Oz by drurydrama (Len Radin) via flickr
The year was 2003, and in March it was the dot.com bust. Today we can look back in horror at U.S. investors buying into nothing more than creative business plans in droves, burying technological adventurers in millions. At the time, venture capital was desperately seeking any promising startup with a website to plunge investor funds into.
Probably the best known overnight failure is Pet.com, which even had a Superbowl ad using its symbolic talking sockpuppet. The site promised delivery to the home of pet supplies, but disappointed customers too many times to survive.
While there were a variety of reasons for investing heavily in dot.com companies that had never shown a profit, most investment vehicles had a share of these speculative ventures in their portfolios. In March of 2000, the high point was reached and a fall began that lasted over the next two years. Investors of all sorts lost as big as they had jumped in, and those investors included insurance companies.
The delusional factor was large in investing in speculative dot.com ventures with business plans most remarkable for their inventiveness. Going to stockholders with losses is always a painful experience. In Texas in 2003, there suddenly appeared to insurance companies a new reason for losses. That was the year that the insurance industry discovered it had been victimized by mold. “Black mold” losses were thrown up in 2003 as a blight not only on homeowners in the state, but on their premiums.
The suspicion that the sudden discovery of losses related to black mold, not a new fungus nor a new problem, were an artificial construction has never been substantiated. No smoking gun such as the recordings of Enron executives demanding shut-downs of power stations so they could overcharge customers has ever turned up. The whistle blowers such as insurance executive Wendell Potter are not coming out of the moldy woodwork.
That the insurance industry invented reasons to hike premiums which had no factual basis has been established, however. By blaming violent weather for its unconscionable rate hikes in 2003, the industry opened itself to some statistical questions that some intrepid reporters answered for consumers.
While bad weather and high premiums do tend to go together, the newspaper found that, among all states, Texas’ premiums were higher than expected given weather damage over the years. Texas has more tornadoes and hailstorms than any other state, federal weather data shows, but when the state’s land area is taken into account, its ranking drops. Texas ranked fifth in total damage from 1990 to 2007, according to the weather data. The insurance industry says Texas premiums have either dropped or held steady in the last two years and that Florida has surpassed Texas in average premiums.
In its analysis, The News used a statistical tool called linear regression, which can control for factors such as weather damage. It is a statistical way to level the playing field across all states for a fairer comparison. The newspaper’s analysis found that, even after controlling for weather damage, the average 2005 homeowners premium in Texas was about 50 percent higher than what it statistically should have been.
Of course, the insurance industry in Texas has paid well to keep itself ensconced in the protective arm of its regulatory body, the Texas Department of Insurance (TDI), and sympathetic lawmakers who do not see a problem with high premiums. Some of the evidence sought by reporters, who compiled the article referred to above, has never been obtained. The award of damages which occurred in a State Farm suit in 2004 is still under appeal.
The fact remains, though, that there was no sudden onslaught of black mold in Texas, though there was a dot.com bust that wiped out investor money. That the investor losses occurred simultaneously with the insurance industry’s appalling premium hikes – which it attributed to black mold – does not meet the test of credulity.
Losses occurred throughout investor circles, but not all investors had an easy source to redeem those losses. Insurance companies could charge their policy holders. They couldn’t tell policy holders the actual reason for their new hikes in premiums: their hysteria of investing in unproved dot.com prospective earnings. They could, however, tell policy holders about losses related to the insurance industry.
From such beginnings, the dreaded fungus now blighting Texas policy holders was born. Black mold belongs in a memorial yet to be established, honoring the greatest snake oil sales of all times.
