Good News and Bad News about Life and Death Rates

By Steven Weisbart, Chief Economist, Insurance Information Institute

The National Center for Health Statistics (NCHS) just released reports on mortality trends in the United States, and some of the news is good and some is bad. The bad news is what grabs the headlines (as the Wall Street Journal put it, “U.S. Life Expectancy Falls Further”). Some other media headlines focused on the rise of suicide as a cause of death (for example, USA Today: “Suicide rate up 33% in less than 20 years, yet funding lags behind other top killers”).

There is no denying it: these are not good developments. And these and other media note that the rate of death by suicide rose by 33.3 percent from 1999 through 2017. (Interestingly, the media generally doesn’t mention the fact that the rate of death by accident over that same period rose by 39.9 percent. Most of the accidental deaths are car-related.)

But there is good news in these reports. You just have to read them to find it. For example, life expectancy from age 65 (not from birth—the Wall Street Journal base) actually rose from 2016 to 2017. In 2017 it was 19.5 years, up 0.1 year from 2016. So on average, of a group of people who make it to age 65, half will live to 84.5 or longer (up from 84.4 or longer in 2016).

Also, in contrast to the increase in the rate of death by suicide, death by stroke was down by 39 percent from 1999 through 2017. Death from heart disease was down by 38.1 percent over that span; death by cancer dropped by 24.1 percent, and death by chronic respiratory disease dropped by 9.9 percent. Even death rates by suicide, which rose for most age groups, actually dropped for people age 75 and over (in 2017 vs. the rate in 1999).

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University of Illinois at Urbana-Champaign Has Insured Itself Against Enrollment Drops

If it has a price, it can be insured. Apparently, that also includes insuring against drops in college enrollment.

The Chronicle of Higher Education recently reported that the University of Illinois at Urbana-Champaign has had an insurance policy in-force since 2015 that would pay for lost revenue if Chinese student enrollment declines.

According to the article, the policy works roughly as follows:

  • The university pays over $400,000 in premium per year for a coverage limit of $60 million.
  • The policy triggers if revenues decline at least 20 percent in a single year following a drop in Chinese student enrollment in its business and engineering schools.
  • Covered triggering events include things like visa restrictions, pandemics, and trade wars.

This policy may seem strange, but it’s basically a type of business interruption insurance, which covers a business’s lost revenue and some expenses following a covered event, like a fire or hurricane. What makes the University of Illinois policy interesting is that it appears to be insuring against some American political events as well.

A brief history of ransom insurance

Did you know that ransom insurance is one of the oldest insurance coverages out there?

People needed insurance because of pirates

Beginning in the early 16th and continuing into the 19th century, state-supported pirates and privateers operating out of North African coastal cities (the “Barbary States”) preyed upon European and colonial commercial shipping.

One lucrative practice was to capture a ship and sell everyone on board into slavery. We don’t know exactly how many people were captured over the centuries, but they probably numbered in the hundreds of thousands. You may have even heard of one particularly famous captive: Miguel de Cervantes, author of Don Quixote.

(Fun fact: some of the first military conflicts for a young United States were the “Barbary Wars” from 1801 – 1805 and again in 1815 – 1816, which were attempts to stop pirate depredations on American shipping. One researcher estimated that the annual costs of Barbary piracy to the U.S., including insurance costs, were equivalent to $10 billion to $20 billion in terms of today’s economy.)

How did ransom insurance work?

Slaves could generally regain their freedom in two ways (if you don’t count mounting a daring escape). One was to convert to Islam – the Barbary States were Muslim and most of their captives were Christian.

A second way was to pay a ransom.

In the early days, churches and families would set up collections to help pay for the release of enslaved captives. That’s how Cervantes was freed in 1580. But starting in the 17th century, cities and states also began to set up ransom insurance pools.

One of the first pools, called the “Sklavenkasse” (literally: “slave insurance”), was established in the German port city Hamburg in the 1620s. That’s over 60 years before Lloyd’s coffeehouse was first mentioned as a proto-insurance shop.

Other places soon followed suit with insurance pools of their own. Individual sailors, churches, and shipping organizations would typically contribute to these pools, which paid out when a participant was captured by Barbary pirates and held for ransom. There were even established rates for how much a ransom should cost: a steersman could fetch 700 Reichstaler (the currency used in Germany at the time), while a common sailor cost a mere 60 Reichstaler.

(For the German speakers out there, you can read more about how the pools worked here.)

Ransom insurance today

Although Barbary piracy faded away in the 19th century, ransom insurance is still available today, usually for important individuals who travel to dangerous regions. Called “kidnap and ransom insurance”, it generally reimburses for ransom payments and other damages, including some medical payments.

And because criminals are creative, we also now have “ransomware” insurance, which covers costs from a ransomware attack. That’s when a hacker freezes a computer system – and will only unfreeze it in exchange for a ransom payment, usually in bitcoin. How the times have changed.

Assignment of Benefits and Hurricane Loss Creep

We’re putting the finishing touches on a major research project on the assignment of benefits problem in Florida, a phenomenon in which a quirk in that state’s laws becomes a lever with which the less-than-scrupulous can supersize a claim settlement.

Our paper looks at how the problem has spread across lines of business – from no-fault insurance to homeowners to auto physical damage claims – and across the state – what started in South Florida has metastasized into the Interstate 4 corridor. Even far west on the Panhandle,  Escambia County (Pensacola) has had 346 assignment of benefits lawsuits this year through November 9. Five years ago it had 20.

Our research focused on the growth from one line of business to another and the spread of the problem over time. Artemis.bm has an interesting take on the knock-on effect from the way the problem is rolling through Hurricane Irma claims. Artemis is a website that is expert in alternative sources of insurance capital like catastrophe bonds, collateralized reinsurance and industry loss warranties.

That marketplace is fretting, in part, because after one major event, the capital that insured (or reinsured) that event is locked up. It can’t be used to insure against a second event until it is clear that it won’t be needed for the first.

And losses from Irma, a 2017 storm,  keep rising. In August, four insurers raised their loss estimates more than $1 billion.  The total  this month passed $11 billion, according to Florida’s Office of Insurance Regulation. More than 76,000 remain open.

What is causing the creep? Assignment of benefits issues are a prime suspect. Unscrupulous contractors dupe policyholders into letting the contractor settle directly with their insurance company – without letting the insurance company know. The insurer gets the news in the form of a bill to pay – never having had a chance to ensure the repairs were appropriate or done competently.

Disputes often go to court, where if the insurer loses, it must pay the plaintiff’s legal costs as well as its own.

As Irma’s loss estimates grow, reinsurers and alternative capital sources worry that the same thing will happen to Hurricane Michael claims. Michael struck six weeks ago, but the number of claims is accelerating.

Artemis cautions against overreacting to Irma’s situation, but notes that reinsurance markets may need to price for loss creep (read: charge more for reinsurance), which ultimately pushes homeowner premiums higher.

 

 

Leadership In All Its Forms

We’re excited here at the Insurance Information Institute about our annual Joint Industry Forum in January (details here) and our keynote speaker, Gen. Stanley McChrystal.

Gen. McChrystal is perhaps best known as commander of Joint Special Operations Command in Afghanistan and renowned for his ability to lead and his exploration of the puzzle that is leadership.

His latest book, “Leaders: Myth & Reality,” takes an intriguing look. Here is a snip from the Wall Street Journal review of his latest book, Leaders: Myth and Reality:

Gen. McChrystal … studies six peculiar pairs of leaders, searching for lessons: the irascible but brilliant creative entrepreneurs (Walt Disney and Coco Chanel); the geniuses (Albert Einstein and Leonard Bernstein); the zealots (French revolutionary Maximilien Robespierre and Jordanian terrorist Abu Musab al-Zarqawi); the heroes (15th-century Chinese admiral Zheng He and American abolitionist Harriet Tubman); the “power brokers” (New York’s Boss Tweed and Margaret Thatcher); and the reformers (Martin Luther and Martin Luther King Jr.).

Quite the dinner party, no? But it does speak to the truth that one can lead by inspiration (MLK) or by intimidation (Robespierre). What makes it all work is at the heart of McChrystal’s book and should make for fascinating listening at our event next January.

Sleep and insurance

I came across this from Swiss Re around 2 a.m., which helps explain why it caught my (sleepy) eye:

Consider these two facts: Firstly, two out of three man-made losses worldwide are due to human failure. Based on Swiss Re’s sigma research, this would mean that people trigger a loss volume of around USD 3 billion per year.

Secondly, life insurance generated premiums of USD 2.6 trillion in 2017. These two facts are linked because tired people make more errors and insomniacs are at a greater risk of dying earlier than would otherwise be the case.

That’s right – the insurance angle on sleep.

The lack of sleep is associated with increased rates of heart attacks, strokes, obesity and other diseases. Sleeping less can also contribute to the development of Alzheimer’s. And recent research found that chronic sleep restriction increases risk seeking behaviour.

If these trends change the loss patterns in property and casualty or mortality rates, this could have a multi-billion dollar impact on the insurance industry in the long run.

The lack of sleep has caused some high profile accidents, the most notable in my world being a New Jersey Transit train that  in 2016 crashed into Hoboken terminal because the engineer, suffering from sleep apnea, zoned out at a crucial moment. One woman died, dozens were injured.

Swiss Re posits that society, ever accelerating, robs us of ever more sleep. The less we sleep, the woozier we become. And the more errors we make.  (Our bodies wear out faster too, becoming susceptible to the maladies Swiss Re mentions above.)

A good dose of resilience helps here. New York area railroads are installing (by federal mandate) positive train control systems, which automatically stop trains in any sort of peril, including that of a tired engineer. The illustration above describes how the system works.

As for my own struggles – an e-book of white text on black background, and perhaps a cup of chamomile tea.

Auto Results: Ups and Downs

While the spike in auto accident rates appears to have eased in the past year or so, increases in claim size continue to present challenges. The folks at Gen Re weigh in:

Industry loss ratios suggest that many carriers are still playing catch-up. With ultimate liability loss ratios above 70% and combined ratios several points above 100%, the industry still has work to do.

Here at I.I.I. we note that for the first half of the year, liability loss ratios have fallen 3 percentage points for personal auto, to 64 percent, but risen 4 points for commercial auto, to 70 percent.  (This comes from NAIC data sourced from S&P Global Market Intelligence. Q3 data isn’t out yet.)

Physical damage loss ratios have fallen 5 percentage points, to 60 percent. Physdam results don’t get split between commercial and personal auto on financial statements until year-end, but the improvement is probably weighted to the personal auto side, since personal physdam is more than 90 percent of total volume.

So the landscape seems to be improving for personal auto but not so much for commercial . . .

. . . Which explains why the Council of Insurance Agents and Brokers reports that commercial auto rates are 7 percent higher than a year ago. It’s the 29th consecutive quarter (more than seven years) of rate increases.

Gen Re spotlights the following trends, most of which transcend personal and commercial lines:

  • Economic Recovery and Miles Driven – The improvement in the unemployment rate puts more cars and a worse mix of drivers on the road.

  • Driver Shortages – The trucking industry estimates a shortage of over 50,000 drivers by year-end, which leads to reliance on inexperienced drivers entering the industry.

  • Distracted Driving – Cognitive distractions and smartphone addiction have contributed to higher accident severity, with statistics often being underreported.

  • Drugged Driving/Marijuana – Studies from Washington, Colorado and Oregon find that accident frequency increased in the years after marijuana was legalized, and more states have since enacted similar legislation.

  • Escalating Repair Costs – Advances in vehicle safety systems, including cameras and sensors, have grown repair costs significantly.

  • Litigation/Jurisdiction – An active plaintiff’s bar, restrictive medical records laws, cost shifting, and litigation funding can drive up settlement values substantially.

We’ve seen similar trends at I.I.I. and highlighted them in this presentation last March in Chicago. The key graphic from that presentation is atop this article. We add speed to the mix, because as cars get more powerful, people drive faster.

 

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Insurance Industry Wildfire Relief Fund

California residents are grappling with the most deadly and destructive wildfires in the state’s history this November.

To help those affected, the Insurance Industry Charitable Foundation (IICF) is facilitating a collective industry relief response. To help with a tax-deductible contribution to the IICF California Wildfire Relief Fund, please click here.

Additional ways to aid victims of the Camp, Woolsey and Hill fires can be found here.