More On Employment and Claim Frequency

Earlier this month Insurance Information Institute (I.I.I.) chief actuary Jim Lynch linked teen employment to the spike in claim frequency. I.I.I. chief economist Steven Weisbart responds:

I think Jim’s post draws the wrong inference from the data. Specifically, the slide pairs the drop in the teenage unemployment rate with the rise in overall collision claim frequency. He infers that if teens are not unemployed, they’re employed and, presumably, driving to work.

But the drop in the unemployment rate of this age group isn’t solely—or even mainly—because they’ve taken jobs. To start with, in 2006-07, there were seven million people ages 16 to 19 in the labor force. That began falling in 2008, crossing six million in 2010 and plateauing at about 5.6 million midway through 2011. So in the space of less than five years, about 1.5 million people ages 16-19 disappeared from the labor force.

In contrast, the number unemployed in this age range dropped from about 1.1 million in 2006-07 to about 0.9 million in 2015. So about 200,000 got jobs. Some who had been in the labor force in 2006-07 must have gone to school, joined the military, were imprisoned, or simply gave up looking for a job (and therefore were not considered to be in the labor force).

If, instead, you look at the number in this age group who were employed in this period, it was 6 million in 2006-07, dropped to 4.3 million in mid-2010, rose to 4.5 million by mid-2014, and was 4.75 million in 2015:Q4. So the number of people in this age group who were employed is still 1.25 million below what it was before the Great Recession and subsequently.

I’ve put together a different slide (below), showing the change in employment and the change in claim frequency. As the number of employed falls with the Great Recession, so does claim frequency. And as employment numbers climb, so does claim frequency.

Employment and Collisions

So I’d say that Jim has a good explanation for the spike in the number of claims; more people get jobs, start driving to and from work and unfortunately get into accidents more often.

But it wasn’t just teen workers. It was everybody.

Tianjin: A Reminder of Insurance Need in Developing Countries

The explosions at the Port of Tianjin, China could ultimately become one of the largest man-made insurance loss events worldwide ever recorded, according to Swiss Re sigma.

Based on Swiss Re’s latest estimates, the total insured property loss of the Tianjin explosions is likely to be around USD 2.5 billion to USD 3.5 billion, making it the largest man-made insured loss event in Asia ever recorded.

Tianjin currently ranks as the third largest man-made insured global loss (in 2015 dollars), behind the September 11, 2001, terrorist attacks in New York, Washington and Pennsylvania and the 1988 Piper Alpha oil rig disaster.

Screen Shot 2016-03-30 at 10.09.19 AM

The Tianjin experience highlights the new potential risks facing developing countries with rapidly-developing economies, according to the latest sigma study.

2015 was the third year in a row that the biggest man-made loss globally originated from an emerging market, a reminder of the importance of insurance for developing countries, sigma says.

“The event shows the large loss potential in a country like China, with a fast-growing economy. If further evidence is needed, in 2013 a fire at a major high-tech semiconductor plant in Wuxi, also in China, caused insured losses of USD 0.9 billion.”

Financial protection through insurance is key to restoring business operations and recouping losses, sigma notes.

Accurate assessment of exposures, appropriate coverage terms and adequate pricing are likewise crucial:

“For re/insurers, they need to actively identify monitor and manage exposures in hazard zones and in areas with high asset-value concentrations.”

The complexities of the Tianjin loss have challenged re/insurers, and highlighted the accumulation of risks that can arise from a single large-scale industrial catastrophe event.

While destroyed and damaged vehicles account for most of the Tianjin losses, uncertainties remain as to the types of insurance policies involved.

Property and cargo present major risk accumulation factors in ports, especially in big centers like Tianjin, sigma observes.

The Insurance Information Institute has useful facts and statistics on man-made disasters here.

How Falling Oil Prices Affect Energy Losses

Is there a connection between falling oil prices and insurance claims?

This question is tackled by broker Marsh in a just-released research report: Can Energy Firms Break the Historical Nexus Between Oil Price Falls and Large Losses?

According to Marsh, insured losses in the global upstream energy sector reached a peak in the 1980s, shortly after the price of Brent crude oil fell from $35 to $15 per barrel.

In the late 1990s, this cycle occurred again when the price fell below $10 per barrel and again in the years following the 2008 slump, when the price fell from more than $100 to $32 per barrel.

When oil prices fall, companies face less revenue and more strain on budgets. Already, Marsh notes that oil and gas companies have been canceling projects and making staffing reductions.

But there are other potential cuts that are harder to quantify such as cuts in maintenance, health and safety measures, and employee training.

Cost-cutting decisions such as these appear to have led to increased losses in the past, according to the Marsh report:

Based on past experience, when this pullback in funding occurs, if it hasn’t already, we would expect to see an increase in losses soon after.”

Here’s the chart showing the link between oil prices and insurance claims:

Screen Shot 2016-03-27 at 10.22.07 PM

Despite falling revenues, Marsh urges energy firms to maintain their investment in risk management to reduce the potential for future major incidents and insurance claims.

Marsh also suggests that now is the time for energy firms to take advantage of lower prices in a benign insurance market to push for increased protection in uncertain times.

With the cost of insurance capital at historic lows, the opportunity clearly exists for companies to access cheap sources of capital from the insurance markets, reduce overall insurance premium costs, purchase insurance in areas that were previously omitted due to cost, and renegotiate coverage terms.”

WCRI Insight Into How Well Workers Comp Process Works

Insurance Information Institute chief actuary James Lynch brings us another highlight from the Workers Compensation Research Institute conference:

A preliminary WCRI study showed little difference across states in how well workers recover from injuries but showed some significant differences in how satisfied injured workers were with the treatment they received.

WCRI researcher Bogdan Savych presented the results of a 15-state survey of 6,000 injured workers. The workers were interviewed three years after their injury. The goal was to learn how well workers recovered and to gain insight into how well the workers compensation process works, at least from the injured person’s point of view.

The health of workers was assessed on a 100-point scale in which the typical American’s health is at 50. Before they were injured, Savych said, workers were assessed at a 56. That score fell to 26 immediately after injury. Three years later, the median injured worker was 46, mostly recovered but not entirely.

Not all workers recover fully, Savych said. Depending on the state, between 9 percent and 19 percent of workers reported they had not fully returned to work. The 15-state median was 14 percent.

WCRI undertook the survey in part to determine how states differ in both recovery rates and patient satisfaction. The organization found that the severity of injuries was comparable across states, as was the level of recovery.

But worker satisfaction varied considerably. In the typical state, 17 percent of workers reported “big problems” getting the medical services they wanted. Wisconsin workers reported the best experience–only 11% reported big problems–while 21 percent of Florida workers said they had big problems getting the services they wanted.

Similarly, in the typical state, 14 percent reported “big problems” getting the medical provider they wanted, with Wisconsin the lowest and Florida the highest.

And 10 percent of Wisconsin workers said they were “very dissatisfied” with their overall care. Nineteen percent of Florida workers made the same assessment. In the typical state, 14 percent were very dissatisfied.

Savych noted that costs per claim were higher in Wisconsin than in the typical state, but the survey provides evidence that claimants from that state may be getting better outcomes for the cost.

WCRI Conference Highlights

Insurance Information Institute chief actuary Jim Lynch attended the Workers Compensation Research Institute (WCRI) conference last week in Boston. Here are some highlights:

Preliminary research from WCRI indicates that New York City residents sometimes get surgery done across the river, in New Jersey, where surgical costs can triple.

WCRI researcher Bogdan Savych outlined how the research organization uncovered this fact. It was akin to unraveling a mystery.

Researchers noticed a 37 percent increase in the average payment for knee arthroscopies at ambulatory surgical centers from 2011 to 2012. Shoulder arthroscopies rose a similar amount.

This was a surprise because New York workers comp claims follow a fee schedule. Normally researchers expect to see claim sizes spike when fee schedules change, but not in other years. Yet New York’s schedule hadn’t changed in years.

Then they noticed that all of the expensive surgeries were done in New Jersey.

It turns out a quirk in New York law exempts out-of-state providers from being paid according to the fee schedule. Instead they receive the usual customary and reasonable charge.

For knee arthroscopies, that means the NJ surgeries paid 266 percent more, an additional $4,954 on average. For shoulders, the cost is $8,551 more – a 326 percent increase.

Preliminary WCRI research indicates that fee schedules in health insurance can drive workers compensation claims higher.

The issue emerges because in many states, workers compensation fee schedules pay more than do group health schedules, said WCRI president and CEO John Ruser.

That creates an incentive for doctors to call an injury work-related–particularly if the cause of the injury is murky, like a strain of the knee or shoulder.

Workers also have an incentive to say the claim comes from work. Workers comp doesn’t have co-payments or deductibles, so the workers save money while the doctor receives more.

“This is not about fraud,” Ruser said, though the study showed that “financial incentives might have a role to play” in the classification of some injuries.

The study showed that when workers comp schedules are 20 percent richer than group health, the odds of a soft-tissue injury being called work-related grows by 6 percent.

Total cost: 1.5 percent of comp claims.

Putting a claim in the workers comp world creates additional hits for employers. First, they pay more for the medical treatment because the comp fee schedule is more expensive. Second, injured employees receive payments for lost income; the payment is covered by workers comp, but eventually the employer pays for it through higher premiums. Finally, where comp benefits are higher, claims can last longer – an additional cost.

Commercial Insurance Barometer Shows Competitive Market

Commercial property/casualty insurance rates in the United States continued to register a decline  in February, but showed little movement across  sectors, according to online insurance exchange MarketScout.

The composite rate remains at minus 4 percent.

Richard Kerr, CEO of MarketScout noted that traditionally February has always been a slow insurance month, so the lack of activity in rates is not surprising.

By coverage classification, commercial property saw the largest decrease at  5 percent, while business interruption, inland marine and commercial auto were all priced more competitively in February as compared to January. The rates for other coverages remained steady.

Large and jumbo accounts were also down more in February, with large ($250,001 to $1 million) down from minus 4 percent in January 2016, to minus 5 percent in February 2016. Jumbo accounts (over $1 million), declined from minus 3 percent to minus 4 percent in the same period. All other account sizes matched the same composite rate from the prior month.

By industry classification, manufacturing had a significant rate decrease from minus 2 percent in January to minus 5 percent in February. Habitational was down another 1 percent in February for a total of minus 6 percent. All other industry rates remained the same as in January, MarketScout said.

Here’s the visual on the average P/C rate changes for 2016 compared to a year ago:

AverageP/CRateIncrease2016

AverageP/CRateIncrease2015

 

Teenage Drivers and the Surge in Claim Frequency

Insurance Information Institute Chief Actuary James Lynch looks at teenage driving:

2016.02.25 LYNCH teen driving slide

This chart shows how closely the teen unemployment rate tracks overall auto accident rates countrywide. It’s eerie. When the teen unemployment rate rises in 2008, the rate of accidents plummets.

And in 2013, when teen unemployment falls, claim frequency takes off.

Here accident rates are measured as collision frequency — the number of collision claims per 100 vehicles over the previous 12 months, as measured by ISO. The seasonally adjusted unemployment rate is from the Bureau of Labor Statistics.

The correlation is so strong (R2 = 0.629, for you data geeks) that I’m tempted to hedge. The data seem to say that teen drivers are behind the current spike in auto rates. I think they are part of the reason, maybe even a big part.

Certainly teen drivers with jobs have to get to work, so they log more miles, and that will lead to more accidents in any group, but particularly teens, whose driving records are notoriously bad.

But many people in this age group can’t drive legally. It would take more research to see how much of the spike in claim frequency is driven by younger drivers.

I was inspired to put this together by an article in the Insurance Institute of Highway Safety’s (IIHS) Status Report, which showed how more teens are on the road.  Their point was to dispel the idea that teens had given up driving for good, that young people would rather text their friends than see them face to face. Instead, IIHS showed, teens were driving less because they didn’t have jobs. Once they got jobs, they started driving again.

At the Insurance Information Institute, we speak frequently about how driving trends affect insurance. We post our PowerPoint slide decks here. We also collect many facts and statistics on auto insurance here.

Women and Insurance

Today marks International Women’s Day so it’s appropriate we take a look at the contribution made by women to the insurance industry.

The Insurance Information Institute (I.I.I.) reports  that women have comprised about 61 percent of the insurance industry workforce in each year from 2006 to 2015, according to the Current Population Survey (CPS), an annual survey of business establishments in private industry conducted by the Bureau of Labor Statistics (BLS).

In 2015, there were 1.6 million women employed in the insurance sector, accounting for 59.4 percent of the 2.7 million workers in the insurance industry, according to the BLS.

The percentage of women in selected insurance occupations varies, ranging from 51 percent of insurance sales agents to 77 percent of insurance claims and policy clerks in 2015. In 2015, women accounted for 47 percent of all workers, based on households in the CPS survey.

Female Workforce in U.S. Insurance Occupations

An ever-increasing percentage of small businesses in the United States are owned by women. In recognition of Women’s History Month, the I.I.I. recommends six key strategies to ensure your business is financially protected.

Also check out the I.I.I’s Pinterest Board that looks at the great strides women have made in the insurance field, including profiles of some of the most influential insurance doyens today.

The Insurance Industry Charitable Foundation (IICF) today announced the fourth year of its Women in Insurance Conference Series.

Dates and locations of the next four installments of the series are as follows:

-June 9, Northeast Regional Forum: New York City

-June 13, Midwest Regional Forum: Chicago

-June 21, Texas/Southeast Regional Forum: Dallas

-June 23, Western Regional Forum: Los Angeles

The IICF Women in Insurance Conference Series is designed to provide an environment for insightful discussions surrounding gender diversity in insurance, industry leadership, and the changing world and future of the insurance industry.

Primary sponsors of this year’s conference series include CNA, XL Catlin, The Hartford, FM Global, WillisTowersWatson, GenRe, Farmers Insurance, and Munich Re.

Don’t Ask, Don’t Tell

We’re reading an item of interest from across the pond where the United Kingdom’s Institute of Directors (IoD) has issued a new report that gives insight into how companies tend to react if they are under a cyber attack.

The IoD study, supported by Barclays, revealed that most companies keep quiet, with under one third (28 percent) of cyber attacks reported to the police.

This is despite the fact that half (49 percent) of cyber attacks resulted in interruption of business operations, the IoD noted.

Hat tip to forbes.com which reports on the IoD findings in this blog post.

It’s worth noting that here in the United States, the Identity Theft Resource Center (ITRC) has long maintained that the record number of U.S. data breaches it tracks are by no means the whole story.

Many data breaches fly under the radar, the ITRC says, because businesses want to avoid the financial dislocation, liability and loss of goodwill that comes with disclosure and notification.

Back to the UK the survey of nearly 1,000 IoD members also showed a worrying gap between awareness of cyber risks and preparedness.

Even though nine in 10 of business leaders said cyber security was important, only 57 percent had a formal strategy in place to protect themselves, and just one fifth (20 percent) held insurance against an attack.

In the words of Professor Benham, author of the IoD report:

No shop=owner would think twice about phoning the police if they were broken into, yet for some reason, businesses don’t seem to think a cyber breach warrants the same response.

Our report shows that cyber must stop being treated as the domain of the IT department and should be a boardroom priority. Businesses need to develop a cyber security policy, educate their staff, review supplier contracts and think about cyber insurance.”

With 34,500 members, ranging from start-up entrepreneurs to CEOs of multinational companies, the IoD is the UK’s largest organization for business leaders.

More on cyber security in the Insurance Information Institute’s paper Cyber Risks: Threat and Opportunities.