Gustav!!

As an actuary who has works with catastrophe models off and on, I'm always interested in what's happening during hurricane season. This Insurance Journal Article outlines the forecasts for Gustav by RMS and AIR, two of the catastrophe modelers out there.

I'm working on two other blogs right now - one on Pay-As-You-Drive insurance and one about getting filings approved in Florida, so stay tuned.

Meanwhile, time will tell if Gustav intensifies and threatens New Orleans again.

Food Shortage

This article by Jeffery Sachs in Scientific American Magazine caught my eye in light of yesterday's blog - check it out! The picture is from the article referenced.

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I take a couple of actuarial lessons from the article.

First, that over time models age. What was a workable model today, needs refreshing or even, overhauling, for use tomorrow. This isn't the fault of the modeling process (I was disturbed that Malthus being "ridiculed" in economics classrooms).

Second, that models can always be improved. We are warned not to over-parametrize models, and that's not what I'm saying. Improvement can come from discovering or including other factors not included in the original design or even removing something that is no longer predictive of the outcomes. Improvement can also mean a better, updated fit based on more current information. (Such as shifts in fertility and mortality in Malthus' model).

Lastly, models should never be taken as the gossip truth in any case. The lesson that economists (and resource management) should have taken from Malthus' work was not the precise year or the precise population that would "break the bank", so to speak. The lesson was that attention should be paid to our consumption and world population. Just like when you're growing that 401(k) balance, the earlier you start dealing with these issues, the easier the fix might be.

Global Climate Change and Crop Insurance

Being married to a biologist and having a fairly big interest in science, topics regarding climate change always get my attention. It is one thing to show the melting ice around the world or predict flooding in low-lying lands. It is quite another to tackle the issue about how global climate change will impact agriculture in all its forms.

From the Midwest, I think of corn and soybeans first, naturally, but what about forests, citrus, rangeland, nursery, farms that depend on fresh or sea water, etc.?

Released in May, 2008, the U.S. Climate Change Science Program (CCSP) authored "Synthesis and Assessment Product 4.3 (SAP 4.3): The Effects of Climate Change on Agriculture, Land Resources, Water Resources, and Biodiversity in the United States." The report was produced by 38 authors from a diverse group of institutions. Universities, national laboratories, non-governmental organizations, and federal service all cooperated on this report and yet another group from the USDA peer reviewed the report.

The report is a type of literature review of the research efforts taken so far. Some 13 agencies have done federal research on some of the questions on global climate change. Some of the conclusions of the report are summarized on the press release about the report.

The report is fascinating. It is very long and comprehensive and is as notable for what is not known as what is known. Nevertheless, an impressive volume of research has been done on the topic to date with more to come.

I know I'll be keeping my eyes and ears open for updates. Crop insurance is one of my interests - particularly corn and soybeans in the Midwest. Upcoming blogs will no doubt touch on my independent work in crop insurance.

Be sure to email me or leave a comment if you'd like copies of my work with crop insurance as segments are completed.

8 Steps to Getting Your Rate Filings Approved – The First Time!

Your guide to Perfect Insurance Rate Filings!

So you're an actuary or other insurance professional who needs to get those rate changes filed with the State Departments of Insurance. And you are under time constraints, so you want it to get approved by the state right away with few on no objection questions.

I have 15+ years of experience with just this scenario. My goal when making rate filings is to provide enough information to the State Departments of Insurance (DOI) that they approve it outright. No objections, no questions asked. If that isn't achievable, my back-up goal is to get the fewest number of objections possible and approval soon after submitting the answers. I am very successful with both of these goals by following the following steps:

(By the way, I've provided 5 of my 8 steps, with the hope that you'll contact me for the full article!! Please do so, I'd be happy to send it to you right away!)

• STEP 1: Quantify the Overall Change
  

  It is very important to clearly calculate the rate change and put the change into context. Each relativity, factor, element, base rate, etc., that is undergoing a change should be shown along with the calculation that shows how the overall rate change is calculated. If you have to estimate or assume anything (such as, "the distribution of the state deductible changes is unknown, so a countrywide deductible distribution is being used"), be sure to include the information on the exhibit and in the actuarial memorandum.
  

• STEP 2: Provide a Rationale for all Changes
  

  Step 2 involves the construction of a good actuarial memorandum. This memorandum should cover all elements of the line of business and clearly provide information on the rationale for all your proposed changes. A broad overview of the exhibits you have included in the filing should be provided to give the reader some orientation. The goal of the actuarial memorandum is to have the reader nodding to themselves as they finish reading it.
  

  Your actuarial memorandum should cover:
  

1. The state, line of business, proposed effective date, overall percent change
   
2. A list of exhibits, with explanation if short (If explanations are longer, the description of the exhibit should be placed as a cover memo to the exhibit itself)
   
3. An overview of the line of business
   
4. A description of the elements of the line that are being reviewed and what changes are requested
   
5. Rationale for all proposed changes
   
6. Information from Step 5 below
   

• STEP 3: Use Standard Techniques/Exhibits
  

  The state departments of insurance see a lot of filings everyday. With limited resources and time, many cannot afford to spend a lot of time trying to figure out what you've done. With this in mind, I recommend providing exhibits to the department(s) that are standard looking and use standard techniques for the most part. If you do something unusual or unique, you'll need to use Step 4's suggestions, and explain the method, its rationale, and the results of using it very clearly. If you are not sure what typical exhibits look like, there are a couple of ways to get your hands on good examples.
  

  You can get typical exhibits:
  

1. From me (just send me an email!)
   
2. From past filings your company has made that were approved
   
3. From the Insurance Department. Ask them to suggest a filing that had exhibits that they particularly liked and you can get a copy from them or from a filing copying service (such as Perr Knight)
   
4. From actuarial textbooks/papers such as Foundations of Actuarial Science

• STEP 4: CONTACT ME for step 4 content
  

• STEP 5: CONTACT ME for step 5 content

• STEP 6: Determine what the state requires and provide all required forms and exhibits
  

It is important to read the information many states have on their websites about what they required for a rate filing to be complete. In addition to the actuarial memorandum and exhibits discussed so far, the state usually requires a form or two filled out with the information, they are presumably most interested in. Since the goal is getting your filings approved quickly, you'll want to have all the forms completed with accurate information.

Some of the information requested on the forms is:

1. Name of the company, NAIC code, address, phone number, contact person
   
2. Effective date and change requested for this filing and the prior filing your company made for this line of business
   
3. 5 calendar years of written premium, earned premium, paid losses, outstanding losses, policy counts, and claim counts
   
4. A breakdown of the requested change and rate level indications
   
5. A breakdown of your expenses and investment income
   

State requirements can be found on the state insurance departments' websites. A list of them all can be found here. I can also help you with the requirements, just contact me anytime.

• STEP 7: Number your exhibits and Label all terms consistently
  

Go through your exhibits and memos and be sure they are numbered consistently. Actuarial rate level indications follow the business protocol of having the supporting information for an exhibit follow that exhibit in the line up. For example, if you have trended, developed loss and loss adjustment expense on Exhibit A, the trend might be developed in Exhibit D, the development might be developed in Exhibit E, and the loss adjustment expense factors may be developed on Exhibit F.

When you go through the exhibits, look for consistency in other things too:

1. The terms you use should be the same. If you call numbers "Reserves" on one page and "Outstanding" on another, you may cause unnecessary confusion
   
2. The exhibits refer to the right other exhibit and they are named consistently. The titles should match the titles in the Actuarial Memorandum
   
3. The font, formatting, and number size are the same throughout
   
4. Cite sources of company financial data and industry data clearly
   

• STEP 8: CONTACT ME for step 8 content
  

Please contact me to get a complete copy of this article. I'd be happy to explain how I can help you get your filings approved, even in more challenging states of Florida, New York, Washington, Texas, and California.

Ask me!

When I was in high school, my dad worked for an insurance company who's advertising tag line was "Ask Me". At the time I didn't think it was very clever at all.

However, it is perfect for this post. Ask your insurance or actuarial question by answering this post with a comment. I'll either reply to your comment with an answer or make a blog post out of the answer, if the topic is more extensive.

So please "Ask Me". I'd be happy to help.

Title Insurance Overview

Invented by Commonwealth Title in 1876, the title insurance business has grown to billions of dollars per year written by about 11 title insurance company groups and 36 unaffiliated companies.

The coverage is purchased to guarantee a clean title to property as of the date on the policy. If later, liens or encumbrances are found to impair the title (and they occurred before the policy date) the title insurance company bears the expenses of repairing the title up to a specified limit. This is a very brief description of the coverage and there are exclusions.

The business of title insurance directly benefits the marketplace because it provides a guarantee of title to purchaser of property, as well as other parties to the transaction. It is more comprehensive than other means of assuring clear title.

When it comes to the profitability, pricing, and reserving of title insurance, several features of the product are important. Notably, title insurance differs from traditional property casualty insurance in several key ways and these ways affect the calculations actuaries make. Those key differences are:

1. The time frame the policy covers - Traditional insurance coverages unknown future events, while title coverage only applies to events that have already occurred. Also, title insurance policies don't expire until the property is resold or refinanced, while most property casualty coverages have a fairly defined loss period.
   
2. Expenses are very high relative to losses - All the research and data gathering for title insurance policies are done before any premium is collected, but high quality of research and data collection can dramatically lower losses as hidden defects in the title can be found and corrected before the policy is sold.
   

Expenses are the key. The highest expense is for the data/history of each property, which has to be gathered daily by an actual person, in most cases, at the county level and verified. This database is their "title plant". Unfortunately, if a title company starts scaling back on the expenses they pour into their title plant, the lack of information and verification can lead to higher losses. The title underwriting process is designed to limit exposure by thorough search of recorded documents relating to the property under consideration. The losses paid are from existing, but unidentified (and not underwritten) defects in the condition of the title.

New title companies have a huge hurtle to overcome. The expenses from gearing up the title plant will severely impair their profit margins in the early years.

The ability to expand infrastructure and maximize profits during good markets and the ability to contract and control costs in bad market is key to success. Currently we are in a slow market for title insurance, because the title market correlates heavily with the real estate market.

As for other expenses other then the title plant - 3% - 6% is for losses and loss adjustment expenses (LAE). Investment income is all but insignificant given that most of the expenses of the policies are paid before the premium is even collected, making for very low financial leverage. However, the loss tail is very on the long side, so provides some very small opportunity for investment.

As indicated above, policies are written once for the risk and do expire upon selling the property. However, there is no notification when policies are no longer in force, so an accurate policy count or payment pattern is not possible. Still, duration may be able to be estimated.

Title insurers carry two reserves: A reserve for all known cases (called the Known Case Reserve) and the Statutory Premium Reserves. The SPR is a liquidation reserve, established by formula by statute. It is basically a mandated IBNR reserve and is released over 10-20 years. Investments are segregated to support the SPR. Should the known case reserve and the SPR be less than the actuarially determined loss and LAE, a supplemental reserve would also be put up.

I would love to get some comments about my first blog posting overviewing title insurance, especially from other actuaries who work in title insurance or title insurance underwriters.