Milliman CAT Fund Studies Slammed

WASHINGTON–Two studies released by an actuarial consulting firm dealing with government approaches to catastrophe risk are being condemned by industry experts as flawed and conflicted.

The studies, conducted by Milliman Inc., deal with the potential impact of recent legislation in Florida designed to bring down the cost of homeowner's insurance, and a federal catastrophe fund proposal being advanced by a newly created advocacy group.

Robert Hunter, director of insurance for the Consumer Federation of America, said the two studies by Milliman analysts are “conflicted.” He explained that Milliman touts the studies as “independent,” but “they don't make sense” because they use what's happening in Florida to draw two different conclusions.

Based on the two studies, Frank Nutter, the president of the Reinsurance Association of America, said that creating federal catastrophe backstops based on Florida's “government-centric approach” to catastrophe risk insurance is “seriously flawed.”

In his comments, Mr. Hunter said it is “impossible for both reports to go out without being in conflict.”

The first report, by the Seattle-based firm ProtectingAmerica.org, says that if its proposal is enacted, it would save homeowners $11.6 billion annually.

ProtectingAmerica.org is a newly created advocacy group strongly supported by Allstate Insurance Company, among other sponsors, that proposes the government help reduce the cost of catastrophic natural disasters by providing tax incentives that would allow insurers to establish state-based catastrophe funds.

Another part of the plan would be the creation of a national backstop in addition to the traditional insurance market.

“Part of the beauty of this approach is that residents of risk-free states would not pay a dime to a catastrophe fund,” James Loy, former deputy secretary of the Department of Homeland Security and a retired Coast Guard Admiral, said at a Monday conference. “This would significantly reduce the current cross-subsidy that occurs when the federal government steps in to repair and rebuild in the aftermath of regional catastrophes.”

Mr. Hunter said the study projects that states would save $5 billion. The table it includes shows Florida with zero additional savings, implying that the recently enacted Florida plan has already created a savings for consumers, according to Mr. Hunter.

But the other Milliman study on the recently enacted Florida laws, commissioned by the Property Casualty Insures Association of America, “implies Florida is a time bomb waiting to go off.”

The study says, among other findings, that the reforms have the potential to put Florida's credit-rating at risk, Mr. Hunter noted. It also says that businesses and auto insurance customers would be forced to pick up the cost of reducing the rates for Florida homeowners who live in coastal areas.

“One study holds up Florida as a model,” Mr. Hunter says, “while another points out Florida as a potential disaster.”

In other words, Mr. Hunter says, “the studies are totally conflicting, and both say they are 'independent'. It just doesn't make sense.”

Mr. Nutter, a senior trade group official who rarely criticizes industry proposals in public, said that taken together, the two studies “demonstrate that you can change insurance laws, but you cannot change the laws of disaster economics or the laws of nature with political science.”

Mr. Nutter called Milliman a “highly respected firm” and asserted that it is “one of the world's premier actuarial and consulting firms.”

He said a Milliman study on Florida cat risk that was commissioned by the Property Casualty Insurers Association of America (PCI), documents that Florida is simply shifting risk through new legislation aimed at reducing the cost of homeowner's insurance in the state's coastal areas.

Under the program, the cost of insuring the state's coastal development would be borne by low- and moderate-risk insureds in central and northern Florida–including automobile policyholders, municipalities, school boards, day care centers and commercial businesses, whether or not they have any catastrophe risk–instead of spreading risk among private reinsurers operating in global capital markets.

He alleged that the Milliman study confirms the Florida cat fund is provided for at below actuarially sound rates and depends mostly on debt financing, not risk-based premiums.

“The debt would be paid from future assessments/taxes on nearly all insureds, in essence, mortgaging the future of the Florida economy and home ownership in the state,” Mr. Nutter said.

“The irony of Florida,” noted Nutter, “is that small commercial businesses, homeowners, and automobile insurance consumers now insure Florida's insurance companies,” he explained.

Regarding a Milliman study on federal catastrophe legislation commissioned by ProtectingAmerica.org, Mr. Nutter said the federal approach supported by ProtectingAmerica.org is designed to encourage other states to adopt Florida-style government programs and shift risk from the books of insurers to taxpayer-backed state government funds and then to the federal government.

Mr. Nutter argues that the ProtectingAmerica.org proposal also introduces the notion that a Florida-style government fund will provide funding for various disaster preparedness and first responder efforts.

According to Mr. Nutter, “This is likely a hollow promise, given that state funds are likely to be debt-financed (as the Florida fund is now) and will be for the foreseeable future.”

Milliman's study on federal catastrophe legislation concludes that consumers nationwide may also save money in exchange for creating numerous state government bureaucracies to take on the catastrophe risk.

Nutter disagrees, suggesting, “Nothing in the Florida gamble should be a role model for other states.”

Mr. Nutter called it a “high risk financial wager, mostly dependent on luck as far as nature is concerned.” Mr. Nutter added that he thought the proposal “threatens the state's fiscal standing and burdens insureds with taxes and surcharges for years.

“Except for the few insurers who will benefit from shifting catastrophe risk from their accounts to taxpayer-backed government funds, including those that are members of ProtectingAmerica.org, there are no other clear beneficiaries–not the state, not insureds without coastal residential exposure, and not insured motorists or commercial businesses,” Mr. Nutter added.