Core Systems Transformation And The Future Of Insurance

Core Systems Transformation is the next evolutionary step toward sustainable excellence and future success for insurance businesses. The key to this shift is how the insurance industry adapts new technologies into its practices–and how insurers embrace its essential values at all levels of their corporate culture.

In a new thought leadership piece, I.I.I. CEO Sean Kevelighan offers a few insights that we hope will initiate a broader discussion on the subject.

“Many liken the adoption of automated and/or augmented intelligence to a “4th industrial revolution.” Uniform standards—Stevenson’s railroad gauges and Whitney’s use of interchangeable parts—helped to power the first industrial revolution. To bring about the next revolution, insurance must further develop and implement its own sets of industry standards to facilitate change and growth in all areas and at all organizational levels: from IT to underwriting to product to distribution and customer service.

Much in the same way leaders in the Fintech sector have leveraged new technologies (e.g., blockchain) with outstanding results, insurance needs to acquire the tools, practices and perspectives (expressed by one global business processor, Xchanging, as conforming around “standards in data, processes, hubs, service providers and technologies”) to maximize and streamline products and, indeed, every link in the insurance value-chain.”

From Making the Pieces Fit Together:  Pathways to Digital Insurance Business and Culture Transformation

Impact Of Collision/Crash Top Cause of Liability Loss In U.S.

Despite advances in safety, the impact of collision/crash, particularly motor-related, is the main driver of liability loss activity in the United States.

The impact of collision/crash accounted for close to half (42 percent) of the value of business liability claims in the U.S., according to the latest global claims review by Allianz Global Corporate & Specialty (AGCS).

New technology will drive a big shift in liability claims, AGCS warns. For example, the rise of autonomous driving presents new loss scenarios for insurers:

“A decline in car ownership in favor of motor fleets, car-sharing and driverless taxis could see insurers move away from providing millions of single annual motor insurance policies to drivers, instead providing large policies purchased by manufacturers, fleet owners and operators.”

The shift to product liability will require insurers to develop technical expertise and not rely on historic data and driver profiling for pricing. Allianz has already started building teams of engineers with experience in automotive and driverless technology.

(Read this Insuring California blog post for more insight on how driverless cars will change auto insurance.)

The growing “sharing economy” also raises new liability questions:

”A road traffic accident featuring an autonomous car share vehicle could involve the vehicle manufacturer, software provider and the fleet operator, as well as third parties involved in the accident. This would make liability harder to apportion and claims more complex to settle.”

AGCS Global Claims Review analyzes over 100,000 corporate liability insurance claims from more than 100 countries, with a total value of €8.85bn (US$9.3bn), paid by AGCS, and other insurers, between 2011 and 2016.

Over 80 percent of losses arise from these 10 causes:

See Insurance Information Institute (I.I.I.) information on litigiousness here.

Insurance Payouts Underpin Disaster Recovery Process

Tens of thousands of policyholders caught in a disaster in 2016 were better able to recover from the losses and hardships inflicted thanks to insurance.

Global insured losses from catastrophes totaled around $54 billion in 2016 – the highest level since 2012, according to the latest report from Swiss Re sigma.

North America accounted for more than half the global insured losses in 2016, with insured losses from disaster events reaching $30 billion, the highest of all regions.

This was due to a record number of severe convective storms in the United States and because the level of insurance penetration for such storm risks in the U.S. is high, sigma noted.

For example, a hailstorm that struck Texas in April 2016 resulted in an economic loss of $3.5 billion, of which $3 billion, or 86 percent, was covered by insurance.

“With insurance, many households and businesses benefited from insurance payouts for the heavy damage to their property caused by large hailstones.”

However, insurance cover is not universal. The shortfall in insurance relative to total economic losses from all disaster events—the protection gap—was $121 billion in 2016. See this chart:

“Under-insurance against catastrophe risk is a reality in both advanced and emerging markets, and there is still large opportunity for the industry to help strengthen worldwide resilience.”

For example, Swiss Re noted that the U.S. has been and continues to be critically underinsured for flood risk, with a flood protection gap of around $10 billion annually.

Additional Insurance Information Institute facts and statistics on global catastrophe losses are available here.

Cyclone Debbie: Storm Surge Biggest Threat

More than 30,000 people in low-lying coastal areas have been urged to evacuate their homes ahead of powerful Cyclone Debbie, as it bears down on the Queensland coast in northeastern Australia.

With landfall expected early Tuesday, Cyclone Debbie is currently a Category 4 storm and could intensify to Category 5. A Category 4 storm on the Australian scale equates to wind gusts of more than 140 miles per hour, the New York Times said.

Storm surge poses the biggest threat as the cyclone strengthens, according to major weather forecasters and news outlets.

The Sydney Morning Herald: Cyclone Yasi, which struck north Queensland in 2011, powered a storm surge that reached 7.5 metres between Cardwell and Tully Heads, akin to a tsunami, said David King, the director of the Centre for Disaster Studies at James Cook University in Townsville.

The New York Times: “People living in coastal or low-lying areas prone to flooding should follow the advice of local emergency services and relocate while there is time,” said Bruce Gunn, the regional director of Queensland’s bureau of meteorology. 

The warnings are a good reminder that while we may think of destructive winds as the biggest danger in a cyclone or hurricane, storm surge is often more deadly.

Here in the U.S. the National Oceanic and Atmospheric Administration this hurricane season will use a storm surge watch/warning system to highlight areas along the Gulf and Atlantic coasts that are at risk of life-threatening inundation.

The new tool will alert residents to the risks of rising water and the need to evacuate, the Tampa Bay blog said.

A 2016 updated study by CoreLogic found that more than 6.8 million homes located along both the Gulf and Atlantic coasts of the United States are at risk of damage caused by hurricane-driven storm surge flooding. More on storm surge risk via the Insurance Information Institute facts and statistics on flood insurance.

Predictive Modeling Seminar Ahead

Insurance Information Institute (I.I.I.) chief actuary James Lynch will be in San Diego at the Casualty Actuarial Society’s (CAS) annual Ratemaking and Product Management conference, March 27 to 29. Here’s a preview:

The I.I.I. partners with the CAS at its conferences. I generally write three or four articles based on conference sessions for the CAS Actuarial Review. These tend to be fairly meaty actuarial topics, but I try to make them digestible. Here is something I wrote about predictive models a while back.

At this meeting, I plan to write three more articles about predictive models. These are sophisticated models that draw on Big Data to help insurers serve their customers better.

Many, if not most personal insurers, use predictive models to price their products. Lately they’ve been developing models to help them settle claims quickly and accurately.

It’s an important, growing area in property/casualty insurance, particularly among actuaries and other quantitative experts. The CAS is recognizing the emerging skill through the CAS Institute – iCAS for short – its subsidiary that awards credentials for quantitative professionals.

The Institute’s first designation is for Certified Specialist in Predictive Analytics, or CSPA, and it will be awarded in a formal ceremony at the conference. I’ll be live-tweeting that event.

The Definition And Risk Of Terrorism Is Shifting

A man drives a car into pedestrians on Westminster Bridge, keeps driving, crashes the car outside the Houses of Parliament, then tries to enter the complex armed with a knife. Four people are dead, including a policeman and the assailant, and at least 40 injured.

The investigation into yesterday’s terrorist attack in the heart of London is ongoing, as Westminster bridge reopens and Parliament gets back to work.

Small group and “lone wolf” terrorist attacks are seen as indicative of the shifting nature of terrorism, according to experts (here and here).

In the U.S. such attacks have yet to meet the $5 million damage certification threshold required to trigger the government-backed terrorism risk insurance program (the Terrorism Risk Insurance Program Reauthorization Act of 2015).

Broker Marsh reports that while recent attacks may have resulted in little direct physical damage and losses, they still have the potential for significant business disruption costs and contingency losses, for example if a city is put under curfew, or travelers cancel reservations, travel is disrupted, and business activity levels are diminished.

To address these evolving threats, insurers have adapted coverage to consider: active shooter situations; extra expense for evacuating people due to threat; contingent interruption of operations; canceled reservations; loss of attraction.

Policies can be structured to include nonphysical damage scenarios such as damage resulting from a cyber event, and nuclear, biological, chemical, and radiological (NBCR) risks.

Terrorism preparedness is evolving too as businesses adapt to the changing threat (see active shooter prevention and response steps).

The last major terrorist attack in the UK in July 2005 targeted the public transportation system during rush hour and left 52 people dead.

Insurance Information Institute facts and statistics on terrorism risk available here.

This chart, via the New York Times, shows that with the exception of the 9/11 and Oklahoma City attacks, there is no year since 1970 when terrorism killed more than 50 people in the United States:

Sugar: The Next Tobacco?

Is sugar the next tobacco? Liability insurance experts say it could be.

Excessive, but not always obvious use of sugar (also salt) in food has the potential for systemic loss, a recent Lloyd’s report found.

The potential loss scenario unfolds if excessive levels of sugar are found to be harmful by scientific studies and if courts find food producers and/or the distribution chain liable for resulting damages.

“A societal shift may make the addition of significant amounts of sugar to our food unacceptable, with liability risks affecting food manufacturers (and possibly distributors and retailers).”

A sample footprint in the report (below), starting from sugar beet and cane farming to sugar and confectionary manufacturing and spreading to various other food manufacturers, wholesalers, retailers, and food and drink outlets shows the widespread distribution of sugar and the potential impact on many customers:

“Historical data suggests that the spread would also be amplified by the presence of large corporates with large insurance cover and funds.”

Businesses address their liability concerns through many types of risk management, of which insurance is an important component, according to the Insurance Information Institute.

A Swiss Re study indicated that the United States in 2013 had the largest commercial liability insurance market in the world both in premium volume ($84 billion) and as a percentage of Gross Domestic Product (0.50 percent).

Spring-Ready With Flood Insurance

It’s the first day of Spring and here in New Jersey we’re expecting a balmy 50 degrees Fahrenheit. Rising temperatures + snowmelt = flooding.

NOAA’s Spring Outlook calls for moderate to major flooding in northern North Dakota and in the Snake River basin in Idaho and flags California, which saw extensive flooding in February, as susceptible to additional flooding in the coming weeks.

Spring also marks the start of severe weather season for many states. Resources on severe weather preparedness are available at the Insurance Information Institute ( I.I.I.) website and weather.gov.

Which brings us to this:

Many homeowners incorrectly believe that flooding is covered by standard homeowners insurance, according to the I.I.I. Consumer Insurance Survey.

In fact, flood insurance is available from FEMA’s National Flood Insurance Program (NFIP) and a few private insurance companies.

How to change the misperception?

Part of the answer lies in education, as the I.I.I. says:

“Consumers can—and should—educate themselves about their coverage, recognize that they may have gaps in their coverage and seek guidance from an insurance professional when they purchase or renew a policy.”

The other part of the challenge, as outlined by Wharton professor Howard Kunreuther in an issue brief, lies in how to communicate to people that the best return on an insurance policy is no return at all.

“In reality, insurance is a protective measure should one suffer a loss. Homeowners should celebrate not having a loss because the financial consequences for an uninsured individual could be staggering.”

What do you think?

Case Of The Missing Comma

Grammarians and legal eagles among you will want to read about how a punctuation mark known as the Oxford comma is the crucial factor in a class action involving overtime pay for truck drivers.

This is just one of the items covered in our Insurance Information Institute (I.I.I.) Daily newsletter today, a must-read publication for anyone in and around the insurance industry. (Sign up by emailing daily@iii.org).

Citing the New York Times, the I.I.I. Daily reports that on March 13 the U.S. Court of Appeals for the First Circuit handed down a lengthy court decision that is seen as a grammar lesson that could lead to an estimated $10 million loss for a dairy company in Portland, Maine.

The backstory: In 2014 three truck drivers filed a lawsuit seeking more than four years of overtime pay they alleged that Oakhurst Dairy had denied them unfairly. Under Maine law, workers have to be paid 1.5 times their normal rate for each hour worked in excess of 40 per week, with some exceptions.

Punctuation refresher: Grammarians are very polarized about whether a comma should be placed before the last of a series of items in a list, and some insist on what is referred to as the Oxford comma, one preceding the final item, while others habitually omit it. The absence of the comma can change meaning.

Comma in question: The state law involved in the case says that overtime rules do not apply to “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: 1) Agricultural produce; 2) Meat and fish products; and 3) Perishable foods.” The question before the court was whether the law intended to exempt distribution of the three categories or packing for their shipping or distribution.

The decision: The appeals court ruled in favor of the drivers, after finding that the absence of a comma after “shipment” led to uncertainty about whether the law exempts applies to delivery drivers who distribute perishable foods, although they do not pack them. The appeals court reversed a lower court decision that denied truckers overtime.

If you’re surprised at the $10 million difference a comma can make, consider how important it is to draft insurance contracts and policy language that use words and punctuation correctly. This Deepwater Horizon coverage dispute is a good example.

Eye On Commercial Insurance Prices

Two broker surveys give insight on where U.S. commercial insurance prices are at.

Willis Towers Watson’s most recent Commercial Lines Pricing Survey (CLIPS) shows commercial insurance prices were again nearly flat during the fourth quarter of 2016:

As you can see above, price changes reported by carriers were less than 1 percent for the fifth consecutive quarter, following a moderating trend in price increases that began in the first quarter of 2013.

The outlier in the results? Commercial auto, where meaningful price increases continue to be reported. Price changes for most other lines fell in the low single digits, according to the CLIPS survey.

Meanwhile, the Marsh Global Insurance Market Index Q4 2016 found that U.S. composite insurance rates were down 3 percent in the fourth quarter of 2016, in line with the global rate:

Marsh said the continuing decline in U.S. commercial insurance prices was driven largely by decreases in property insurance pricing.

However, U.S. cyber liability rates continued to increase for the sixth consecutive quarter, albeit at a moderating rate, Marsh noted.

Cyber price increases don’t appear to be deterring businesses from buying this essential coverage.

The number of Marsh clients purchasing cyber insurance increased by 25 percent from 2015 to 2016 across all industries, with the greatest overall uptake in healthcare, communications, media and technology.

See more on the importance of cyber insurance to businesses in this Insurance Information Institute (I.I.I.) white paper.

Significant trends shaping the property/casualty insurance business are discussed in this I.I.I. presentation.