Educational Presentations made before Affordable Homeowners Insurance Commission

Dr. Hunter, former Director of the Texas Department of Insurance, Presentation 4/11/2012.

Dr. Hunter began his presentation by discussing his research of the economic cycle of the property and casualty insurance industry. Dr. Hunter said that by his tracking, prior to 1992, the insurance industry was able to “weather catastrophes pretty well”. However Hurricane Andrew had a major impact in the insurance industry and their profitability. Following the devastating losses caused by Andrew, the insurance industry had to “radically change” how they do business. The insurance companies said they need to use models which provide thousands of years of data. The insurance companies also said they need to restrict coverage, for example by charging hurricane deductibles and putting caps on replacement costs. Finally, the insurance companies said they need to “dump” the higher risks by putting them into a state or federal government pool.

Dr. Hunter explained there was consensus among the state’s governments and consumer advocates that changes needed to be made and he endorsed the changes. Dr. Hunter said insurance executives told him once these changes are in place, the insurer’s ability to write coverage, restrict coverage and prices would not change. Based on these assurances, Dr. Hunter, while Director of the Texas Department of Insurance, told his citizens that while these changes will hurt in the short run, it would bring stability to an otherwise unstable insurance industry. Dr. Hunter said he told the Texas coastal citizens “the pain would be inflicted once”, and then there would be stability. Then, in 2004 and 2005, then Katrina, the insurance companies “did it again” and “reneged on all their promises”. Dr. Hunter felt he was duped by the insurance companies. He said they (insurance companies) were either price gouging or they mismanaged their previous changes.

Dr. Hunter further explained that the insurer’s ratio of risk per every dollar of surplus is at a historic low. He said it is a very safe industry. He said most experts agree that the risk ratio should be 1.5 to 1, but now it is in the order of .8 to 1.

Dr. Hunter addressed the way insurers eliminate the risk of hurricanes by using reinsurance and risk aversion strategies. He said insurers put the risk back on to the consumer by use of deductibles, caps on replacement costs and the anti-concurrent causation clause. Dr. Hunter said if all of the disasters including the 911 event occurred in this year alone, the insurance companies would still have a very safe leverage ratio.

Dr. Hunter explained in the past thirty years, there have only been three years in which the insurance companies made an underwriting profit. The insurance companies’ large surpluses have come primarily from investment income. He concludes an underwriting profit is not essential to an insurance company’s financial health. He stated the largest impact to insurance companies’ financial health has not come from any natural disaster, but instead came from the financial crisis.

Dr. Hunter’s presentation continued with his explanation of use of models and how they can often be inaccurate and that companies which produce models compete with each other and may produce models which are more favorable than others to insurers. He believes insurance companies should make their actuarial data public. He stated the lack of competition between insurance companies may explain the diversity of rates. Dr. Hunter provided information on why regulation is necessary for homeowner’s insurance. He contends most people lack a fundamental knowledge or understanding of what they are buying. Most people are not lawyers and they do not understand their policies. He cited after Katrina, most people didn’t understand the anti-concurrent causation clause and didn’t realize their claims would not be paid under this clause.

Dr. Hunter recommended exploring a multi-state compact. The states can work together to develop a regulatory model and create a multi-state reinsurance mechanism. He also recommends banning the anti-concurrent causation clause and suggests collection of data. Dr. Hunter believes carriers should use several models, instead of just one and that modelers need to be regulated as an advisory organization. He suggests the federal government can offer opportunities to provide assistance to Alabama in development of regulatory models and data collection. Dr. Hunter also said mitigation is very critical in helping resolve the problems. He concluded his presentation and offered to take questions.

Chairman Russell thanked Dr. Hunter for his extensive research and described the diversity of the Commission to him. Chairman Russell said there were legislators, consumers, HHII representatives, realtors, attorneys, professors and industry representatives on the Commission.

Dr. Hunter was asked about his thoughts regarding the multi-state compact and the impact on risk comparing Alabama’s limited coastline as compared with Texas and Florida’s coastline. Dr. Hunter acknowledged every state has a different risk. He suggested the models would be worked out that addresses the exposure. Dr. Hunter said the federal government could help prepare a multi-state model.

Chairman Russell asked for Dr. Hunter’s thoughts regarding a Hurricane Facility and Authority which would deal with deductibles on insurance/financing arrangement which would be funded by money from the BP fine money. The deductibles would be large enough so that the companies could give a substantial premium credit. Dr. Hunter said the higher the deductible, the lower the premium and a facility as described by the Chairman would encourage policyholders to take a higher deductible.

Commission member Carl Schneider asked Dr. Hunter if the surplus numbers he referred to include all carriers, or was it solely P & C carriers and if it includes all carriers, how can he make the relationship between the surplus for all companies versus companies that only take on the risk of property. Dr. Hunter replied it is based on all companies. He added only a small handful of companies don’t write property. Mr. Schneider asked Dr. Hunter about leverage ratio and in particular some of the startup companies which have gone into Florida and are running a five or six to one ratio.

Additionally, Mr. Schneider asked Dr. Hunter to further clarify his comments regarding how P& C insurers eliminate risks.

Commission member Michelle Kurtz asked how one state could initiate a multi-state type of entity. Dr. Hunter said there was a meeting in Atlanta several years ago which was initiated by Florida’s Department of Insurance. He suggested contact between the states’s Departments of Insurance. There was discussion on the viability of the Federal Flood Program.

The role of the federal government was discussed and clarified as having an advisory role in the capacity of data collection and not regulating what the states are doing.

Representative Joe Faust discussed the feasibility of using the BP money and the bond money from Raymond James to start Alabama’s own reinsurance pool. Presently a lot of reinsurance money is going overseas. Dr. Hunter is of the opinion the state could make money if a reinsurance pool is carefully constructed.

There was additional discussion on the collection of data from insurance companies regarding cause of loss information.

Posted 4/9/2012


Karen Clark is an expert in the field of catastrophe risk assessment. She developed the first hurricane catastrophe model in 1983 but she is now worried that models are being given more credit and influence than they deserve.

Read and listen to her Presentation on Model Limitations to the National Association of Insurance Commissioners.  Also read a follow up presentation on Using Catastrophe Models and Other Tools to Assess Hurricane Risk.

You can read much more about hurricane risk modeling here.

Posted 12/2/2011

The underlisted links are to PowerPoint educational presentations made before AHIC.

Some files are large and may take several minutes to download, depending on the speed of your internet connection.  You will need MS Office 2007 PowerPoint to view.

Some Things You May Want To Know About Alabama Insurance Underwriting Association

Aon Benfield Reinsurance Education Discussion

Reinsurance Topics: Impact on Insurance Rates

Captive Insurance Companies

Alabama Department of Insurance

Building Blocks of a Successful Property Insurance Market

This page last revised 3/26/2013