All posts by James Lynch

Flood insurance after the government shutdown

At 12:01 Saturday, the U.S. government shut down. Here is what that means for the National Flood Insurance Program, as taken from the NFIP’s web site (last updated Wednesday):

FEMA and Congress have never failed to honor the flood insurance contracts in place with NFIP policyholders. In the unlikely event the NFIP’s authorization lapses, FEMA would still have authority to ensure the payment of valid claims with available funds.

However, FEMA would stop selling and renewing policies for millions of properties in communities across the nation. Nationwide, the National Association of Realtors estimates that a lapse might impact approximately 40,000 home sale closings per month.

 

Actuarial science vs. Neuroscience

I get interviewed by a lot of newspapers, magazines and TV stations, but maybe the most interesting one came last year when I spoke to David Scharfenberg of the Boston Globe about neuroscience and actuarial science.

David’s article looks at the criminal justice system and suggests that people under the age of 25 should be classified and punished differently from people older than that. Their young-ish minds aren’t fully developed.

He points to scientific studies and programs, but he wanted to talk to me about insurance. The I.I.I., of course, has no opinion on criminal justice, but famously, auto insurers charge younger drivers more than older drivers, and the rates generally change about age 25.

From the article, here is what I said:

The insurance industry’s decades-old imposition of higher rates on young adult drivers is . . . rooted in hard numbers.

The data show a significant decline in the number of accidents for drivers over the age of 25, because they’re more experienced and more mature. And property casualty insurers — more than 2,000 in all — have to retest that proposition year after year, in order to justify the elevated rates to state regulators.

“It’s like, ‘OK, here we are in Arkansas — well, looks like we’re going to be drawing the line at 25, 26 again,’ ” Lynch says. “Now, we’re looking at Massachusetts — oh, there we are again.” The industry, he says, has known for decades what the white coats in the lab are now confirming.

“We were there,” he says, “long before the neuroscientists.”

Postscript: This article was actually published in November, but I only heard about it in mid-January when a prisoner at a correctional center in Massachusetts asked for more information. I sent him this link from our Facts and Statistics page.

NFIP taps reinsurance market again in 2018

The National Flood Insurance Program returned to the private reinsurance market for 2018, paying $235 million for $1.458 billion coverage from a single flood event.

The coverage limit is 40 percent more than what the NFIP purchased last year ($1.042 billion), and the premium is 56 percent higher than the $150 million NFIP paid last year. The 2017 treaty was the first significant foray for the government insurer into the private sector, and the government recovered the entire $1.042 billion from Hurricane Harvey’s floods.

The structure is a bit different this year. Last year reinsurers covered 26 percent of $4 billion in losses after NFIP retained $4 billion losses. Reinsurers will pay 18.6 percent of the first $2 billion of losses excess of $4 billion and will pay 54.3 percent of the $2 billion excess $6 billion.

Both last year and this, the NFIP gets no protection for the first $4 billion of any flood event – the $4 billion acts similar to a deductible on an insurance policy. After that, the worse the flood gets, the more NFIP recovers, and this year the maximum is $1.458 billion.

Examples:

  • A $5 billion flood would result in a recovery of $186 million – $5 billion minus $4 billion is $1 billion and 18.6 percent of that is $186 million.
  • A $7.5 billion flood would result in a recovery of $1.1865 billion:
    • For the first $6 billion, the recovery would be $372 million, being 18.6 percent of $2 billion (after the $4 billion “deductible.”)
    • For the $1.5 billion in losses above $6 billion, the recovery would be $814.5 million, being 54.3 percent of $1.5 billion.

NFIP explains the structure in a press release, with program Director Roy E. Wright adding his thoughts in a blog post.

Harvey was the third worst flood in NFIP’s 50 years, behind Hurricane Katrina in 2005 ($16.3 billion) and Superstorm Sandy in 2012 ($8.7 billion). Harvey has generated 91,514 claims through January 5, according to messaging from FEMA, and 90.9 percent of them have closed. The average payment has been $108,825.

The I.I.I. has more information on floods and flood insurance here.

What are the odds? Pretty good. . .

New York Times columnist David Leonhardt discusses how people think about probability:

People understand that if they roll a die 100 times, they will get some 1’s. But when they see a probability for one event, they tend to think: Is this going to happen or not?

They then effectively round to 0 or to 100 percent. . . . It’s . . . what many Americans did when they heard Hillary Clinton had a 72 percent or 85 percent chance of winning. It’s what football fans did in the Super Bowl when the Atlanta Falcons had a 99 percent chance of victory.

If you tell someone a thing is unlikely, they will tend to think it is impossible. When the unlikely happens, they are more likely to blame you (or your mathematical model) than their leap of logic.

In insurance, we hear about it when a flood encroaches a 500-year floodplain or a 1-in-250 year storm hits.

It is one of the biggest challenges we face in helping to create a more resilient world – convincing people that what is unlikely today is inevitable someday.

 

Drivers, beware – perdiddle alert!

 

These are the longest nights of the year, so here’s a driving tip: check the headlights on your car.

This advice comes from my mechanic, who in the course of two weeks replaced the left headlight on both our vehicles. This is the season for headlights to burn out, he said – something about a wearing out of the bulb straining the filament, which then snaps when temperatures drop.

So take a second before you drive to turn on your headlights and walk around the car. You may find a perdiddle.

Click here for more winter driving tips from the I.I.I.

I.I.I. Market Report Webinar: Protecting Small Business Against #cyberfail”

“Small businesses are an easy target,” said Steve Clarke, Vice President, Government Relations, ISO. Clarke was one of several experts describing the cyber threat small business owners face in an Insurance Information Institute webinar Dec. 11, “Protect Your Business from #cyberfail.”

Many of these enterprises are data-rich businesses, Clarke continued, pointing to how a recent study estimated 28 percent of cyber thefts occur at health care companies while another 17 percent came at financial services firms.

Other issues which arose—

Cutting down the time between when a cyber breach takes place, and when the victim notices it has happened, also known as the ‘dwell time.’

The importance of educating employees about cyber risks, and how many cyber breaches occur because a company’s employees unknowingly open emails which are part of phishing operations aimed at gaining access to a company’s computer network.

The U.S. Small Business Administration has materials on cybersecurity on its website.

Watch this webinar now.

Presentation Date
Monday, December 11, 2017

Speakers

Introduction: James Lynch, Chief Actuary, Insurance Information Institute

Moderator: Marty Frappolli, Senior Director of Knowledge Resources, The Institutes

Panelists:
• Steve Clarke, Vice President, Government Relations, ISO
• Nick Graf, Ethical Hacker, CNA Insurance
• Donald Smith, Director of the Office of Entrepreneurship Education, Small Business Administration
• Michael Rohrs, Associate Director of Global Cyber Practice, Control Risks

Marijuana in the Workplace: What Happens When Business Managers in Legal-Use States “Just Say ‘No’”?

By James Ballot, I.I.I. senior advisor, special content projects

The conversation about marijuana use has evolved. Once, in the not too distant past, we (meaning our appointed civic leaders, parents and other authority figures) had the luxury of taking an absolutist stance about weed. Fast-forward to today, and the discussion is mostly a constructive exchange between or among parties invested in positive outcomes, and willing to embrace wide-ranging points of view.

Marijuana users—particularly persons permitted lawful therapeutic use of cannabis—are both empowered and motivated to pursue legal protection from discrimination potentially caused by employer “zero tolerance” policies.

So, what’s an employer to do? In “Marijuana, the Workplace and EPLI – Clearing the Haze,” Mindy Pollack, J.D., Product Specialist and Vice President in Gen Re’s Treaty department, lays out a few hypotheticals to clarify the situation (i.e., legal use of cannabis by new hires and employees). She also identifies solutions like EPLI policies that offer coverage against claims, as well as guidance for how employers can tailor conduct bylaws to better fit the new realities as legal marijuana use becomes the norm.

In short, the courts are split on discrimination claims related to marijuana use. That leaves employers with no single answer when the marijuana question comes up. Add to that the variations in state laws and workplace scenarios, and you have even less clarity.

The Week in a Minute, 12/8/17

The I.I.I.’s Michael Barry has been attending the National Association of Insurance Commissioners’ meeting. This week, I.I.I. Daily editor Jennifer Ha picks the week’s most important insurance stories.

  • Record winds are fanning the flames of three major wildfires in Southern California. Already 200 homes and buildings have been destroyed, and tens of thousands of persons face evacuation.
  • Damage claims related to the October wildfires that hit the state’s Wine Country have risen to $9 billion. The state tracks the losses reported to major insurance companies, and the recent losses are far greater than any other wildfire outbreak in state history.
  • The Federal Emergency Management Agency (FEMA) has filed claims with private reinsurers for the full $1.042 billion the agency has in coverage. The claims are being sought to help FEMA recover the losses of the National Flood Insurance Program (NFIP) from Hurricane Harvey. Meanwhile, Congress approved a short-term (December 22) extention for the NFIP.

I.I.I. members receive the I.I.I. Daily for the latest insurance-related news for free. Nonmembers can purchase a subscription. Contact daily@iii.org.

More Wildfires, This Time in Southern California

The worst wildfire season in the history of modern California is taking another bad turn, as three major fires have destroyed more than 200 homes and buildings.

Strong winds will be fanning the flames. The state’s foresters have issued a purple wind alert for Southern California, something they have never done before.

This follows a Department of Insurance report that insurers have incurred more than $9 billion in claims so far from the October fires, being $8.4 billion in residential claims, $790 million in commercial property, $96 million in personal and commercial auto, and $110 million from other commercial lines. County-level details here.

The New York Times has a 2-minute video summarizing why this year’s wildfire season has been so bad.

Their take:

  • Wet winter followed by hot summer. The moisture encouraged plant growth. The heat turned those plants to tinder.
  • Longer fire season, perhaps linked to climate change.
  • Growing residential areas. Development is encroaching on forests.
  • Santa Ana winds. As noted above, the winds are blowing harder this year.

I.I.I. Facts + Statistics on wildfire can be found here. Here’s a prior Terms + Conditions post on filing claims. (It was written for the October fires, but the message will not have changed much.)