Whether insurance policy prices should be set through government regulation or left to market forces was the hot topic Tuesday for a panel of top insurance minds.
“When you look at the program of protecting coastal properties, it’s been an absolute failure,” said Steven Pociask, who runs the American Consumer Institute for Citizen Research. “It subsidizes second and third homes and people [who] live in Monaco. I don’t see the point.”
Pociask’s remarks were at the Florida Chamber of Commerce Insurance Summit, taking place this week in Orlando.
Joining Pociask on the panel were Appalachian State University Finance, Banking, and Insurance Chair David Marlette and Derek Freihaut, a consulting actuary for Pinnacle Actuarial Resources. The panel moderator was Florida Catastrophic Risk Management Center Director Lorilee Medders.
Pociask said artificially low rates through state-backed insurer Citizen’s Property Insurance Co. aren’t just bad for competition, but unfair to the consumers who cover the brunt of the cost of subsidizing coastal properties.
“The average household income of someone in Gainesville is one-20th of the household income on Fisher Island,” he said. “That person has to pay for their insurance and subsidize the coverage of someone else.”
He also said it was unfair for Floridians to subsidize policies for out-of-state or international homeowners. In 2013, Citizens said about one out of every six of its policyholders have an out-of-state address, with most of those policies for coastal properties.
Appalachian State University Finance, Banking and Insurance Chairman David Marlette sees some value in programs such as Citizen’s, though. Marlette was already in the insurance business when Hurricane Andrew hit Florida and said that event, as well as the “fairly unprecedented” 2004 and 2005 hurricane seasons, show homeowners need an insurer of last resort.
“Those houses were already built and those people already lived there,” he said.
The panel’s views were murkier on price optimization and predictive analytics, the complex data sets insurers use to price policies. Some states don’t allow certain analytics, which can range from gender and age through to the contents of a policyholder’s credit report, but without them it can be difficult for insurers to price their offerings.
“Just because the state says something doesn’t exist doesn’t make it so,” Freihaut said. “The cost is there and the company is aware of it.”
Even so, Marlette said the main problem with price optimization and certain analytics is that consumers see the practice as an insurer saying “how much can I charge this person before they leave and shop around,” even though some optimization practices can lead to drastically lower rates.
When a 16-year-old driver is added to a family’s car insurance policy the cost can be astronomical, Freihaut said, but some insurers may use price optimization to give those drivers a lower rate in the hopes they turn into long-term customers.
When it comes to weighing consumer protections against solvency, though, the panelists were in agreement.
“Solvency trumps everything else,” Freihaut said. ““It’s natural to focus a little bit more on the consumer protection side, though, since most companies tend to focus on solvency themselves.”
He said that while it’s important to make sure consumers can read and understand their policy, at the end of the day solvency is a form of consumer protection.
“The worst thing is if an insurer goes under and a lot of customer claims don’t get paid,” he said.