Actuaries have the top-rated job in America, which gives I.I.I. chief actuary James Lynch a chance to crow.

Actuaries – the number crunchers of the insurance industry – have the best jobs in the United States, according to the latest annual analysis by CareerCast.com. Newspaper reporters have the worst.

This has a personal resonance, because I am an actuary and I used to be a newspaper reporter. I wrote personal finance stories for the Miami Herald in the late 1980s. Before that I was a general assignment reporter for the Washington Missourian.

I think I’m the only person who can make this claim, and the fact continually sparks conversations, the most recent being April 14 after I spoke at the AIPSO Residual Market Forum in Warwick, Rhode Island.

This time the questioner was Karen Furtado, a partner at Strategy Meets Action, a Boston consultant to insurers. She asked: “That’s such an interesting change of careers. How did that happen?”

My response is a practiced tale:

I worked nearly a decade in journalism and had many reasons for leaving. You have to have lots of reasons to change careers. If there’s only one thing wrong with your job, that’s a good job and you shouldn’t leave it.

Before I left, I made some lists, as career guides urge. One list was of the things I wanted to do but never found time to do, because of the constraints of my career. One item on the list was “Take Math Classes.” (I had always gotten good math grades.)

So I quit my job and enrolled at Florida International University, near where I lived then. This was about three months before my wedding. I was 29.

At first I wanted to become a computer programmer because I had enjoyed writing the code that generated charts in the newspaper.

I quickly learned that programming is an art governed by a muse, and much of a programmer’s job is to stare at a screen until the muse whispers the correct code to write. This muse might alight in an hour, or in a week or maybe three weeks. In the meantime you faced a blinking cursor and ate Snickers.

That was not the career for me.

I had loved my math classes, though, and decided to change my major. I walked into the math department offices, and – serendipity! – the admin handed me a brand new brochure touting the university’s brand new certificate program in actuarial science.

You need to be curious about a lot of subjects: mathematics, statistics, economics, law. You need to be able to explain complex ideas in a simple way. Actuaries surely need those skills – but reporters need them, too.

This I can do, I thought. I got the university’s first certificate in actuarial science and picked up a bachelor’s in statistics along the way. After a mere decade of brutal exams, I was a fellow of the Casualty Actuarial Society (CAS).

My I.I.I. job combines my two careers. I work closely with the CAS, for which I write press releases and the occasional article. And I write research papers for the I.I.I., like this one on alternative capital, or the occasional magazine article, like this one on autonomous vehicles.

In fairness, I’ve never thought newspaper reporter was the worst job in the world, even back when I was so disenchanted a quarter century ago. Much of its poor rating today comes from future of newspapers, more bleak today than when I worked for one.

And the job that one person hates another may love. The journalist who can barely add (I’ve met them) would be an unhappy actuary, as would the actuary who struggles to write.

I feel lucky to have a job that blends my unique skills, and I always hope that others can find their own way as well.

I.I.I. chief actuary Jim Lynch brings us some surprising numbers on America’s addiction to opioids:

Americans are grossly misinformed about the dangers of opioid drugs, according to a recent survey by the National Safety Council (NSC).

Opioids are commonly prescribed painkillers like Vicodin, OxyContin and Percocet. The drugs are meant to mimic the nervous system actions of heroin and morphine and all too often lead to similar levels of addiction and suffering. More than 170,000 Americans have died from opioid overdoses this century, nearly triple the number of U.S. military deaths in Vietnam (see my earlier post).

I wrote about the epidemic in Contingencies magazine, focusing on the toll the drugs have taken in the workers compensation system.

Too few Americans are aware of this risk, according to the survey of 1,014 adults, reported in the March 24 edition of Workers’ Compensation Report. Just one in five considered opioids to be a serious safety threat. Only 12 percent said addiction was a concern; two-thirds were unconcerned about any side effects from the drugs.

Education is part of the problem. Only 29 percent of respondents said they had taken or been prescribed an opioid in the past three years, though the number jumped to 42 percent once they were provided with a list of common opioids.

Nearly 60 percent of users had at least one addiction risk factor. Common risk factors include alcoholism, depression, use of psychiatric medication or being the victim of physical, mental or sexual abuse.

Users held opioids in high esteem. For example, 78 percent said they were the fastest method of pain relief, 74 percent said they were stronger pain relievers than alternative prescriptions, and 71 percent said they were the best way to relieve pain.

They underestimate the risk. Though 16,235 people died from prescription drug overdoses in 2013, just 19 percent of survey respondents said they had major concerns about the risk of injury or death from the drugs.

That’s less concern than they had about injury or death from severe weather or a natural disaster, from which 586 people died in 2013, and about the same level of concern as riding in a commercial airliner in the U.S., an activity that in 2013 killed eight, roughly 0.5 percent as many as opioids.

Details on the NSC survey can be found here.

A major hurricane or earthquake hitting a densely populated metropolitan area like Miami or Los Angeles will leave insurers facing losses that far exceed their estimated 100 year probable maximum loss (PML) due to highly concentrated property values, a new report suggests.

In its analysis, Karen Clark & Company (KCC) notes that the PMLs that the insurance industry has been using to manage risk and rating agencies and regulators have been using to monitor solvency can give a false sense of security.

For example, it says the 100 year hurricane making a direct hit on downtown Miami will cause over $250 billion insured losses today, twice the estimated 100 year PML.

Insurers typically manage their potential catastrophe losses to the 100 year PMLs, but because of increasingly concentrated property values in several major metropolitan areas, the losses insurers will suffer from the 100 year event will greatly exceed their estimated 100 year PMLs.”

Instead, the report suggests new risk metrics—Characteristic Events (CEs)—could help insurers better understand their catastrophe loss potential and avoid surprise solvency-impairing events.

The CE approach defines the probabilities of a mega-catastrophe event based on the hazard rather than the loss and gives a more complete picture of catastrophe loss potential.

Rather than simulating many thousands of random events, the CE approach creates events using all of the scientific knowledge about the events in specific regions.

This information is then used to develop events with characteristics reflecting various return periods of interest, such as 100 and 250 year, which are then floated to estimate losses at specific locations.

To protect against solvency-impairing events, the report suggests insurers should monitor their exposure concentrations with additional metrics, such as the CEs and the CE to PML ratio.

KCC estimates that overall U.S. insured property values increased by 9 percent from 2012 to 2014, faster than the general economy.

The state with the most property value is California, followed by New York and Texas. The top 10 states account for over 50 percent of the U.S. total.

U.S. vulnerability to hurricanes and other coastal hazards continues to rise because of increasing concentrations of property values along the coast.

Of the $90 trillion in total U.S. property exposure, over $16 trillion is in the first tier of Gulf and Atlantic coastal counties, up from $14.5 trillion in 2012, KCC estimates.

 

Nearly 37 percent of the United States and more than 98 percent of the state of California is in some form of drought, according to the latest U.S. Drought Monitor.

Its weekly update shows that more than 44 percent of California is now in a state of exceptional drought, with little relief in sight.

The report says:

Continued dryness resulted in an expansion of Exceptional Drought (D4) in northwest California. Statewide snowpack remains at 5 percent as of April 6, 2015.”

Here’s the visual on that:

20150407_usdm_home

What could this mean for wildfire season?

The April 1 Outlook issued by the National Interagency Fire Center warned that parts of California will likely see increased wildfire activity earlier than usual thanks to the effects of the long-term drought.

Here’s what the significant wildfire potential looks like by June and July:

extended_outlook

Meanwhile, the National Oceanic and Atmospheric Administration’s (NOAA) recently issued Spring Outlook calls for drought conditions to persist in California, Nevada and Oregon through June with the onset of the dry season in April.

In its Outlook, NOAA said:

If the drought persists as predicted in the Far West, it will likely result in an active wildfire season, continued stress on crops due to low reservoir levels, and an expansion of water conservation measures.”

I.I.I. facts and statistics on wildfires and insurance are available here.

 

Commercial insurance rates in the United States held steady in March, according to the latest analysis from online insurance exchange MarketScout.

The average property/casualty rate increase was flat or 0 percent compared to the same month last year. This compares to a slight rate increase of 1 percent in February 2015.

Richard Kerr, CEO of MarketScout, noted:

March is an important month. There is a considerable volume of U.S. business placed with both the U.S. and international insurers. While a small change from February, the downward adjustment in rates may be an indicator of what is to come for the next six months.”

General liability and umbrella/excess liability were down at flat or 0 percent in March from up 1 percent in February.

No line of coverage reflected a rate decrease, while the largest rate increase by line of coverage was 1 percent.

By account size, large accounts ($250,000 to $1 million premium) were flat as compared to up 1 percent in February. Small accounts (up to $25,000 premium) adjusted downward from up 2 percent to up 1 percent. Rates for all other accounts were unchanged.

Business Insurance reports on this story here.

For a broader look at the p/c insurance market, check out industry financial and results commentary from the I.I.I.

The April 2013 Boston bombing may have marked the first successful terrorist attack on U.S. soil since the September 11, 2001 tragedy, but terrorism on a global scale is increasing.

Yesterday’s attack by the Al-Shabaab terror group at a university in Kenya and a recent attack by gunmen targeting foreign tourists at the Bardo museum in Tunisia point to the persistent nature of the terrorist threat.

Groups connected with Al Qaeda and the Islamic State committed close to 200 attacks per year between 2007 and 2010, a number that grew by more than 200 percent, to about 600 attacks in 2013, according to the Global Terrorism Database at the University of Maryland.

Latest threats to U.S. targets include calls by Al-Shabaab for attacks on shopping malls.

And a recent intelligence assessment circulated by the Department of Homeland Security focused on the domestic terror threat from right-wing sovereign citizen extremists.

On January 12, 2015, President Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015.

A new I.I.I. white paper, Terrorism Risk Insurance Program: Renewed and Restructured, takes us through each of more than eight distinct layers of taxpayer protection provided under TRIA’s renewed structure.

While TRIA from its inception was designed as a terrorism risk sharing mechanism between the public and private sector, an overwhelming share of the risk is borne by private insurers, a share which has increased steadily over time.

Today, all but the very largest (and least likely) terrorist attacks would be financed entirely within the private sector.

Enactment of the 2015 reauthorization legislation has brought clarity and stability to policyholders and the insurance marketplace once again, the I.I.I. notes.

In the week before Christmas when Congress adjourned without renewing the Terrorism Risk Insurance Act (TRIA), Jeffrey DeBoer, president and CEO of The Real Estate Roundtable, a trade group representing real estate industry leaders, said:

This law does not stop terrorist attacks. But it does disrupt terrorists’ goals of damaging our economy.”

The I.I.I. paper makes a similar point:

Since its creation in 2002, the federal Terrorism Risk Insurance Act, and its successors, have been critical components of America’s national economic security infrastructure. TRIA has cost taxpayers virtually nothing, yet the law continues to provide tangible benefits to the U.S. economy in the form of terrorism insurance market stability, affordability and availability.”

For a federally backed program, that is quite a success story.

Here’s a simple chart that compares the number of people killed in the opioid epidemic from 2000 to 2013 with the number of soldiers killed in the Vietnam theater, writes I.I.I. chief actuary Jim Lynch.

2015.03.20 LYNCH opioid graphic

Opioids are legally prescribed drugs designed to safely mimic the painkilling effects of heroin and morphine. They have not proved as safe as had been hoped.

The drugs killed more than 170,000 over 14 years, about three times as many as this country lost in Vietnam. The Centers for Disease Control and Prevention (CDC) provides the data for opioids, and Vietnam statistics come from the Congressional Research Service (CRS) and National Archives.

I compare the epidemic to warfare because I became aware of the issue at a 2014 Workers Compensation Research Institute (WCRI) conference, when a Boston poll noted (if memory serves) that for every Massachusetts fatality in Iraq or Afghanistan, there were eight opioid victims. It’s also valuable, I think, to compare the War on Drugs with the more traditional battlefront.

Sometimes opioids like OxyContin, Vicodin and Percocet are referred to with the general term narcotics, as I did in an article for Contingencies magazine that traced the epidemic’s impact on workers compensation insurance:

Chances are good that if you’ve made a workers comp claim, you’ve had opioids in [your] medicine cabinet. Narcotics made up 25 percent of workers comp drug costs, according to the National Council on Compensation Insurance (NCCI), and more than 45 percent of narcotics costs pay for drugs containing oxycodone.”

There is some relatively good news. Opioid deaths appear to have peaked in 2010 at 16,917, the CDC reported last month. In 2013 the toll was 16,235.

By contrast, 16,899 died in Vietnam in 1968, the most violent year of the war. So the opioid epidemic has leveled off to deliver tragedy as frequently as the worst year of the Vietnam War.

On another front the news is not good. Opioid addicts often turn to heroin when their prescriptions run out, and the number of heroin-related deaths rose 39 percent last year, to 8,257, the CDC reports. That’s in addition to the opioid toll.

Together, opioids and heroin killed 215,031 between 2000 and 2013, about 80 percent more than the approximately 120,000 U.S. military deaths since World War II.

The amount of financial loss caused by catastrophes not covered by insurance is growing, according to the latest Swiss Re sigma report.

This so-called global insurance protection or funding gap totaled $75 billion in 2014.

The rate of growth of total losses has outpaced the growth of insured losses over the course of the last three decades, Swiss Re notes:

In terms of the 10-year moving average, insured losses grew at 10.7 percent between 1979 and 2014, and total losses by 11.4 percent.”

Here’s the Swiss Re visual showing global insured vs. uninsured losses from natural catastrophes and man-made disasters from 1970 to 2014:

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Lack of insurance cover clearly remains an issue in many countries.

Swiss Re gives the example of low pressure system Yvette last May which brought very heavy rain in Europe to Serbia, Bosnia and Croatia – in some areas the heaviest downpour in 120 years. Yvette resulted in 82 fatalities, the largest loss of life from a natural catastrophe in Europe in 2014, and total losses were estimated to be $3 billion – mostly uninsured.

Areas of the United States are also underinsured, sigma reports. Last August’s South Napa earthquake caused structural and inventory damage of $0.7 billion, particularly in the numerous local wine barrel storage facilities. However, the insured loss was just $0.16 billion.

As Lucia Bevere, co-author of the sigma study, notes:

In spite of high exposure to seismic risk, insurance take-up in San Francisco County and California state generally is still very low, even for commercial properties. That’s why insured losses, in certain areas, can be surprisingly low when disaster events happen.”

Meanwhile, the economic cost of natural disasters continues to rise due to economic development, population growth, a higher concentration of assets in exposed areas and a changing climate.

Without a commensurate increase in insurance penetration, the above will likely result in a widening protection gap over the long term, sigma concludes.

I.I.I. has more facts and statistics on global catastrophes available here.

A new Insurance Information Institute white paper examines the impact of alternative capital on reinsurance, says I.I.I. chief actuary and paper co-author Jim Lynch.

What sounds like a dry topic actually may in the long run significantly affect the entire insurance industry, right down to the humble buyer of a homeowners policy.

It’s a dry phrase, so let’s parse the phrase alternative capital on reinsurance by starting at its back end. Reinsurance is the insurance that insurance companies buy. Insurance companies accept risk with every policy. They work hard to ensure they don’t have too much risk in one area, like too many homes along Florida’s Atlantic coast.

When they do, they protect themselves by buying reinsurance. Instead of buying a policy that covers one risk, the insurance company enters into a treaty that can cover thousands in case of a catastrophe like a hurricane.

Catastrophes are a big deal for lines of business like homeowners. More than 30 percent of homeowners claim payments over a 17-year stretch came from catastrophes, according to a recent Insurance Research Council study, and many of those claims were paid by money that ultimately came from reinsurers.

Legally, the insurance company is obligated to pay all claims, regardless of any reinsurance it has. After Hurricane Awful, a homeowner files a claim with his or her insurer, and that insurer is responsible for payment, regardless of any reinsurance it may have purchased.

While reinsurance doesn’t affect the insurer’s obligations, the financial health of the insurer depends on the quality of its reinsurance arrangements. Insurance companies are careful to spread risk across many reinsurance companies, so the plight of one will not devastate their own affairs.

To the average person, a traditional reinsurance company looks a lot like an insurance company, run by professionals who underwrite risk and administer claims. The pool of money to cover extraordinary losses – capital – had been built from contributions by an original set of investors and augmented by earnings retained over decades.

Here’s where the word alternative comes in. The new arrangements feature two twists on traditional reinsurance.

First, the capital to protect against big losses doesn’t come from within the reinsurance company. It comes from outside investors like hedge funds, pensions and sovereign wealth funds.

Second, the reinsurance doesn’t sit within the confines of the traditional reinsurance company. Companies called collateralized reinsurers and sidecars let investors pop in and out of the reinsurance world relatively quickly. Some reinsurance is placed in the financial markets through structures known as catastrophe bonds.

The new investors don’t use the traditional structure, but they do use traditional tools. Most ally with traditional reinsurers to tap those companies’ underwriting acumen, and they use sophisticated models to price risks, just as reinsurers do. Deals are structured so to be as safe as placing a treaty with a traditional reinsurer.

Such deals have grown; their share of global reinsurance capital has doubled since the end of 2010, according to Aon Benfield Analytics.

The amount of capital in the reinsurance market drives prices in classic supply-demand fashion. As capital grows, reinsurance prices fall, and alternative capital has driven reinsurance rates lower, particularly for catastrophe reinsurance.

If insurers pay less for reinsurance, they pass along the savings to customers. Citizens Property Insurance, Florida’s largest homeowners writer, reduced rates 3.7 percent last year, in part because of lower reinsurance costs.

If, as some experts argue, alternative capital is the new normal, consumers will continue to benefit from lower rates. If, as others contend, it is akin to an investment fad, rates could creep higher as the fad recedes.

The I.I.I. white paper looks at the types of alternative capital, its growth and its future.

A new report from across the pond points to a large gap in awareness when it comes to cyber risk and the use of insurance among business leaders of some of the UK’s largest firms.

Half of the leaders of these organizations do not realize that cyber risks can be insured despite the escalating threat, the report found.

Business leaders who are aware of insurance solutions for cyber tend to overestimate the extent to which they are covered. In a recent survey, some 52 percent of CEOs of large organizations believe that they have cover, whereas in fact less than 10 percent does.

Actual penetration of standalone cyber insurance among UK large firms is only 2 percent and this drops to nearly zero for smaller companies, according to the report.

While this picture is likely a result of the complexity of insurance policies with respect to cyber, with cyber sometimes included, sometimes excluded and sometimes covered as part of an add-on policy, the report says:

This evidence suggests a failure by insurers to communicate their value to business leaders in coping with cyber risk. This may, in part, reflect the new and therefore uncertain nature of this risk, with boards more focused on security improvement and recovery planning than on risk transfer. It nevertheless risks leaving insurance marginalized from one of the key risks facing firms.”

Senior managers in some of the UK’s largest firms were interviewed for the report published jointly by the British government and Marsh, with expert input from 13 London market insurers.

As a first step to raising awareness, Lloyd’s, the Association of British Insurers (ABI) and the UK government have agreed to develop a guide to cyber insurance that will be hosted on their websites.

Reuters has more on the report here.

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