A View from the Ivory Tower - An Insurance Actuary Talks

Election Day Notes Related to Insurance Industry

2008-11-04T11:01:00.003-06:00

According to this recently released poll, if it were up to only insurance industry professionals, McCain would win today, 59% to 38% (2% to other candidates).

Yet a iii graph shows that what party the president represents has little impact on insurance company returns over time.

Happy Election Day and be sure to vote!!

Sign Up Now for Free Web-seminar

2008-10-31T01:06:00.002-05:00

ASK “WHY?”: The Application of Predictive Modeling to your Insurance Business

November 13/ 2:30 pm EST
and
November 14/ 11:00 am EST

Rather than asking ”What” went on last quarter, get at the reasons “Why” the quarter went as it did and improve your underwriting results. Everyone has data, but not everyone has the technical know-how to dig deep in your data for trends and correlations. Knowing these trends and correlations can aid your insurance company in matching pricing action with underwriting standards.

In this free web-seminar, allow us to introduce a BRAND-NEW CUTTING-EDGE SOLUTION to:

· Show how you can deal with your data more effectively, through visualization and dashboards

· Leave your technical worries behind - view our example of predictive analysis from a non-techie viewpoint

· Learn how actuaries can use the trends and correlations to make territorial and rating relativity adjustments

· Marry your underwriting standards to your updated rating plan

· Upgrade your pricing and underwriting guides to attract lower risk members of each of your classes

· Provide alerts when unusual activity (policy or claim) is occurring

· Increase your company’s efficiency and profitability

Featured Speakers:

Badri Narasimhan, President, Rulester, Inc.

Rulester, Inc. is a Chicago company founded by Badri Narasimhan. Mr. Narasimhan has developed a number of analytic solution tools and is a veteran of Insurity, a Choicepoint company.

Kimberley Ward, FCAS, MAAA, Partner, Windsor Strategy Partners

Windsor Strategy Partners, LLC, is an actuarial consulting firm based in New Jersey. Ms. Ward works from their suburban Chicago branch office. She specializes in property casualty pricing and product management.

Email your name, company, phone number, and session preference to kward@wspactuaries.com to register for the seminar.

Slow as Molasses Housing Market Affects Title Insurance Profits

2008-10-25T12:34:00.002-05:00

According to a new report by AM Best, title insurers are experiencing losses as an industry for the first time in 17 years. This translates to a $84.5 million loss.

Factors contributing to the loss are similar to the issues raised in my last post on title insurance and include a large slowdown in sales of title insurance as properties languish on the market ( 10.4 months of inventory on the market, 33.1% drop in housing starts). Also contributing is inadequate loss reserving practices earlier this decade and agent fraud and embezzlement.

Though expenses are rising, the increase is due to falling premium revenues rather than a real increase in expenses. In my opinion, this is due to increasing levels of title recording automation at the county level, allowing title insurers to hold the line on their expenses due to running the title plant itself. Keeping expenses in alignment with premium revenues is a key challenge for title insurers.

The outlook for title insurers is iffy with the continuing housing adjustments.

You can see a free excerpt from the report or purchase the full copy.

New Credential For Kim

2008-10-25T11:54:00.005-05:00

Just a quick self-congratulatory post to share with you. I have a new credential - the Certified Associate in Project Management. The credential is the lowest level that the Project Management Institute confers and involves having 1500 hours of experience being a part of a project management team (or 23 hours of education on project management) and taking a 3 hour exam on the material in the Project Management Body of Knowledge manual.

My project management experience is primarily the project I did at CNA in the 90's building the system and methods of measuring the asbestos, pollution, and mass tort exposures.

My purposes in sitting for this exam and getting the credential was to (1) learn more about project management for the benefit of my clients and (2) perhaps it will give me an edge when I bid on USDA crop insurance projects.

So, congratulations to me!

Project Management Concepts and Insurance Companies

2008-10-10T17:01:00.003-05:00

Many elements of project management (PMI.org) could be applied to help insurance companies manage their operations and projects better, but one in particular struck me as being a strong area for most actuaries to help with. That area is the CONTROL area.

Control is the mate of Planning, another area that strong actuarial help is valuable. Control gets a bad rap from people that feel that the term implies heavy-handed oversight or punitive measures, but is, in reality, an essential part of the planning process. Where planning says what you are going to do and when, control checks on those plans and can suggest corrective action when plans are going awry, as they so often do.

There are three types of control processes - (1) Feedback Control, (2) Concurrent Control, and (3) Feed-Forward Control.

Feedback Control is frequently done by actuaries in insurance companies. Studies of rate levels, unallocated expense allocation, projected expenses, loss reserve calculations are often purely or nearly purely Feedback Control, in that they base the future projections on historical results. In project management, Feedback Control is considered the least optimal control method, since the undesirable events have already occurred well before the control function is initialized. Interestingly, projections based on historical events is quite favored by insurance departments of insurance, that frequently require explanation if your projections are based on anything else.

Concurrent Control is a type of control that takes place when a process is about to occur. The final checking before sending rate filings, Annual Statement reports, agent's bonuses, large claim settlement reports, etc. are are form of Concurrent Control. Training and periodic checking of employee work is also considered Concurrent Control.

The last form of control is an interesting one. It is a form of control more and more actuaries are getting involved in. This type of control function is called Feed-Forward Control and it's goal is to inspire corrective action before a deviation in the plan occurs. Actuaries call it "modeling" and have applied the concept to forecasts of future profitability, premium levels, claim costs for certain lines of business, enterprise risk management, or dynamic financial analysis.

The steps of Feed-Forward Control are as follows:

Identify all relevant input variables. For project management, these variables relate to time, volume, and money (or costs of the project). For actuarial work for insurance companies, the variables might be premiums, loss costs, expenses, investment income, risks of various company functions or operations, etc.
Build a dynamic model representing the process and keep it updated.
Collect data and enter into your model. For most projects I do, the data gets collected into the model before, during, and after it is built.
Perform regular assessment of the projected path and the variation from the plan. Are the loss costs out of range? Is persistency decreasing off planned values? Is the level of risk for a type of insured/coverage/policy unacceptably high? Are the number of claims or policies off plan?
Take action - Feed-Forward Control provides the early warning system needed to take action before getting too far away from plan.

Actuarial work for insurance companies generally uses the Feedback Control type the most, but Feed-Forward methods have the potential to change the profitability of the company quicker and more reliably. The major disadvantage for insurance companies is the more complicated filing and approval process for applications that require state approval, but that is overcome with clear actuarial memos and an education process. The advantages of getting ahead of deviations to your insurance company's plan outweighs difficulties getting the process approved. Rating agencies also appreciate the use and application of Feed-Forward Controls both for the added stability of the company and the evidence of careful planning that is implied in the use of such a method.

Parametric Insurance

2008-10-03T08:16:00.002-05:00

Insurance that cover events that are insured based on a condition (or triggering event) and not on the actual losses sustained is called Parametric Insurance. Offered by brokers such as Marsh, products have been developed for crop insurance and catastrophe insurance applications. Catastrophe insurance depends on accurate measures of things such as wind speed. Crop insurers may cover drought conditions or rain fall on a parametric basis. The concept of parametric insurance has been studied and advanced by the National Insurance Academy in India.

Parametric insurance has been long used by crop insurance. Its newer application is for weather events. The amount paid to the insured is based on the numbers, with low expenses for administration. For example, if the triggering event is wind speeds above 100 miles per hour, the parametric insurance would pay whether or not there are any losses sustained, in the traditional sense. Payouts are quick, automatic and controversy-free for both insured and insurer.

However, accurate, dependable measurements are required to assure policyholders that settlements will be fair and to keep claim expenses low.

RMS (Risk Management Solutions) has hardened weather stations throughout the South to measure wind speed and other data related to hurricanes. The data is used in parametric indices offered by WindX and Paradex and in RMS's weather modeling studies.

A recent National Underwriter article reported that RMS's stations survived Hurricane Ike using power saved from solar panels (one wonders why they don't operate during the storm using wind power?) and back up recording devices if the uplink fails. According to the article 10 of 11 government facilities failed to operate throughout the storm.

The successful operation of the stations during Hurricane Ike should reassure the insurance and capital markets that the capability exists for making the types of measurements needed for parametric insurance related to wind, and encourage more parametric systems to be set up. This type of insurance could be valuable for state wind pools and assigned risk facilities as a way to lower expenses and costs, while providing coverage to coastal homes and businesses.

Some Notes From Kim

2008-09-30T10:27:00.005-05:00

I'm getting my blog for tomorrow written, but thought I'd pause a bit to update you on a bunch of smaller things.

First, I hear that at the Federal Crop Insurance Corporation meeting on September 25, 2008, I was designated a crop insurance expert/actuarial reviewer, able to do reviews of USDA Risk Management Agency studies and reports. I'm looking forward to some interesting work here!

Next, I went with RiskLightHouse partners Robert Faber and Karen Pachyn to visit two midwestern insurance companies, West Bend Mutual and Jewelers Mutual.

Thank you to all three groups for the productive and enlightening meetings.

Karen then went off to the Midwestern Actuarial Forum meeting at Sentry. I couldn't go, but sure missed it that day, as I've been involved with the MAF for some time, most recently as president.

Lastly, the bailout plan and stock market drop are surely weighing heavily on all our minds. Bailout or no bailout, I see some very hard times ahead. Insurance has been on the edge of this financial downturn - perhaps it is due to 50 state regulators taking a good look at insurance companies that have kept the insurance companies out of the mess so far.

I'd appreciate any comments about whether insurance companies will be able to stay above the fray or not...Have the restrictions on insurance assets served to spare insurance companies? Will insurance companies be seen as a great investment? And what about state versus federal oversight of insurance companies?

Forward these questions onto other actuaries you know - It would be interesting to get a range of responses.

GAO on the Availability of Terrorism Insurance

2008-09-23T11:35:00.005-05:00

On Monday, September 15, the Government Accountability Office (GAO) released a study called "Terrorism Insurance: Status of Efforts by Policyholders to Obtain Coverage". (GAO-08-1057) As a member of the American Academy of Actuaries Terrorism Risk Insurance Subcommittee, I was involved in meetings in Washington DC as the GAO was pulling together expert opinions and background on the issues involved.

Background

The terrorist attacks of 9/11 are estimated to have caused insured losses of about 32.5 billion (as of 2006). Just after the attacks, the availability of coverage was severely impaired, causing problems in the real estate sector and other negative economic consequences.

To help mitigate these consequences, Congress enacted the Terrorism Risk Insurance Act of 2002, more commonly known as TRIA. Under TRIA, insured must offer terrorism insurance to their commercial policyholders on the same terms they offer for other coverages on the policy. In the event of a terrorist attack, the insurance industry is responsible for a deductible of 20% of their direct earned premium and 15% of losses after that. The US government would cover 85% up to a maximum of $100 billion annually. (NOTE: This seems very small compared to the financial services bailout being considered!)

The act has been reauthorized in 2005 and 2007, with changing amounts of deductible for the industry and changes in the lines of business covered. The current act doesn't expire until 2014.

The study here was to determine if specific markets in the US are having any trouble getting the amounts of coverage they wish to obtain. Specifically:

Availability of terrorism insurance in certain geographical areas
Factors limiting insurers' willingness to offer coverage
Advantages and disadvantages of some options for changes to TRIA or the funding mechanism.

The study looked at take up rates, data on insurance companies, and interviews with more than 100 experts on various parts of the insurance process.

GAO Conclusions

The GAO Concludes:

That some high-value properties in major cities may face initial challenges in obtaining enough coverage, but eventually manage to by using several insurance companies in more complex insurance structures, buying separate terrorism coverage, or self-insuring
The current "soft" market has helped the availability of terrorism insurance overall
Many insurance company CEOs worry about their overall exposure (aggregation limits) in some geographical areas and seek to control their concentration there.

There is a lack of consensus on what future TRIA options would be the most useful for improving the availability of terrorism insurance coverage.

Other interesting facts from the GAO report:

The "take-up rate", or the percentage of commercial insurance policyholders opting to buy terrorism coverage has been between 60% and 65% since 2004.
The cost has generally amounted to about 4% of annual premium for these customers. Note that coverage is not usually priced on a percentage basis, but as a loss cost that varies by territory. I'm assuming that the 4% refers to high risk areas since those were targeted in the scope of the study.
The policyholders that don't purchase coverage do so because they don't feel at risk or their lender doesn't require it.
Reinsurers and Rating Agencies may influence the purchase of terrorism insurance.
Options for modifying TRIA include:
- Lowering TRIA industry deductible following large terrorist attacks
- Permitting tax-deductible reserves for terrorism losses
- Forming insurance pools for sharing assets and losses
- Catastrophe bonds
- Limiting state regulation and requirements

What does it mean for you

The fact that the GAO didn't find any serious availability issues means that TRIA will remain in place, unchanged for some time to come, unless a big terrorist attack occurs. In that case, availability will "harden" in the short term while losses are assessed.

From a risk management and actuarial point of view, controlling concentration (or your aggregation limits) is key to sleeping easy at night, even if it makes potential insurers (or their brokers) work harder to find coverage. That effort makes the system work better because spreading the loss is an important function of insurance.

The industry's lack of consensus when it comes to alternative options really hurts the industry's credibility and their ability to influence the options eventually selected. I think a industry-wide conference with interested stakeholders in the terrorism insurance arena (A "constitutional convention" so to speak) would be a valuable first step to a more permanent terrorism insurance solution. In my mind, the government HAS to have a stake in the final arrangement, since the government's actions have a great influence on terrorism activity in the US.

Sources:

GAO-08-1057 at gao.gov

I would love to field comments about the study or the options for modifying TRIA.

Pros and Cons of ZIP Codes for Rating Territories

2008-09-17T09:20:00.006-05:00

Many lines of business include ZIP Code-based rating territories for ease of establishing where an insured location is without depending on the agent's input or to facilitate online quoting. But is this really a good idea? This blog entry provides some information about the pros and cons.

Instituted in 1967, ZIP Codes are now part of everyday life in the US. The approximately 45,000 ZIP Codes come in four types:

1. Unique (assigned to a single high-volume address)

2. PO Box-only (used only for P.O. boxes at a given facility)

3. Military (used to route mail for the U.S. military)

4. Standard (all other ZIP codes)

PROS:

ZIP Codes are readily available and can be easily verified, assuming that the record has the correct location ZIP Code on it. Some locations may have the billing ZIP Code on the policy record which may be a PO Box or a separate location than the building location.
Territories assigned based on the true location ZIP Code are accurate and are not subject to manipulation by the agent, insured, or insurer.
ZIP Codes are commonly used in ecommerce, facilitating online quoting and policy sales.
ZIP Code is a good way to tie information from several sources together. Building code information, wind or flood zones, catastrophe model results, home construction values, census statistics, etc., may all link up through ZIP Codes.

CONS:

ZIP Codes do not really specify a physical boundary, but are actually a collection of addresses. As such they are frequently changed. In my experience, over a third of the codes change within a 5 year time frame. Since the “boundaries” change without changing the ZIP Code value, it makes tracking rating territory changes more challenging. City and County limits change less often and do involve a physical boundary that can be accurately mapped.
While some ZIP Codes are small and relatively homogeneous, some rural ZIPs are very large and diverse. If the ZIP contains parts of several different fire district or topology, rating variables may not be appropriate for the entire ZIP.
The Postal Service assigns place names to the ZIP Codes that are, at times, confusing or misleading. These problematic ZIP Codes cause confusion among policyholders about where their location ZIP really is.
Making changes in ZIP Code territory rating may be difficult to explain to regulators due to some of the CONS listed here and may delay or prevent approval of your filing.
Some states do not allow ZIP Code rating for one or more lines of business.

ANSWER:

If you are grouping ZIP Codes into two or more larger territories each of which includes a number of ZIP Codes, the CONS are largely mitigated. Boundaries don’t matter as much, the diversity within a ZIP would be replace with diversity of the territory and making changes will be easier to explain and quantify to the insurance departments.

If you are using individual ZIP Code rates, I think the problems are too big to ignore. Even if you publish and maintain ZIP Code rating information, it is my opinion that the work should be done on the census tract level or using groups of geocodes, though each of these has its own pros and cons.

EPCOT’s StormStruck Attraction

2008-09-10T15:54:00.002-05:00

Hurricanes are probably something that Disney World in Orlando, Florida, worries some about. I know a friend who was in one of the Disney Resorts for one of the hurricanes a couple of years ago and says that trees might be down and damage evident all through Orlando, but Disney had the resort cleaned up almost before anyone even got up the next morning! Customer satisfaction has always been a Disney hallmark.

Educational exhibits are also not new to Disney – EPCOT has many, if not commercialized, educational exhibits. And they've tackled controversial subjects in the past. I, myself, took my children to see a short animated presentation hosted by Martin Short about human reproduction (The Making of Me) at Disney several years ago. And it was very, very well done. Another educational, but controversial topic was one on "Universe of Energy" sponsored by Exxon, starring Ellen Degeneres and Bill Nye, that maintained that there is plenty of oil and gas for everyone, not to worry.

Disney's new attraction, StormStruck: A Tale of Two Homes, is sponsored by FLASH, Federal Alliance for Safe Homes, Inc., (there are other sponsors, see press release here) . It is a 4D presentation showing the destruction of hurricanes and, in an entertaining way, makes the case for building elements that reduce storm damage. StormStruck is aimed at raising awareness about safer, stronger, more weather-resistant homes.

The exhibit is probably very interesting to residents of the Gulf Coast and Atlantic states and probably surprising to residents from other areas. I appreciate the effort to educate the (Disney-going) public, even a little, with proposals for National Catastrophe Funds, among others, being presented.

One feature of National Cat Funds and reforms of the National Flood Insurance Program are the cross-subsidies that are bound to be a feature. You can't have a coastal resident pay less without someone else paying more. (That is not quite true if the variance is reduced, but close enough).

Yesterday, this article was printed by the National Underwriter, writing about leading reinsurers making the point that loss mitigation, like what they are teaching to 10 year olds at Disney, would be far better than setting up either intended or unintended subsidies. Along with land conservation, loss mitigation and stronger building codes significantly improve results after a hurricane and should be encouraged. Subsidies encourage behavior such as building on the beach without the proper building techniques.

A website about building techniques and how they help prevent storm damage is at this site about the ARA, Applied Research Associate's Intrarisk program, which provides certifications to Florida buildings regarding the building's loss mitigation features. The company helped the Florida Office of Insurance Regulation present a large schedule of credits for various loss mitigation credits that apply to the insured's Homeowners and Property Insurance. A search of the internet could not locate those reports, but I have pdf versions available (CONTACT ME). Other states may well follow with similar loss mitigation credits.

I believe that credits like these, along with a strong building code and land management/conservation efforts would provide the right incentives and avoid damaging cross-subsidies.

Hanna and her Siblings!

2008-09-03T06:58:00.002-05:00

Well, the next few weeks will be interesting with three hurricanes all in a row. Hanna was briefly a hurricane over the Bahamas yesterday, but has weakened for now and seems a bit disorganized; Ike and Josephine are lined up in the Atlantic with projected paths similar to Hanna's. Ike is expected, though, to enter the Gulf of Mexico, while Josephine's ultimate destination is more unclear.

Everyone here is having fun with the fact that my middle child is named Hannah and she has kind of a stormy personality. Since Tropical Storm Hanna has caused death and destruction, I wouldn't want to carry the comparison out to too many decimals. My child is, of course, very sweet, but hurricanes really aren't.

Back to business... The absolute best place I have found to track storms is at this Florida site. I like how the Tracker shows the storm moving in time to scale, so that you can see where the storm stalls and where it moves quickly. And color coding the strength of the storm is a nice touch. I'm not sure where they get their storm projections. The tracker, though, does not show the size of the hurricane graphically. A good place to see the satellite view is here.

P.S. I'm glad Gustav wasn't the worst it could have been. It went over Cuba as a category 4, so I'm sure it caused a lot of damage and wrecked some lives. I'm relieved that New Orleans was spared the brunt though.

Pay-As-You-Drive Personal Auto Insurance

2008-09-01T11:33:00.006-05:00

California private auto was changed forever in 1988 with the passage of Proposition 103.

Among other things the regulations provided that insurance companies must accept all good drivers (as defined by them) and rate auto on 3 primary factors: Driving Safety, Annual Mileage, and Years Driving (rather than age of driver).

(CONTACT ME FOR MORE CONTENT on the history of auto insurance in California)

Pay-as-you-drive insurance:

It is the limited number of categories for annual miles driven that catches the attention of regulators and others wanting a more refined rating plan. Number of miles driven seems like a reasonable way to measure exposure and is easily understood by policyholders. Presumably in combination with "where you drive" (territory, that is. Though this isn't "where you drive", it's "where you LIVE"), it would seem to cover a driver's exposure pretty well (see next section for what research shows).

The new proposed regulation is being touted as a "green" provision, encouraging drivers to drive less by having their insurance coverage apply by mile driven. California Insurance Commissioner Steve Poizner has proposed this optional rating mechanism, allowing insurers to offer a voluntary option for consumers who are interested in pay-as-you-drive coverage.

Consumer groups are opposed, saying that there is not enough protections in the law for protecting the privacy of insured's everyday activities. Some tracking mechanisms include "OnStar" satellite and GPS-based meters similar to those used in cell phones.

Quoting from the article:

The Environmental Defense Fund estimates that if 30% of Californians participate in this voluntary coverage, California could avoid 55 million tons of CO2 between 2009 and 2020, which is the equivalent of taking 10 million cars off the road. This would save 5.5 billion gallons of gasoline and save Californians $40 billion dollars in car-related expenses. Additionally, the California Air Resources Board has recommended the adoption of pay as you drive as one of the means to meet future climate change gas reduction targets.

Hard to ignore potential emissions reductions like these numbers.

But the research shows:

The research shows that pay-as-you-drive insurance may not get at the true exposure to auto insurance claims for each insured. The following table shows that annual mileage isn't one of the top three predictors of insurance claims. By the way, insurance score (or "credit" score) is not allowed in California.

Coverage	Factor 1	Factor 2	Factor 3
Bodily Injury Liability	Age/Gender	Insurance Score	Geography
Property Damage Liability	Age/Gender	Insurance Score	Geography
Medical Payments	Insurance Score	Limit	Age/Gender
Comprehensive	Model Year	Age/Gender	Insurance Score
Collision	Model Year	Age/Gender	Insurance Score

Source: The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity, Michael Miller, FCAS and Richard Smith, FCAS, Epic Actuaries, June 2003

Pros/Cons of Pay-As-You-Drive:

Pros:

Exposure for insurance tied to miles driven – easy to understand by drivers
The amount you pay for insurance would be directly controlled by the driver, rather than on factors such as sex, age, martial status, etc. that the driver has no control over.
The current proposal is for an optional credit, giving low mileage drivers a choice.
Reduced emissions

Cons:

The amount a driver pays should be as closely tied to his/her exposure to loss as possible, to avoid cross-subsidies and comply with Actuarial Standards and Principles.
Tracking mileage is difficult and some methods proposed inspire fear of lack of privacy in some consumers and consumer watchdog groups.

My opinion is that there are better, less complicated ways to refine the rating plan options when it come to annual mileage, and still emphasize lower emissions and "green" policies. One obvious one is to simply increase the number of mileage bands in the current plans and offer "green" discounts (and debits) based on the type of automobile covered. Discounts for Prius's, debits for Hummers.

My firm would be happy to work with you to weigh your personal auto rating plan options and refine your plan.

Current events link:
Insurance Journal Article

Background/Bibliography
Powerpoint by Harbage
Powerpoint by Kelleen Arquette
AAA Review of Pay-as-you-drive report (EPA, 2002)

Gustav!!

2008-08-29T08:21:00.003-05:00

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

2008-08-25T08:40:00.004-05:00

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.

***

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

2008-08-24T23:32:00.003-05:00

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!

2008-08-22T11:49:00.007-05:00

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:

The state, line of business, proposed effective date, overall percent change
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)
An overview of the line of business
A description of the elements of the line that are being reviewed and what changes are requested
Rationale for all proposed changes
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:

From me (just send me an email!)
From past filings your company has made that were approved
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)
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:

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

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
The exhibits refer to the right other exhibit and they are named consistently. The titles should match the titles in the Actuarial Memorandum
The font, formatting, and number size are the same throughout
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!

2008-08-20T15:48:00.004-05:00

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

2008-08-19T18:48:00.004-05:00

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:

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.
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.