This past week, I spoke at the Insurance Information Institute-organized all trades forum at New York City’s Waldorf Astoria hotel. It was a half-day event, starting with a panel that featured me and some other insurance pundits, followed by another panel with industry insiders; an address from Federal Insurance Office Director Michael McRaith; and finally, a dinner speech from former House Financial Services Committee Chairman Michael Oxley (of Sarbanes-Oxley fame.) Without breaking any confidences, I’d like to recount some of what I found most interesting in a series of short items this week:
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In conversations about earthquake insurance, several people told me that they had serious doubts that the private market had the capacity to deal with earthquake risk in California. In the strict sense, I’m quite sure this is untrue: unlike nuclear attacks in big cities and major asteroid/comet strikes—where there is not enough money to insure against in the entire world—capital to insure against big earthquakes certainly exists. The more relevant question is whether or not the insurance could be made available at a price that allowed primary insurers to receive a decent return on capital while simultaneously offering a product that people wanted to buy. I’m actually reasonably sure that the second criteria could be satisfied; the first, I’m a little bit less sure.
Earthquake risk is a little bit different from other types of catastrophe risk. It’s lower frequency than any of the 16 named perils in the HO-3 policy but has much higher severity. Most years, an earthquake insurer can depend on a loss ratio well below 25%. But when a quake hits, even a very savvy insurer that charges high premiums is probably going to have something like 250% or more. Furthermore, an enormous percentage of claims are going to take place in a major catastrophe setting. Thus, it may be that the nature of earthquake risk means that it’s best managed by companies that can deal with—and even seek—very volatile portfolios. This, basically, means reinsurers rather than big consumer-facing primaries.
This may mean that something like the California Earthquake Authority or private earthquake insurance written under a private sector “write your own”-structure (first dollar risk is ceded to reinsurers) makes more sense than looking to primary insurers to back earthquake insurance with their own capital.
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Perhaps a half dozen people asked me about Heartland’s funding. The bottom line is pretty simple: like all non-profits that I know of, Heartland does not release the names of its donors. They’re a trade secret and, in any case, we promise confidentiality to donors in writing. I couldn’t release them even if I wanted to.
Most of Heartland’s funding overall comes from individuals and foundations and we have more than 2,000 donors in all. To my knowledge, the only large foundation that is based on a fortune earned in insurance is the MacArthur Foundation and, best as I know, it has virtually no interest in supporting work related to insurance and even less in supporting that of people on the political Right.
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Personally, I’d just as soon see most major provisions of the Sarbanes-Oxley law repealed or, at least limited in their consequences for companies wanting to go public. (I do strongly support the idea of public company CEOs having to personally sign off on financials.) But co-author Michael Oxley deserves a little credit for the spirited defense of the law he offered at the all-industry trades meeting. I disagree with what he says, for the most part, but there were at least two things I agreed with.
First, SOX shouldn’t have been expected to prevent the biggest accounting scandal—the Bernie Madoff fraud–that has taken place following since its passage. Madoff ran a Ponzi scheme and those were illegal well before SOX. It probably couldn’t have been expected to prevent it.
Second, the law obviously shouldn’t have been expected to prevent the mortgage crisis. It didn’t address the same issues at all.
Does this mean the law is worthwhile? Heck no! But it’s important to base arguments against the law on its actual negative consequences—making it harder for companies to go public—rather than things for which it can’t plausibly be blamed.
