Anthony Hilton says Florida’s hurricane disaster fund is a model that could be copied by other governments and seriously damage the global insurance industry
It is often a truth in business that the worst kind of competitor is someone who does not know what they are doing. A rival as expert as you, playing by the same rules might well make your life a misery but even as he tramples you underfoot you know what you have to do to stay in the game.
Whether or not you can deliver is of course another matter, but that is the survival of the fittest for you. It is however quite a different story when you are hit by someone who plays to different rules – sometimes, like Direct Line because it has invented a completely different business model, but more often simply because they do not know what they are doing.
Or when you have a competitor whose pricing bears no relation to the cost base or the risk, someone who does not seem subject to the same laws of economics as you.
Insurance is particularly prone to this. Independent Insurance is now dead and almost gone. But I recall in its heyday, rival underwriters in the same space saying how they could not understand how it made money.
As one who was around when Vehicle and General first went boom and then went bust in the early 1970s the stories struck a chord.
But meanwhile of course the rivals had to live with the competition, but severely hamstrung by continuing to run their business sensibly.
That hits particularly hard in this business because it takes longer than most for economic reality to reassert itself. It may all end in tears, but not before it has reduced you to tears too.
I was thinking of this the other day with the ‘official’ start of the hurricane season in the US. As readers will no doubt recall the loss to the industry from American windstorms in 2004 as $30bn and in 2005 , the year of Katrina, it was $85bn.
Last year, however, the wind barely blew at all, which means that at half time in the words of Alec Foster of Hiscox Investment Management the score was 2 – 1 for the hurricanes.
Unusually however the playing field will be different for the second half. The new factor for this year is the decision by the State of Florida to set up a State Hurricane Disaster Fund, a move it made allegedly in response to the high premiums proposed for 2007 by the mainstream industry.
Florida’s Governor, Charles Crist, and his political allies cashed in on the popular outcry against continued high premiums coming on the back of the high profits made in 2006. And they conveniently ignored the fact that these profits were still not enough to offset the earlier losses.
The fund is financed by a levy on home owners who are in effect being forcibly enrolled into a mutual.
As a result many have not bothered taking out normal insurance because they assume there will be enough in the pot to meet all the claims.
If this is another benign year for hurricanes they should be okay, but if it is bad who knows how the mutual will fare.
Perhaps it will be able to meet its claims, perhaps it will increase the levy, perhaps it will scale back, or perhaps, 2008 being an election year, the Florida politicians think they can go cap in hand to Washington and expect to be bailed out by federal funds.
But however it pans out it has caused significant dislocation to insurers operating in the market, because they have to cope with a competitor playing by different rules.
The threat to the industry globally is that there is likely to be more of this not less. True, no other US state has shown interest in copying the Florida move and, unless it proves to be a glittering success in more than just the short term, they are unlikely to do so in any numbers.
It is a different story in the rest of the world however. The emergence in the Middle East and Asia of several newly powerful economies presents an interesting new challenge because most have strong governmental direction – witness Dubai, Singapore, Vietnam and China – where the state uses its funds to enter the capitalist arena.
Thus Dubai bought the ports business of P & O and is creating an international financial centre; the Singapore government has been active in all sorts of areas and in what was surely a highly significant move the Chinese government recently paid billions to become the first major outside shareholder in Blackstone, the private equity group, which recently snapped up Alliant Insurance the US broking giant.
If the huge financial surpluses of these countries continue to accumulate, which seems likely, they are going to become more and more adventurous in how they invest, and that will surely take them into insurance.
The rest of the world is going to have to get used to such state capitalism and the fact that they may not always set so much store by the creation of work of shareholder value, particularly in the near term.
Florida is an early lesson in how difficult this could be for those who have to play by the rules. IT
Anthony Hilton is the City editor of the London Evening Standard