Archive for October, 2010

California Insures Low-Income Drivers

Tuesday, October 5th, 2010

All CoveredCalifornia Governor Arnold Schwarzenegger signed into law the California Low Cost Automobile Insurance Program, which provides affordable liability coverage for low-income drivers with good safety records. The intent behind the program is to facilitate compliance with California law requiring that all drivers be insured. The California Legislature concluded that low-income drivers violate the law as the cost of compliance is prohibitive.  The California Automobile Assigned Risk Plan administers the program, but private insurers underwrite policies.  As with most initiatives, the intent is good, but we are rapidly crowding out the private sector at a time when California is broke. Remember the Robert Plan and other such insurance ventures from the 1990’s? They figured out how to insure non-standard motorists in the private market. We need some private sector innovation.

Living Dangerously

Monday, October 4th, 2010

It Doesn't Add Up

USA Today completed an analysis demonstrating that insurance markets in the states most vulnerable to natural disasters are on dangerously shaky ground. More than half of our states have state-sponsored insurance plans, dating back to the 1970’s when private insurers stopped underwriting properties in high-risk areas, such as inner cities. After Hurricane Katrina inflicted unprecedented losses in 2005, private insurers reduced their market exposure in the affected states. Abandoned policyholders then fell into the state plans, which began to assume unprecedented liabilities. Since Katrina struck in 2005, the value of property covered under the eight coastal state insurance plans from North Carolina to Texas has doubled from $316 billion to $632 billion. But while private companies are required to maintain reserves sufficient to pay expected losses, the states exempt their own plans from such laws. The result is that the state plans have inadequate reinsurance (third-party capital to backstop their risks) and unfunded liabilities. The eight coastal state plans from North Carolina to Texas have only $6 billion in cash reserves and $11 billion in reinsurance coverage. Should a major hurricane strike, the state plans would have to raise assessments, which are effectively taxes on private policyholders to subsidize the policyholders in the state plans. But even under the most aggressive assumptions, the assessments would not be sufficient to pay claims.

Consider that Citizens Property Insurance, Florida’s state plan, reported that it insures property worth $433 billion. For losses in excess of $15 billion, it would have to levy assessments against state residents carrying any type of policy, from auto to liability insurance, that add 16% to the costs of their premiums, which are already quite high. Texas isn’t in much better shape. Its state plan insures property worth $73 billion along the Gulf Coast (remember, that is just a tiny geographic sliver covering Galveston), but has only $150 million in cash and no reinsurance. Surcharges can generate an additional $2.5 billion to pay claims, but that is it.  Last week, I blogged about the temporary extension of the National Flood Insurance Program, which had expired three times this year. Our liabilities are simply too massive for us to continue this self-deception. We must stop the short-term fixes, Band-Aids and wishful thinking and start serious planning for our financial future.

Whistleblower Alleges Katrina Insurance Fraud

Sunday, October 3rd, 2010

A whistle blower lawsuit filed against the Allstate Insurance Company alleges that the company inflated the amount of flood losses sustained by three clients in connection with Katrina-related homeowners’ insurance claims that Allstate had disputed. The whistle blower is an attorney who represented the homeowners and reports direct knowledge of the allegations, asserting that Allstate fabricated insurance documents to shift its own claims obligations to the federal government. Flood losses are not covered by a standard homeowners policy, but instead are covered when the government’s National Flood Insurance Program provides insurance. Although the whistle blower lawsuit was filed more than three years ago, Allstate was just informed of the matter last week. The whistle blower filed the suit of the government for which he seeks three times the amount of fraud losses plus civil fines and legal expenses. The case will be heard in New Orleans. While the facts of the case have yet to be determined by the court, it is clear that the existence of a government-funded program provides incentives for cost-shifting at taxpayer expense.

Harry Potter and Entrepreneurship

Saturday, October 2nd, 2010

Improving Children's Literacy

Billionaire author J.K. Rowling shared her insights into the entrepreneurial process in an interview with Oprah Winfrey that was televised yesterday. The author of the Harry Potter series of children’s novels, Rowling has achieved a level of financial success few authors can even imagine. Oprah Winfrey shared a video clip of the June 2008 commencement address to the graduating seniors of Harvard University in which Rowling spoke of the benefits of failure, which includes stripping away the inessential from her life:

My greatest fear had been realized and I was still alive…Rock bottom came to be a solid foundation on which I rebuilt my life…it is impossible to live without failing at something, unless you live so cautiously that you might as well not have lived at all…. Failure is not spoken of enough but it is so important, it leads to greater success. People who are terrified of failing don’t try anything; they live in a straitjacket of their own making.

Rowling is as articulate in defining the risk-taking appetite required of success, as she is in creating characters for her children’s novels.

NFIP Extension is a Stop-Gap Measure

Friday, October 1st, 2010

Late in the day yesterday President Obama authorized an extension of the National Flood Insurance Program until September 30. This reprieve comes as welcome news to NFIP’s more than five million policyholders, as NFIP has lapsed three times this year. The extension also offers another measure of stability to the real estate market. “Today’s signing will come as a relief for millions of Americans who could be affected by floods or just wish to buy or sell a home,” said Jimi Grande, senior vice president of federal and political affairs for National Association of Mutual Insurance Companies.  But for small businesses that own or lease commercial properties in flood zones, the uncertainty continues. The NFIP is $18 billion in debt and no measures have been taken to assure its long-term solvency.  Long-overdue reforms, such as the inclusion of wind coverage and optional business interruption insurance remain unresolved. We need to keep the pressure on our elected representatives for a long-term solution for sustainable insurance cover.