As everyone knows, Florida suffered significant hurricane damage in 2004 and 2005. Since then, however, Florida has avoided major hurricane damage. Thus, Allstate has avoided significant hurricane losses over the last two years. In addition, new laws were passed in Florida to use billions of dollars of public funds to help insurers like Allstate avoid major hurricane losses . Seems like good news for property insurers like Allstate.
But despite that good news and the greatly reduced risk, Allstate’s Florida insurance companies are seeking rate increases of up to 42%. How do Allstate’s actuaries justify that huge increase in insurance rates when their risk has gone down? Global warming!
Florida regulators and legislators were shocked to discover Allstate is using a global warming model to justify these huge rate increases. The first reason they are shocked is that the global warming model is not approved by the state insurance regulators. There is a model that was approved by the Office of Insurance Regulation, but Allstate is not using it. They were also surprised that Allstate is using a short-term model that only looks at what might possibly happen in the next five years, rather than the approved model which looks at the long term history and actual trends of hurricanes. In addition, there is wide disagreement among scientists whether there is any basis to believe there will be more or worse hurricanes in the next five years. Finally, state officials are concerned because Allstate’s model is based on Allstate’s assumptions that hurricanes in the next five years will be more severe and more frequent than the historical data suggest. It’s the old “garbage in, garbage out” scenario. Make the correct assumptions and the computer will spit out whatever result you want.
To put this in perspective, consider what happens if you suffer personal injury and make a claim. Allstate will insist that you may only recover future damages that are “reasonably probable” or “reasonably certain.” Those are the proper legal standards and Allstate will insist you meet them. If you tried to recover damages that were merely “possible,” Allstate would laugh at you and reject that part of your claim.
Yet Allstate wants to base the rates it can charge on possibilities that are highly speculative and based on a novel actuarial approach. Should the regulators really be surprised that Allstate’s analysis is biased to achieving higher rates for Allstate?