Thursday, March 31, 2011

Flood Insurance Reformers to Hold Second Hearing

The House subcommittee preparing a flood insurance reform measure will have its second hearing on April 1 to hear testimony from Federal Emergency Management Agency (FEMA) Administrator Craig Fugate. Fugate was unable to be at the first hearing on March 11 as he was directing the government’s response to the earthquake and tsunami in Japan. The Insurance, Housing and Community Opportunity Subcommittee, chaired by Rep. Judy Biggert, is considering a measure to reauthorize and reform the National Flood Insurance Program (NFIP), which is administered by FEMA. Biggert’s initial draft of a bill received a generally positive bipartisan and business response, although some lawmakers voiced concern that it did not go far enough to address the $18 billion debt the program faces and others balked at adding additional living expenses and business interruption coverage options to the program. Others urged Biggert to move more towards privatization of the program. “NFIP is underwater by nearly $18 billion. A fiscal disaster can’t respond to a natural one. We need to put the program back on track so that it can provide reliable protection for the homes and businesses that need it — without putting taxpayers at undue risk,” Biggert said. She said FEMA’s testimony is “critical to ensuring that the program can meet the next challenge.” The hearing will take place on Friday, April 1 at 10:30 a.m.

Friday, February 18, 2011

Inflation and Insurance

Is the return of “cash flow underwriting” a possibility?
Inflation—or the prospect of inflation in the U.S. in the near future—dominates the news today. To gain some perspective on inflation and any impact on the fortunes of property-casualty insurers, this week IN&V will look at insurer investment income and profits and compare that with historical changes in consumer prices (inflation). While the historical data are interesting and provide some insights, making predictions is very difficult—especially about the future.
China’s inflation rate was reported on Feb. 15, 2011, as nearing 5%, up significantly from a year earlier with food prices rising annually there at near 10%. Much of the Mideast turmoil is being attributed to unrest from high inflation in food prices. Then, to bring matters home to the U.S., many feel the Federal Reserve’s approach of quantitative easing will drive inflation via devaluation of the dollar, and there are concerns over oil and food prices here as well.
To gain perspective on a potential increase in inflation and the possible impact on insurance, consider data beginning from 1969 from A.M. Best Aggregates and Averages for insurance and the Bureau of Labor Statistics for inflation. This time period is of interest as it includes the 1970s and early 1980s when the U.S. saw two dramatic spikes in consumer prices. Using insurer profits and investment income as a percentage of industry premiums, the graph below shows inflation as measured by the change in consumer prices for urban areas.Source: A.M. Best Aggregates & Averages and the Bureau of Labor Statistics (CPI: All urban consumers).
As you can see, there is no obvious correlation between insurer investments or profits and inflation. There are two spikes in inflation in 1974 and 1980, and after that the p-c industry benefited from a general increase in investment income. Beyond that though, any conclusions seem at best speculative. If anything, what seems most obvious is insurance profits are quite volatile in spite of more stable inflation rates and investment income.
Some industry concerns surround possible increases in inflation, focused on the hyper-inflation of the 1970s and early 1980s and the prospect of a return of “cash flow underwriting.” Readers who were in the business at the time may recall that following a period of underwriters pursuing soft insurance premiums at seemingly any risk for dollars to invest at high interest rates, the industry saw investment income fall and loss costs rise, ending in the epic hard insurance market of the mid-1980s (see the infamous “Time” magazine cover story, “Sorry America, Your Insurance Has Been Cancelled,” from 1986).” No one seems to have a strong opinion whether this could or would