What Does Private Market Flood Insurance Look Like?

In his second post from the Cat Risk Management 2017 conference, Insurance Information Institute chief actuary James Lynch discusses private market flood insurance options:

Florida has opened its market to private flood insurance, and there has been some activity in that area. Most plans have been National Flood Insurance Program (NFIP) clones in that they mimic how the NFIP prices risk but introduce a lot of underwriting rules to try to avoid problem risks.

Other than mimicking the NFIP program, there are two alternative ways to price risk:

    • Develop a refined rating plan, which resembles (to me at least) a traditional classification plan. The company develops a base rate then credits and debits a risk based on factors like:
      • Elevation.
      • Relative elevation (whether a risk is higher or lower than the areas that immediately surround it).
      • Distance to coast.
      • Distance to river.
    • Use a sophisticated catastrophe model to price each risk individually. That approach is more precise, but it could be more difficult to pass regulatory approval.  (The model might be too much of a black box.) It could also be harder for agents to understand the model and explain it to clients.

Much of the industry long-term seems interested in how computer models can price flood risk, but most people recognize the challenges. A big one is how to build in the precision necessary.

Figuring out how far a property is from a river is easy. But it is hard to use Big Data techniques to determine something as simple as whether a property has a basement; let alone knowing the elevation of the lowest vulnerable point in a property. (Hint: It’s probably not the front threshold.)

Private Market Looks Closely At Flood Insurance

Almost all private insurers have shunned covering flood since the 1950s, but that could be changing fast, writes Insurance Information Institute (I.I.I.) chief actuary James Lynch:

At the Cat Risk Management 2017 conference I attended earlier this month, flood was the hottest topic. Here’s why:

  • Insurers have become increasingly comfortable with using sophisticated models to underwrite insurance risk, and modeling firms are getting better at predicting flood risk.
  • The federal government, which insures the vast majority of flood risk, is looking for ways to share the risk with private industry. Key reasons:
    • The National Flood Insurance Program (NFIP) owes the Treasury more than $20 billion (thanks to flooding from Hurricane Katrina and superstorm Sandy). It has no practical way to pay that back, and the government has made it clear that it doesn’t want to fund more losses. So the NFIP is purchasing private reinsurance. More on that below.
    • The number of people who lack flood insurance is distressingly high. I.I.I. surveys show that only about 12 percent of Americans have flood insurance. The government wants people to be protected, and encouraging a private flood insurance market could do that.

Here are some of my notes from #catrisk17 on flood insurance:

  • The NFIP reinsurance deal (effective January 1, 2017) means that reinsurance would reimburse NFIP for 26 percent of the losses from an event where losses exceed $4 billion. The maximum recovery is $1.046 billion, and the cost, according to my notes, is $150 million. (If you work in reinsurance it may be easier to think of the pricing this way: NFIP cedes 26 percent of the $4 billion excess $4 billion occurrence layer at a 14.3 percent rate on line.) There have only been a couple of floods that big in NFIP history (Hurricane Katrina and superstorm Sandy), so the cover is in place primarily to protect against storm surge. However, it would cover other major types of flood as well.
  • A significant obstacle to modeling flood risk is the fact that much of the most important data (underwriting and claims information) is in the federal government’s hands. The government wants to share the data responsibly, but its hands are tied by federal rules on sharing data about individuals. The rules are driven both by privacy concerns and cyber security laws. The government will likely be developing a certification process so that professionals could qualify to have access to the data on a limited basis.
  • A live poll found that flood modeling was the most important topic at the conference, cited by 56 percent of respondents – outpacing severe convective (thunder) storm models, cyber insurance models or terrorism models.

Uber Case Highlights Employment Liability Risk

By now you’ll have read the troubling tale of alleged workplace sexual harassment as told by a former Uber employee on her personal blog.

As the LA Times reports, Uber CEO Travis Kalanick has called in former U.S. Attorney General Eric Holder to conduct an independent investigation and claimed that the blog post was the first he knew of the incident.

The allegations are a warning to the tech industry and its so-called rockstar culture, the LA Times notes.

The New York Times goes into more detail here.

In a statement issued following a meeting with Kalanick and staff to discuss diversity and inclusion, Uber board member Arianna Huffington said:

“I view it as my responsibility to hold the leadership team’s feet to the fire on this issue.”

This is not the first time that the ridesharing company has been in the hot seat for behaving badly, as discussed in this earlier blog post.

Charges of sex discrimination, including sexual harassment and pregnancy discrimination accounted for 26,934, or 29.4 percent of all job bias charges reported to the U.S. Equal Employment Opportunity Commission (EEOC) in 2016.

As the Insurance Information Institute (I.I.I.) notes, the number of employee lawsuits has increased in recent years, and any size business is vulnerable to this type of risk.

Employment Practices Liability Insurance (EPLI) provides important financial protection to businesses against claims or lawsuits filed by employees, former employees, or potential employees.

EPLI covers legal costs, settlements and judgments that arise from claims of: discrimination (age, sex, race, disability, etc.); wrongful termination of employment; sexual harassment and other employment-related allegations and lawsuits.

In addition to insurance protection, I.I.I. says businesses should take key steps to reduce the risk of an employee lawsuit, such as creating clear workplace practices on employment practices and educating management and employees.

A recent Insurance Journal article took a look at what to expect in EPLI in 2017.

Conference Shows How Workers Comp Wheels Are Turning

March brings my annual trip to the Workers Compensation Research Institute (WCRI) conference in Boston, writes Insurance Information Institute chief actuary James Lynch:

Workers comp is an intricate dance among regulators, lawyers, employers, insurers and the medical community. WCRI’s annual conference is one of the better places to catch up on the direction the many gears are turning on the workers comp machine.

Agenda items I’m looking forward to:

  • Alternatives to opioids: The opioid epidemic, until recently, was the silent mass killer in America. I first heard about this particular scourge at the 2014 WCRI conference. That year almost 19,000 people died from opioid overdoses, yet I had never heard the term opioid. After the conference, I wrote about how the workers’ comp world grappled with the epidemic for Contingencies magazine.
    This year the conference has an update on those efforts. It also has a session on emerging alternatives like mindfulness and other cognitive approaches. Included in that session is a look at medical marijuana, an issue most insurers are approaching with grave caution.
  • Appraising the Grand Bargain in 2017: Comp, of course, is the result of the Grand Bargain. Injured workers give up the right to sue and employers agree to indemnify the injured, regardless of fault. Most insurers will tell you that bargain holds up well more than a century after it was struck. But some challenge that idea. I attended a conference last year baldly titled, “The Demise of the Grand Bargain.” And a 2016 Department of Labor (DOL) study alleged states were engaged in a “race to the bottom,” scuttling benefits to keep employers happy.
    A new president may send DOL priorities in other directions, of course, but there’s still a discussion to be had. WCRI’s conference will end with a debate among experts representing government, insurers and the legal community.

The conference is, March 2 and 3 at the Westin Copley Place, Boston. Details and registration here.

 

Satellite, Mobile Technologies Underpin Insurance Payout To Herders In Kenya

A $2 million insurance payout to thousands of livestock owners in Kenya hit by drought is a good example of insurance and technology coming together to deliver financial protection where it is needed most.

The Kenya Livestock Insurance Program (KLIP), a public-private partnership developed by the government of Kenya and reinsured by Swiss Re, just announced the payout which averages around $170 per household and will be made by the end of February.

KLIP uses satellite technology to measure vegetation available to livestock. Payment is triggered for feed, veterinary medicines and water trucks when the satellite data shows drought is so bad that animal lives are at risk.

In this case, the $2 million payout will help save 70,000 tropical livestock – primarily cows, goats and camels – that in turn sustain approximately 100,000 people across six counties.

Even better, a consortium of insurers led by APA Insurance will pay funds directly into the livestock owners’ bank accounts or via mobile phone accounts.

Here’s the infographic:

The 2016/2017 drought in Kenya was one of the worst in 16 years. Between 2008 and 2011, livestock losses in Kenya accounted for 70 percent of the $12.1 billion in damages caused by drought.

More on this story from Thomson Reuters Foundation.

Insurance Information Institute facts and statistics on droughts and heatwaves are available here.

Out of the Mouths of Insurance Families

Trying to decide whether a career in insurance is right for you? A six-year old friend of the family just nailed it.

In a school homework assignment all about “My Dad” the first grader was asked to complete the sentence: My dad is the best dad in the world because…

Here’s his answer:

FullSizeRender

So, there you have it, an insurance career in the making. Or, as the six-year old’s Mom quipped: #hiitsjakefromstatefarm.

There’s a new State Farm ad in there somewhere.

Check out the Insurance Information Institute’s new web portal–My Career in Insurance to get a sense of the incredible range of opportunities and occupations waiting for you.

Insurers Active In Auto Crash Prevention Efforts

2016 may have been the deadliest year on the roads since 2007, with an estimated cost to society of $432 billion, according to preliminary data released by the National Safety Council (NSC).

“As many as 40,000 people died in motor vehicle crashes in 2016, a 6 percent increase over 2015 and a 14 percent increase over 2014—the most dramatic two-year escalation in 53 years.”

A recent Insurance Information Institute (I.I.I.) white paper on personal auto insurance offered this prescient warning:

“There has been an alarming increase in crashes and claims reported. This, combined with the cost of the claims themselves, has led to a dramatic rise in the overall loss cost.”

And:

Technology is both improving and complicating matters, making vehicles safer but at the same time amplifying possible driver distractions, as discussed in this New York Times article.

The NSC call for life-saving measures, includes:

Extend laws banning all cell phone use – including hands-free – to all drivers, not just teens; upgrade enforcement from secondary to primary in states with existing bans.

I.I.I. tips on how to keep your auto insurance affordable here.

From China With Love Insurance

Can’t buy me love, or can you? In China, at least, it appears you can.

This Valentine’s Day Chinese insurers have their hearts set on wooing customers with the sale of love insurance.

As Sixth Tone reports, love insurance comes in various packages. One policy offered by Answern Property & Casualty Insurance entitles customers to a congratulatory payment if they and their designated significant other get married any time between three and 13 years after taking out the policy.

Customers choose a one-time premium payment for the policy of 99 yuan ($14), 297 yuan ($43), or 495 yuan ($72) in return for a respective payout of 1,999 yuan ($291), 5,997 yuan ($873), or 9,995 yuan ($1,445), providing a valid marriage certificate is shown to the insurer in the allotted timeframe.

Other insurers will throw in a little extra love. For example, China Life will send 10,000 roses to the wedding ceremony of any customer who marries their partner three years after signing up for the 299 yuan plan, Sixth Tone explains.

Love insurance has been around for a few years now. See this 2012 report by the Financial Times.

More on how to make sure your loved ones and valuables are protected on the Insurance Information Institute’s Valentine’s Pinterest board.

From 1 To 100: Re(insurer) Tech Investments Soar

Who says insurers and reinsurers aren’t tech savvy? CB Insights reports that (re)insurers made 100 strategic investments in private tech companies in 2016, up from a single investment just four years prior.

Wow, that’s an increase of 9,900 percent.

Cybersecurity, digital insurance distribution, IoT and property management software are some of the tech areas where insurers and reinsurers are investing, according to CB Insights data.

Screen Shot 2017-02-12 at 9.56.44 AM

U.S.-based tech startups attracted 65 percent of (re)insurer investment between 2015 and 2016, while France, China, the United Kingdom and Germany also saw deals.

Munich Re and HSB, XL Catlin’s XL Innovate, Liberty Mutual, Mass Mutual and Assurant are just some of the reinsurance and insurance companies investing in tech startups either directly or via their corporate venture arms.

This is just one of the ways that insurers are leveraging technology, and more specifically data and analytics, into their business.

At the recent Insurance Information Institute Joint Industry Forum, property/casualty insurance leaders identified technology as one of the most important issues for the industry in 2017.

This post by the I.I.I. Insuring California blog talks about how Silicon Valley’s Plug and Play is connecting insurers with the startup ecosystem.

From Many Models, One Decision

Insurance Information Institute chief actuary James Lynch previews one of the most important conferences in the catastrophe modeling world.

I will be attending Cat Risk Management 2017 in Orlando next week, and the reason is as close as the weather forecast I’m looking at early Wednesday.

By now, the weather models have more or less converged: my own sliver of New Jersey is forecast to get about 6 inches of snow. The key word in that last sentence is models.

The many organizations that forecast the weather – the Weather Channel, Accuweather, Weather Underground, the National Weather Service – even the hearty jokester on your local station – use multiple models to predict sun, rain or snow.

The similarity to actuarial work is striking. Like an actuary, the weatherman hasn’t built the models but has to understand the strengths and weaknesses of each. And she has to make a single, certain prediction, yet couch that certainty within a pocket of doubt. The National Weather Service predicts 6.7 inches for my hometown: as much as 7 but as little as 3 (Editor’s Note: total snowfall 6.3 inches by Thursday evening).

Actuaries do that with your insurance policy – many uncertainties but one price. Of the many risks with which they must contend is how their portfolio of policies will perform under a catastrophe. Years ago this risk was estimated crudely – the old Casualty Actuarial Society exams included a section on the ISO Excess Wind calculation. Now catastrophe models do the job. And insurers need a lot of catastrophe models, which is what will be taking me to Orlando.

Next week’s conference is a cornucopia of cat models – hurricane models and wildfire models, earthquake and flood models. There is even discussion of how to coordinate the many models insurers must juggle. The conference, presented by the Reinsurance Association of America, is sold out; about 500 will attend.

I will be live-tweeting and will post a report. I.I.I. wants to draw attention to the importance of resilience – helping people understand that the best way to rebound from cataclysm is to prepare for it. Explaining how insurers do their part – in this case using models so that a policy’s price reflects its risk – helps everyone understand how much risk they must prepare for.

And I suppose, yes, will be good to visit balmy Florida after digging out from a half-foot of snow.

I.I.I.’s Facts and Statistics on global catastrophes gives a good idea of the scope of disasters that insurers protect against.