couldn’t afford more insurance before the mandate still won’t be able to afford it and instead of pinching pennies somewhere else in their budget they may choose to drop coverage all-together increasing the deficit of coverage in Louisiana–not increasing coverage.
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