Hard Lessons of the Louisiana Floods

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Louisiana, and particularly Baton Rouge, was hit by severe flooding last month.  The photographs of destruction and displaced families are heart-wrenching.  Unfortunately, with the election season ramping up to full throttle, the devastation of Louisiana is already being crowded out of society’s attention.  Ordinarily, I would expect that relief agencies and compassionate individuals ought to have the situation well in hand, and that insurance mechanisms have kicked in to help the flood victims rebuild their lives.  Everything working as it should, the flood damage is sad and inconvenient (to put it mildly), but the situation should be manageable.  Time to move on.  Next crisis, please.

But that’s not the case.  Oh, it is true that many of us have moved on to other things… the circus that is our election season, the arrival of the college and pro football seasons, even the next big storm as tropical storm Hermine makes her way up the U.S. east coast.  But the situation in Louisiana is not under control.  Many people have literally lost everything… their homes and their possessions.  So why hasn’t flood insurance done what it is intended to do by helping these people rebuild their lives?  Because more than half (55%) of the state’s residents living in high-hazard flood zones did not purchase flood insurance.  Even worse, 88% of those living in low-to-moderate hazard zones (which were affected by this particular flood) did not buy flood insurance.  One Baton Rouge resident said, “You think, ‘I’ll never need that, I’ve never seen water come up this high.’”

The best that these uninsured residents can hope for is a FEMA grant with a maximum amount of $33,000, and perhaps a low-interest federal government loan to rebuild.  For many, that just won’t cut it.  By the way, this isn’t just a problem for those who have lost their homes and possessions, it is also a problem for society that faces the prospect of hundreds, perhaps thousands, of blighted properties.

This is not a call for a massive government bailout of these unfortunate individuals, nor is it a call for tighter regulations that would make flood insurance mandatory for even the slightest exposure.  My major concern is what is going on in the minds of these property owners that would cause them to act seemingly irrationally by foregoing flood insurance?  With several public service announcements broadcast on behalf of the National Flood Insurance Program to raise awareness of the exposure and the NFIP solution, ignorance does not explain it.  It seems more likely that the sparse flood insurance purchases are a manifestation of the old saying that “you can lead a horse to water, but you can’t make him drink”  (no pun intended).  The average cost of flood insurance for Louisiana homeowners is around $700/year and would have covered up to $250,000 on homes and $100,000 on personal property.  That’s not an outrageous expense, to protect the most significant asset that most people own.

So why didn’t more people have flood insurance?  The “it-can’t-happen-to-me” attitude should have been swept away by hurricane Katrina, super-storm Sandy, and many other weather events of recent memory.  I don’t have the answer, and it pains me because I love the power of the insurance industry, its product, and its people to move into disasters such as this and put people’s lives back together.  When the people in need of the help fail to take the minimal steps (relatively speaking) to protect themselves by securing the powerful insurance mechanism for their own benefit, I feel for them and I long to send them back in time so that they might make a better choice.  Unfortunately, they will have to serve as hard lessons to those who still have time to make that better choice, and prepare for disaster by securing the proper insurance.  I only hope that the next victims of flood, fire, windstorm, hail, etc. are watching and learning from the despondence of Baton Rouge.

Back to School

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Next week marks the beginning of a new academic year at Ferris State University, and it is going to be a busy one.  The FSU Risk Management and Insurance program officially launches a re-engineered curriculum this fall.  One of the most important features of the updated curriculum is a 15-credit block wherein students will tailor their education (with academic and professional advice) to suit their interests and aptitudes.  Some students may decide to enhance their RMI degree with an area of emphasis in data analytics by completing coursework in data mining, statistics, and predictive analytics.  Other students may focus on risk management by adding coursework in advanced risk management, enterprise risk management, and risk management technologies.  These are but two examples of potential specializations which might also include other areas such as cyber-risk, entrepreneurship, agency operations, and more.  Fun stuff!

Earlier this year, the Ferris State RMI program launched a strategic planning process.  The bulk of the committee’s planning work is now complete.  Execution of the strategic plan is already underway, and will be an ongoing process over the next few years.  This will result in considerable activity both inside and outside of the academic classroom, adding to our students’ success and strengthening the program for future students.

On a personal note, I am beginning my fourth year in academia this fall.  After spending the first 25 years of my career working in and around the risk and insurance industry in a variety of roles, I can honestly say that the past three years have been the most intrinsically rewarding years of my career.  But what really excites me is what I see ahead.  Ferris State has established a fantastic foundation for the RMI program, the risk and insurance industry is eager to hire ambitious graduates, and now we just need to fill more of the seats.  It is going to be a busy and exhilarating year.  Let’s get started.

Davy Jones’ Locker

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Meet Mr. Dave Jones, California’s elected insurance commissioner.  “Elected” is important in that opening sentence because that inherently makes the regulation of insurance in California a political activity.  As is typical in current California electoral politics, Mr. Jones is from the left side of the political spectrum, and seems particularly sympathetic to the green lobby.  Witness his concern over insurance company investment portfolios that dare to include any companies that derive 30% or more of their revenues from fossil fuels.

Mr. Jones has made waves in recent months by asking that insurers doing business in California provide an annual accounting of their fossil fuel investments. Although he has graciously stated that divestiture in such assets is voluntary, he warned that insurers who do not divest themselves of fossil fuel firms will be publicly identified and subject to examinations due to the concern that such assets might damage the insurer’s financial health.  Giving Mr. Jones the benefit of the doubt, it’s possible that he is simply reading the not-so-subtle tea leaves of political statements such as Hillary Clinton’s admonition that “we’re going to put a lot of coal miners and coal companies out of business.”  If that political ambition has a genuine chance of being realized, then yes, there is a concern that such investments on an insurer’s balance sheet could impede their long-term claim-paying ability.  But this smacks of a chicken-and-egg conundrum… is Mr. Jones acting as a prudent regulator of insurance companies, or is he currying political favor with his fellow leftists to propel his own political ambitions and to eventually lead to the realization of a crumbling fossil fuel industry?

The cynic in me leans toward the latter.  There is another effect of this action that concerns me.  California does tend to be out in front of (and often alone) the rest of the country on many left-leaning political initiatives.  Many of the insurers doing business in California also do business in other states.  If the California Insurance Commissioner takes it upon himself to manage the individual investments in an insurer’s portfolio to advance a political agenda that is not directly related to the business of insurance, is that not usurping authority from the other 49 insurance commissioners?  What’s a national or regional insurer to do if all 50 state insurance commissioners begin picking favored and dis-favored industries for their regulated insurers to hold in their investment portfolios?  Couldn’t the Michigan insurance commissioner take a similar approach toward Silicon Valley tech companies since there has been talk of another tech bubble inflating?

We all like to assume that our elected public officials truly have the best interests of their constituents at heart when they exercise the authority of their office.  Unfortunately, I think we’ve witnessed increasing evidence that many such actions taken in the last 10-20 years have been politically motivated and self-serving.  My instinct tells me that this is the case here with California’s chief insurance regulator using his authority to sink fossil fuel investments deep into Davy Jones’ Locker – not for the good of insurance companies or customers, but for the advancement of his own political agenda and ambitions.

Brexit Surprise

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Besides being a fun word to say, “Brexit” has suddenly become a historical term that will now appear in history books for years to come.  Not more than 24 hours ago, as the votes were being cast in the United Kingdom, the clever term seemed to be headed for the dustbin of over-hyped media-coined phrases.  The conventional wisdom was that the UK would remain part of the European Union, and “Brexit” would be forgotten much like “Grexit” was cast aside last year.  The U.S. stock market certainly priced that expectation into the 230-point Dow Jones Industrial Average rise on June 23.  The surprising victory for the “leave the EU” faction caused worldwide financial markets some whiplash, with the Dow falling 610 points on June 24.  And just like that… Bam! The “Brexit” star is born.

Financial markets abhor uncertainty, and the now imminent departure of the UK from the EU will not be quite so imminent as there is a two-year process ahead for negotiating the terms of disentangling the UK from the EU.  That means two years of uncertainty, and probably a few more surprises and unintended consequences.  Welcome to the Brexit-induced damper on all things financial and two-year Chinese water torture of volatility.  The Federal Reserve, along with the rest of the world’s central bankers are going to be doing an awful lot of re-thinking in the months ahead.  I could be wrong (as I was about the Brexit-outcome) but I wouldn’t count on seeing anything that resembles a “normal” interest rate environment in the next two years.  Heck, we might not even see another 25 basis point increase in U.S. interest rates for that long.

There are so many Brexit-related things to think about… there are many political implications and backstories, but at the heart of the Brexit-surprise seems to be a nationalistic fervor that sovereignty still matters.  That could have parallels here on this side of the pond in November’s presidential election.  Channeling Forrest Gump, “That’s all I have to say about that.”

Now, what about the effects on risk management and insurance?  [I know, I know, you wondered where I was going with this Brexit rambling.]  Well there’s great speculation today about the future of London as an international insurance hub.  Not that it will cease to be an insurance hub, but more about what frictions and complications may be introduced by the need to re-structure firms, obtain new licensing, and yes, perhaps re-locating some resources, once the UK is no longer a part of the EU’s shared economic and regulatory framework.  Will Brexit impede London insurance firms’ access to the EU markets?  What about EU insurance firms serving the UK market?  All fair questions, and all will need to be sorted out over the next few years.  I realize it’s not the same, but I think it might be useful to think of Brexit in terms of the potential economic considerations that would arise if Michigan were to suddenly secede from the United States (Miexit?) and left us all to figure out how to transact business with Indiana and Ohio.  It could kill the export market for Mackinac Island fudge!  Oh the inhumanity that could be wrought.

More broadly, put your risk management hat on and think about the enterprise risk management dimensions of Brexit.  Isn’t this one of those unique sorts of risks that ERM was intended to address?  The political and economic risks associated with Brexit clearly fall into the strategic risk quadrant that traditional risk management relegated to the C-Suite, but ERM’s Chief Risk Officers are supposed to be ready for such vast strategic risks.  So how are CRO’s with operations in the UK and/or the EU reacting today – particularly since most of the world was shrugging off Brexit as a soon-to-be non-event just yesterday?

Add Brexit to your list of worries, concerns, and market volatility triggers to monitor for the next few years.  Oh, and one more piece of advice.  Don’t check your 401(k) balance today.  In fact, it’s probably best you just keep that long-term investor perspective and leave those statements unopened until, say, 2020.

 

 

Easy Come, Easy Go

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It is often said that the legislative process is similar to sausage-making: Neither process is much fun to watch.  Four years ago, in the process of working out the Michigan state government budget, auto insurers found themselves with an unintentional tax credit that is reportedly worth $80 million in the current fiscal year.  Naturally, the legislature and Michigan Governor Rick Snyder are keen to fix this budgetary snafu.  That is likely to happen very soon as both the Michigan House and Senate have sent the fix to the governor’s desk where it will be signed.

How did this windfall come about?  Long story short, the prior budget deal transferred the Michigan assigned claims plan from the Secretary of State to the Michigan Automobile Insurance Placement Facility (MAIPF) in order to gain efficiencies and better claims handling.  Apparently, no one realized that this switcheroo now entitled insurers to tax credits on the additional funds that were now being channeled through MAIPF.  Oops.

The opposition to the legislative “fix” for this accidental tax credit has argued that the loss of the tax credit could cause auto insurance premiums in Michigan to increase by as much as $40 per vehicle.  That may well be true, but it’s a difficult political argument to keep such a vast tax break in place when everyone openly acknowledges that it was unintentional in the first place.  Michigan’s auto insurance premiums are the highest in the nation.  Loss of the accidental tax credit is certainly not going to bring them down, but perhaps it will remove a distraction so that the legislature and governor can finally devote some serious attention to reforming the Michigan auto insurance system – like the fact that medical providers can charge different fees for the same services based solely on whether the patient was involved in an automobile accident or not.  For example, an MRI paid for by Medicare, $484.  Same MRI paid by a no-fault auto insurer $3279.  Now that’s worthy of some legislative attention now that the politics of the easy-come-easy-go tax credit is resolved.

You Get What You Pay For

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One year ago this month, my hometown of Portland, Michigan was struck by a tornado.  The storm damaged several homes, businesses, and churches.  Thankfully, no one was seriously injured, and one year later the town has largely recovered.  I know of several good friends who have recently moved back into repaired and rebuilt homes and offices, thanks to the benefits provided by their insurance providers.  However, it has not been an easy road back for everyone.  I blogged about the storm and some of the recovery struggles last fall.

Some of my friends who are ecstatic to be back in their home or office have mixed feelings about the sometimes long and arduous claims process they endured to get there.  There are also a few situations where people are still not back in their damaged homes primarily because the insurance coverage they purchased was insufficient.  Two such situations involve older, shall we say “vintage,” homes whose owners understandably want the repairs done with like-kind and quality materials rather than similar or functionally equivalent materials.  The trouble is that like-kind and quality materials in vintage homes are much more expensive and not typically covered by traditional homeowners insurance policies.  Therein lies the source of conflict and the delay in getting these policyholders back in their homes.

I can certainly empathize with these policyholders who understandably assume that the insurance they bought would indemnify them by restoring them back to their pre-loss state regardless of their purchased limits and the loss settlement technicalities of the insurance contract.  Most insurance consumers fail to understand that there is no direct correlation between their home’s market value and the true cost to rebuild it.  Furthermore, the typical insurance policy provides for similar or functionally equivalent materials because that is perfectly acceptable to the vast majority of homeowners and makes the cost of the insurance policy more affordable.  For those consumers with vintage homes that they want to have restored with like-kind, quality, and workmanship, the simple truth is that it costs more to do so.  It likely requires that the consumer purchase higher limits and also loss settlement provisions that reflect this desire.  That means paying a higher premium – something most consumers resist even when all of this is explained to them.  My late father was a smart man, and he often used the phrase, “Son, you get what you pay for.”

I feel bad for my Portland brethren who are still embroiled in disputes with their insurance companies almost a year after the storm.  It’s no fun for the insurers either, as they take a black-eye in public relations even though they are abiding by the contract that was sold.  Nevertheless, the industry, and especially the agents who sold these policies, must shoulder some of the blame for not being more careful at the time of sale.  I am not going to name names here, but agents who become “order-takers” rather than personal risk advisers to their clients are doing their clients and themselves no favors.  I would much rather see an agent take the time to understand the nature of a client’s home, and if it’s vintage or has vintage elements, the implications for insurance coverage must be fully explained and proper coverage for the client’s expectations must be recommended.  Perhaps the customer is fine with losing some of the vintage charm of his/her home by replacing ornate doors and trim with contractor-grade materials because they don’t want to pay more in premiums.  The point is, that discussion must occur and the agent/personal risk adviser needs to have the client “sign-off” on such decisions.  If they want to fully restore their damaged home to its vintage charm, then they must invest the time with their agent and underwriter to obtain that level of coverage and pay for it.  “You get what you pay for,” or another apropos phrase my father often used, “There’s no such thing as a free lunch.”

 

NFIP Hatchet Job

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The National Flood Insurance Program (NFIP) administered by the Federal Emergency Management Agency (FEMA) is a mess.  The program’s fiscal house is far from being in order, and now a PBS/NPR documentary reveals the ineptitude of the government management of the program.  In the process, the insurance industry gets attacked and left with a black eye, partly because it didn’t fight back against the inherent bias in the reporting.  According to the report, no insurers agreed to be interviewed for the documentary – that looks great.

In the meantime, the reporter grills interviewees about “how much profit are the insurance companies making on this program?”  To be clear, the claims are paid by the government, and the insurers are receiving fees from the premiums collected to cover the services they provide in administration of the policies.  Yet, the report makes a convoluted argument that insurers are delaying or settling claims for low-ball amounts because of concern that Congress will kill the program if costs are not kept down.  Totally illogical given that the insurers are not paying the claims with “their money” and if there is a true concern about “killing the golden goose” then why would the same insurers be charging excessive fees for their administration services?  Still, no insurers step up to defend themselves.  Personally, my response to the self-righteous reporter’s question about “how much profit?” – “Not enough for having to deal with the federal government bureaucracy, sweetheart.”

Okay, so I’m no public relations genius.  Nevertheless, it’s irritating when the media launches these investigative hatchet jobs on predictable targets and perennial “bad guys” such as the insurance industry.  Where are the reports vilifying the manufacturers of hammers and toilet seats after the exorbitant Pentagon spending on such commodities made news years ago?  Worse yet, why won’t the insurance industry fight back?  The allegations of “excessive profit-taking” (an oxymoron to a free-market capitalist libertarian such as myself) are left out there, hanging in the air, polluting the image of the industry at the same time we are trying to convince young people to consider a career in the industry.  You want to see a really ugly mess?  Let the federal government manage the entire program – from policy issuance to claim settlement. [Insert your favorite postal service joke here.]

Insurance is a noble industry and profession.  We help put people’s lives back together (when the government stays out of the way), and we grease the cogs of economic activity.  It’s time for the insurance industry to stand up for itself more forcefully.