The Tampa Tribune
by Steve Otto
August 24, 2011
Here’s a story to read while you keep a weather eye on Hurricane Irene as it storms up the coast. If you have insurance this also is about your money.
It starts with a young woman sitting at the airport last week. She’s taking advanced placement statistics this fall at Plant High School, which right away means she’s smarter than you or I. Her assigned summer reading: “Numbers Rule Your World,” by Kaiser Fung.
No, I’m serious. That’s the guy’s name. Not only that, I’ve learned Fung is hot out there in the world of numbers. He’s sort of the Lady Gaga of statistics.
Anyhow, she’s reading the book, turns a page and the next chapter is about her grandfather, Bill Poe Sr., the former mayor of Tampa. The chapter is about the collapse of Poe’s insurance and financial empire a half-dozen years ago and how it relates to the influence of probability and statistics.
“What amazes me,” said Poe Sr. from his office, “is how detailed and correct Fung is in the book. I’ve never heard of the guy and he never contacted any of us. But he is right, not only in the details, but that there was no way I could have anticipated or predicted what was going to happen.”
* * * * *
Go back to the late 1990s, when Poe was at the top of his game. The former mayor still was active in his community, a philanthropist and a good guy.
His insurance empire had soared; selling property and underwriting insurance he had become the state’s largest broker. In 2005, following an unprecedented string of devastating storms, it all collapsed.
Fung writes of that time: “… national insurance giants like State Farm and Allstate were ruminating openly about quitting Florida markets. … Having inherited hundreds of thousands of polices from failed property insurers, the state government realized it lacked sufficient capital to cover potential losses and offered to pay … companies to assume these policies. Poe was one of the early takers.”
Fung moves on to 2005. “Hurricane Wilma arrived at the tail end of two consecutive devastating seasons in which eight hurricanes battered the Florida coast. … In 24 months Poe’s customers suffered losses topping $2.8 billion.”
* * * * *
I think Fung, like me, knows that Bill Poe did nothing wrong except believe the models and projections that were the standard for the industry. He took the risks and paid a huge price, one that we need to learn from.
He goes on to describe why the numbers and models were completely wrong for hurricanes in Florida. You’ll have to read the book to figure all that out, although Fung concludes we are living on borrowed time and even the state-run Citizens, which has swallowed up many of Poe’s customers, ultimately is doomed to fail.
Because all of you contribute to Citizens, it’s an unsettling scenario and one that suggests in the end both the insurers and the policyholders in Florida are in trouble.
http://www2.tbo.com/news/opinion/2011/aug/24/menewso3-a-numbers-game-thats-sure-to-fail-ar-252530/
