Insurance Claims And Issues

Replacement Income Models for Retirement, Catastrophe Models Same Flaw: GIGO.

   Their shared flaw?  "Garbage In, Garbage Out" ("GIGO").

   70 percent of current income is the model widely used for calculating the amount of income you will need when you retire.  Unfortunately, that model, like Catastrophe Models, is not based on experience but on opinion.

   In a newly released study, Professors John Karl Scholz and Ananth Seshadri wrote about "What Replace Rates Should Households Use?"  Their study was published by the University of Michigan Retirement Research Center.  Here is a pdf copy posted online of their Research Paper.  They found many reasons why 70 percent of currrent income is a flawed model for calculating retirement income, but the biggest is the simplest:  Calculate your retirement needs based upon your experience, not opinions.

   Even if the opinions are your own, but even more so if the opinions are someone else's.

   Here is a web page with some of the research papers made available online of Professor John Karl Scholz, Economics Professor of the University of Wisconsin-Madison.  Here is the web page listing publications of Economics Professor Ananth Seshdari, also at the University of Wisconsin-Madison. 

   Oh, and forget about using those online calculators unless you are actually trying to fail.  "In other words, if you're using an online calculator to plan your retirement, you might be undersaving or oversaving by a wide margin."  MarketWatch, "Typical Retirement Savings Rate Models Are Often Flawed, Professors Say," published online in St. Petersburg Times Online, Friday, November 6, 2009.

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California Wildfires Drive Increases in Premium, Decreases in Homeowner's Coverage Decreases

   Wildfires in California are driving up Homeowners Insurance Premiums.  According to this linked newspaper report, the same wildfires may also drive future decreases in Homeowners Insurance Coverage.  Marc Lifsher, "Insurance/California Homeowners Facing Insurance Rate Hikes" (Los Angeles Times Online, Tuesday, September 1, 2009).

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State Farm Dropping Discounts on the Way Out of Florida?

    State Farm is the largest Property Insurance Company in Florida measured by Premium volume.  It wants to increase its income in Florida by reducing discounted Premiums.  Some folks say this is a backdoor way of increasing Premiums without filing for Premium Rate Increases.

    The Florida Office of Insurance Regulation, i.e., the Florida Insurance Department, recently allowed State Farm to totally eliminate Premium discounts for State Farm Policyholders who (1) pay State Farm Premiums for more than one Insurance Policy, such as Auto Insurance, (2) installed burglar alarms in their homes, and (3) have not made Homeowner's Insurance Claims on their State Farm Homeowner's Insurance Policies.  The O.I.R. also allowed State Farm to reduce its Premium discounts to Policyholders who upgraded plumbing, electrical systems, and HVAC systems in their Homes.  See, e.g., Beatrice E. Garcia, "State Farm Can Drop Some Discounts on Homeowners Policies" (Miami Herald Online, Friday, August 7, 2009); Julie Patel, "Insurer Plans to Leave State/Rate Hike Coming for State Farm Home Insurance Premiums/State Regulators Approve Changes That Will Increase Premiums an Average 28 Percent" (South Florida Sun-Sentinel.com, Thursday, August 6, 2009).

    "However, State Farm can't reduce the credits it offers homeowners for installing wind mitigation features," Beatrice E. Garcia, supra, which are Insurance Premium credits required by Florida Statutes.  The reported reason is that the Computer CatClaims Models used by State Farm "to justify why the mitigation credits should be reduced" were not done on the same CatClaim Model as State Farm used when it filed supporting information with the O.I.R. for the required mitigation credits in the first place.  In other words, State Farm used one company's Computer CatClaims Model to show its compliance when it was initially required by the Florida Statutes to offer the Insurance Premium credits, but it "used another modeling firm's work as the basis" of its offered justification for reducing the statutorily required mitigation credits.  Beatrice E. Garcia, supra.

     Since these reports were published, the Florida Insurance Consumer Advocate has raised questions about the O.I.R.'s ruling.  Specifically, the Advocate has reportedly questioned allowing the total elimination of Premium discounts "for homeowners with smoke or burglar alarms, multiple policies through [State Farm] and few to no claims."  "House Keys" Blog, "Battle Brewing Over State Farm Discounts" by Julie Patel, posted on Sun-Sentinel.com on Friday, August 14, 2009.  The Advocate makes the point that Premiums are based on risk.  He reportedly questions whether these particular Homeowner's Insurance discounts, which appear to reduce State Farm's risk exposure, can or should be allowed without the scrutiny attracted by a formal Premium Rate Increase filing.  Id.

    Interesting point.  

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No Storms Proof to Some Catastrophes Are On the Way.

    There have been no named storms so far this year in Florida.  Knock on wood (you cannot see me right now, but I am tapping my forehead).

    This is good news for most of us.  Even the Computer Models used in the Rocky Mountains to predict Hurricanes in Florida (under an arrangement made by the previous administration) and the National Weather Service have downgraded the number of likely Hurricanes and damaging storms for 2009.  (Isn't it an oxymoron to label individuals in Colorado as Hurricane Experts?  It seems a lot like saying that people who work in Florida are the perfect candidates to predict rockslides in the Rockies.)

    The absence of storm damage and the lowered predictions of Catclaims are especially good news for most of us that live here in Florida.  See generally Emily Nipps, "It's Quiet Now, But Keep the Canned Goods Handy" (St. Petersburg Times Online, Thursday, August 6, 2009), republished online on August 7, 2009 under a totally different headline..

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"CICO": Catastrophes In, Catastrophes Out: Are CatModels Being Gamed?

    Computer Models are used to predict Catastrophes and raise Premiums.  There is a dispute over how long a time period is valid for inputting data.

    In simple terms, Property Insurance Companies would like to use the last 5 years, for example, which would treat Hurricanes like Charley, Katrina and Wilma as the new reality.  They base their Premium Rate Increase Requests accordingly.  This is in fact very like what they do at the present time.

    Others rely on inputting the Catastrophe and other weather data which has accumulated over the last 100 years or so.  This would have the effect of keeping Property Insurance Premiums lower and produce more accurate results, or at least this system has produced more accurate results for years since it is the system that has been and is still in use.

    This dispute appears to be at the center of talks in Tallahassee, Florida in the past week, as reported by Julie Patel of the Ft. Lauderdale Sun-Sentinel at "House Keys/Hurricane Insurance is the Talk of Tallahassee Today" (Posted Thursday, July 23, 2009).  Florida is the only State with its own Computer Model for predicting the frequency and likelihood of Catastrophes like Hurricanes -- and which Florida uses to check the data relied on by Property Insurance Companies filing Premium Rate Increase Requests.

    The results are not in.  As soon as they are, they will be posted.  Discussions like these are important.

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Property Insurers Dovetail With Environmentally Concerned Coalitions.

     The Travelers and Fireman's Fund Insurance Companies are reportedly pressing for innovations to meet climate changes that would alter forever the face of Property Insurance Coverage in the United States.  See, e.g., Cornelia Dean, "Groups See Added Risks From Change in Climate" (New York Times Online, Friday, April 24, 2009);   NU Online News Service, "Group Unveils Blueprint to Save Billions From Hurricanes" published by P & C/National Underwriter, Thursday, April 23, 2009.

    Among the innovations backed by an increasingly broader array of supporters:

• Adopting local land-use policies that deter people from construction in high-risk flood-prone areas.  An example is reportedly provided by City and County officials working together in or about Charleston, South Carolina to restrict development on Johns Island to its interior.
• Enacting more realistic Construction Codes and, at the same time, encouraging existing homeowners and commercial property owners to make their buildings more resistant to storms in storm-prone areas. 

While the members of the coalition were apparently reluctant to endorse the use of Property Insurance Premiums as a planning tool, clearly where Property Insurance in such areas is available at all the Premiums will be very high -- and the Property values are likely to increasingly become lower than they are even now.  See generally John K. DiMugno, Steven Plitt & Dennis J. Wall, "CAT Claims:  Insurance Coverage for Natural and Man-Made Disasters" (Thomson-West Publishing 2008).

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"Beware of Geeks Bearing Formulas."--Warren Buffett.

    Mr. Warren Buffett wrote those words on page 15 of his attached recent letter to Berkshire Hathaway shareholders.  He wrote them in a section of his 23-page, February 27, 2009 letter captioned, "Tax-Exempt Bond Insurance".  There is much more to comment on, that Mr. Buffett addressed in his lengthy letter.   Download 2008ltr WARREN BUFFETT 022709 (NOTE:  This pdf from the Berkshire Hathaway web site begins on page numbered 2.) 

    Buffett was writing the words quoted as the headline of this post, about investing models used by quants to impress investors.  Unfortunately, the quants or "geeks" made spectacularly wrong assumptions.  Here, in his version of "Garbage In, Garbage Out," is Mr. Buffett's take on page 14 of his attached letter:

        Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors.  These parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible.  They then made this experience a yardstick for evaluating future losses.  They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn't afford.  In short, universe "past" and universe "current" had very different characteristics.  But lenders, government and media largely failed to recognize this all-important fact.

    Mr. Buffett could as easily have been writing about Catastrophe Models pushed by and on behalf of Property Insurance Companies:  In short, universe "past" (such as Hurricanes Charlie, Frances, Ivan, Jean, Katrina and Rita) and universe "current" have very different characteristics.  But Policyholders, regulators and media largely fail to recognize this all-important fact.

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Hope.

    Dr. King's Birthday will be celebrated on January 19 in 2009.  Dr. King is being honored with a National Holiday to be observed on the occasion of his birth because he was a great American.  His life gave evidence to us all that perfection is not required in order to be a good person, let alone, in his case, a great one.

    Hope is a singular quality he provided.  And which his memory continues to provide.  I call often to my mind something that Dr. King said about a person who had lost hope.  This is what he said:

The cessation of breathing in his life was merely the belated announcement of an earlier death of the spirit.  He died when he lost hope.

[Emphasis in original.]

    Hope can be found for most Americans in the Inauguration of a new President.  See, e.g., Maya Angelou, "At Long Last, Ready For The Real Deal" (Washington Post.com, Sunday, January 18, 2009).

    That is much.  More even than that, and in addition to that, hope can be found in other things previously despaired of.  Such as courage and competence under pressure.  The pilot and all the members of the crew of Flight 1549 provided that kind of hope in the week before this post.  Their names are Chesley B. Sullenberger III, the pilot; co-pliot Jeffrey B. Skiles; and Flight Attendants Doreen Welsh, Sheila Dail, and Donna Dent.  See, e.g.,  Ray Rivera, "In a Split Second, a Pilot Becames a Hero Years in the Making" p. A19, col. 1 (New York Times Nat'l Ed., Saturday, January 17, 2009); Ray Rivera and Liz Robbins, "For Flight 1549, With Age Came Wisdom," The Lede web log, January 17, 2009 post.

    Hope.  That Insurance Premiums will be forced to be based on actual actuarial information and not Computer Model GIGO 'projections'.

    And that among other things Insurance Companies' market performance will be a result of their strong Insurance operations rather than CDSs and CDOs and other false profits.

    Hope.  This is a great message sent by Dr. King's Birthday.  His Birthday is observed as Washington's Birthday is observed together with Lincoln's Birthday.  The commemoration of Dr. King's Birthday was not enacted by the U.S. Congress as a day they gave Dr. King as his "Day," which they can take away.  To the contrary.  An annual observance of Dr. King's Birthday was enacted into law because of the accomplishments which Dr. King had already conferred upon the Country.

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Computer Models: The New Astrological Charts.

"Their credibility suffered for it last year."   Louis Uchitelle, "Forecasters See Fast Recovery; Others Doubt Their Eyesight"  p. A1, col. 5 (New York Times Nat'l Ed., Sat., Jan. 3, 2009).

    Their credibility suffered because they failed.  They could not predict what they said they could predict. 

    They used Computer Models.  The Computers were filled with information.  The Models digested that information and displayed the directions reflected by that mass of information.  The Computer Models did not work.

    Computer Models of Catastrophes?  In a sense.  The Catastrophes in this illustration are financial.  But financial Catastrophes only for the many.  A few including the self-proclaimed predictors made a lot of money.

    Even though they failed.  Even though their Catastrophe Models were wrong.

    Now they are at it again, the predictors of things that they do not have the capacity to predict.  For some reason, they are still speaking, still demanding to be listened to, still touting their failed Computer Model printouts as Astrologers touted (and continue to tout) their Star Charts.  See generally Louis Uchitelle, supra.

    Property Insurance Companies use their own Computer Models too.   They too jealously guard the secrets of their Computer Models.  They do not generally allow others to test the information they put into their Computer Models, either.  They too tout untested or just plain false Computer Model printouts, and for the same purpose:  Financial Astrology.  In their case, higher Premiums for Property Insurance.

    Otherwise, why would they hide the information that goes into the Computer Models, why would they make their Computer Models so mysterious, and why in short would they pretend that these Computer Models are able to predict the future when so clearly they cannot?

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Man Bites Dog ... Berkshire Hathaway Loses Money!

Insurance Losses and Investment Losses on Derivatives Drop Value in 3Q 2008 Reported Results.

    Berkshire Hathaway reports that its 3Q profit declined 77%.  It was the fourth straight Quarterly drop for Berkshire Hathaway.  Reportedly, that has not happened since at least 1995.

    Berkshire Hathaway's 3Q report includes a drop in "operating profit" in its Insurance subsidiaries, although they are still in the black, turning a profit still.  Berkshire Hathaway's Insurance subsidiaries include GEICO and General Re.  Their income in 3Q 2008 was reportedly $81 Million, down from $486 Million.  3Q 2008 Hurricane losses of $1.05 Billion were reported.

    However, in addition Berkshire Hathaway reported also on certain losses with which it began 2008, which tanked even further in 3Q 2008:  Derivative Contracts.    E.g., "Berkshire Hathaway Profit Tumbles 77%" (Associated Press Copyrighted Report published in New York Times Nat'l Ed., p. B8, col. 4 Business Day Section, Saturday, November 8, 2008); Earnings Roundup, "Berkshire Hathaway Profit Falls 77%/Lower Insurance Returns Send Profit Down 77%" (Los Angeles Times Online, Saturday, November 8, 2008).  Those are the "weapons of financial destruction," to quote Mr. Warren Buffett the prime mover behind Berkshire Hathaway, that are responsible for the world's credit chaos at this time.

    Reportedly, Berkshire Hathaway began 2008 with "an unrealized $1.67 billion loss" on its derivative contracts and, in 3Q 2008, they lost value in the reported amount of $1.05 Billion, the identical, exact amount reported by Berkshire Hathaway as the total of its 3Q losses on Insurance Claims from Hurricane damage.

    It is fair to say, based on these results, that the damage caused by Derivative Contracts is equivalent to the insured damage caused by a Hurricane.

Postscript of Monday Evening, November 10, 2008:

And see this Blog Post by Julie Patel on "House Keys" Blog, "Even Warren Buffett Takes a Hit as Insurance Industry Sees More Trouble", November 10, 2008.

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