More start to question subsidized insurance and coastal welfare

Today’s New York Times features a provocative article that ends up focusing on Dauphin Island off the Gulf coast of Alabama on the wisdom of using tens of billions of tax dollars to subsidize coastal reconstruction in the aftermath of storms.  Recommended reading, particularly the discussion of the little-heralded Stafford Act, which subsidizes reconstruction of government buildings.

Dauphin Island

The “A” marker shows Dauphin Island in the Gulf of Mexico off the Alabama coast

Retreating from the Beach: Easier Said Than Done

There’s an Op-Ed from Professor Orrin H. Pikey in the November 15, 2012 New York Times. Here’s some “fair use” of that article.

We Need to Retreat From the Beach

By ORRIN H. PILKEY

Durham, N.C.

AS ocean waters warm, the Northeast is likely to face more Sandy-like storms. And as sea levels continue to rise, the surges of these future storms will be higher and even more deadly. We can’t stop these powerful storms. But we can reduce the deaths and damage they cause.

Hurricane Sandy’s immense power, which destroyed or damaged thousands of homes, actually pushed the footprints of the barrier islands along the South Shore of Long Island and the Jersey Shore landward as the storm carried precious beach sand out to deep waters or swept it across the islands. This process of barrier-island migration toward the mainland has gone on for 10,000 years.

Yet there is already a push to rebuild homes close to the beach and bring back the shorelines to where they were. The federal government encourages this: there will be billions available to replace roads, pipelines and other infrastructure and to clean up storm debris, provide security and emergency housing. Claims to the National Flood Insurance Program could reach $7 billion. And the Army Corps of Engineers will be ready to mobilize its sand-pumping dredges, dump trucks and bulldozers to rebuild beaches washed away time and again.

But this “let’s come back stronger and better” attitude, though empowering, is the wrong approach to the increasing hazard of living close to the rising sea. Disaster will strike again. We should not simply replace all lost property and infrastructure. Instead, we need to take account of rising sea levels, intensifying storms and continuing shoreline erosion.

This is not the time for a solution based purely on engineering. The Army Corps undoubtedly will be heavily involved. But as New Jersey and New York move forward, officials should seek advice from oceanographers, coastal geologists, coastal and construction engineers and others who understand the future of rising seas and their impact on barrier islands. We need more resilient development, to be sure. But we also need to begin to retreat from the ocean’s edge.

 

I agree with much of what it has to say. But …

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NFIP: And you think Texas has problems?

Take a look at the National Flood Insurance Program and the havoc Category 1 Sandy wreaked on its finances.  While there are differences between NFIP and TWIA, fundamentally the issue is government subsidized insurance encouraging inefficient development in catastrophe prone areas and then, precisely because of inadequate premiums, having inadequate assets to pay off policyholders.  Here are some worthwhile articles: Property Casualty 360Washington Post editorialInsurance JournalWired. And a fun YouTube video: best line “We don’t have special car insurance for Lindsay Lohan.”

Lindsay Lohan: whose car insurance is not government subsidized

Lindsay Lohan: whose car insurance is not government subsidized

Amazing how easy it is to see in hindsight precisely the sort of problems we are warning about here.

Tuckerton, New Jersey -- who insured these properties -- and why?

Tuckerton, New Jersey — who insured these properties?

Catastrophe insurance and the case for compulsory coinsurance

The effect of coinsuranceThis entry presents an interactive tool by which you can study the effects of “coinsurance” on expected losses from catastrophe.  The short version is that coinsurance can, under the right circumstances, significantly reduce expected losses from tropical cyclones. As such, legislatures in coastal states, including Texas, should strongly consider prohibiting subsidized insurers such as TWIA, from selling windstorm insurance policies unless there is a significant amount (say 10%) coinsurance.  The rest of this blog entry explains why and demonstrates the tool.

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Bonds so dubious, Texas won’t even try to get them rated

People need to read with great care the document posted in the last email from the Texas Public Finance Agency.  I’m reprinting it below for convenience. Basically what it says is that the bond market is dubious about the ability of the Texas Windstorm Insurance Agency to pay back the $500 million it borrowed recently and, as a result, the interest rate TWIA pays will go up. The outlook is so bleak that Texas isn’t apparently even going to waste money in a futile gesture to try to get the bonds rated. The resulting increase in the interest rate isn’t in and of itself a gigantic problem — unless, of course, a surprise storm means TWIA doesn’t have the cash next summer to pay it back in full (in which event the interest rate on $500 million jumps to 8%.)

What is a huge problem, however, is the growing evidence that TWIA will be hard pressed to borrow under the existing statutory scheme the money it will need to pay back claims following a major storm.  Just to repeat, no ability to borrow, no ability to pay claims, at least not in full.  That means many households and businesses on the Texas coast who were banking on TWIA will not be able to rebuild and may not be able to pay their mortgages. If first line bondholders are demanding 8%, what higher rate are second and third line bondholders likely to demand following a storm? Conceivably the market will have more confidence in Class 3 assessments because those are paid by insurers, but I doubt they will feel any better about Class 2 assessments paid mostly by coastal policyholders than they do about the Class 1 bonds, which the market apparently does not regard as investment grade.

And those with cash are going to be able to put the squeeze on TWIA following a storm.  That’s because an additional consequence of an inability to borrow is that TWIA won’t be able to access the large reinsurance policy it spent $100 million on this year.  The reinsurance contract is written so that it doesn’t matter if TWIA is liable to pay its policyholders.  Ours, like most reinsurance policies, is an indemnity policy.  The reinsurers don’t pay until TWIA pays.  But if TWIA can’t borrow then TWIA can’t pay.  So, unless TWIA is willing to kiss a $100 million premium goodbye, it’s going to have to take what the unfeeling bond market offers.

So maybe some coastal politicians are right that we don’t need to worry much about all this because, after all, the odds of a serious storm hitting the Texas coast are just as remote as, why, a hurricane hitting New York City.  On the other hand …

A scary document from the Texas Public Finance Agency

A scary document from the Texas Public Finance Agency

Thanks again to David Crump who has brought this document to my attention.

The latest information on post-event bonding issues

David Crump [1], one of the clearer thinkers on catastrophe insurance in Texas has done some excellent work in getting information on the ability of Texas to sell post event bonds — and the likelihood that we would have to do so following a signifiant storm.  I’m reprinting his email below, putting the document from the Texas Public Finance Agency at the bottom of this post, and providing access right here to the response TWIA provided to Mr. Crump’s public information request.  Good work, Mr. Crump!

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A B+ for Loren Steffy

Loren Steffy, a blogger for the Houston Chronicle has an interesting entry today.  You can read it here.  

He gets a B+.  He’s right on the following points:

1.  The Texas Windstorm Insurance Association should be warning policyholders that they may be subject to assessment in the event of a significant storm and that TWIA may not be able to pay claims fully in the event of a major hurricane.  That way policyholders would be able to make better choices about (a) whether to invest in coastal property in Texas and (b) about whether to go with TWIA or to purchase, where available, an often-more-expensive-but-possibly-more-secure policy from a private insurer.

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Fractional order distributions using beta-weighted expected quantiles

In an earlier post, I discussed how decisions under uncertainty that could be characterized by a statistical distribution might be evaluated not just using “spectral measures” but also by using an order distribution.  The idea, in a nutshell, was that a risk averse person would evaluate a situation involving uncertainty as if she were making N draws from a distribution and being asked to pick the worst outcome.  “N” becomes a measure of risk aversion.  The higher the “N,” the more likely that one of your draws is going to be really bad. This methodology had the virtue of being perhaps more comprehensible than spectral measures.  A disadvantage, however, was that it permitted only integer measures of risk aversion in which one was restricted to discrete numbers of draws.

What I have now recognized — and I believe this may be what Wolfram Research’s Oleksandr Pavlyk may have been trying to communicate to my less expert self a few weeks ago — is that the mean of an order distribution of some distribution F is — at least often — the expectation of a quantile function of that distribution weighted by a beta distribution in which one of the parameters takes on a value of 1.  And, if this is the case, one can emulate fractional order distributions by letting the other parameter of the beta distribution be something other than an integer.

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Eight Reflections on Sandy

1. Turns out a Category 1 hurricane can, under the right circumstances, do a heck of a lot of damage. So can tropical storm force winds.

2. Up until this week, New York City and New Jersey could (and, for all I know, did) make the sort of arguments that would have kept insurance reserves available to pay for Sandy far too low.  The argument would have been: no tropical cyclone has made landfall in New Jersey as a hurricane in 109 years, therefore the risk is low.  Acceptance of those arguments can result in greater insurer insolvency and policyholder shortfalls. Turns out the theoretical flaws with that kind of argumentation, which we hear from some Texas coastal politicians all the time, can come back to bite you in the rear.

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