AAIS had a record turnout for its 2008 Main
Event conference, and interest is strong for the 2009 event, April
26-28 in Half Moon Bay, Calif.
Below is a description of some of the 2008
conference sessions. For an abridged, edited transcript of our keynote
address,
Do you know why the insurance industry uses a
distance of five miles from a responding fire station as standard
benchmark in homeowners insurance rating?
It's a holdover from the 1950s, said Jeff Kucera,
consulting actuary in the Chicago office of EMB America, in his address
to the AAIS Main Event on "The Growth and Evolution of Homeowners Rating
Variables."
According to Kucera, geographers in the 1950s
estimated that the time needed for a typical fire truck to travel five
miles equaled the time needed for a fire to reach the point of
flashover, where a fire creates its own fuel and totally consumes a
structure.
From that observation developed a standard feature
of homeowners insurance rating that persists to this day, Kucera said.
That anecdote summed up the message of Kucera's
presentation, which was that homeowners rating has evolved from reliance
on a highly simplified selection of factors based primarily on fire loss
to an increasingly complex mix of factors reflecting property and
liability exposures.
According to Kucera, about half of all companies
writing homeowners insurance today, accounting for about 85% of the
premium in the line, utilize some form of predictive modeling to rate
their policies.
"All the large companies have accepted this," he
said. "It's not an option. Is the price of being in the game."
Kucera credits Progressive Insurance's brief foray
into homeowners insurance with helping to shake the industry's strict
reliance on simplified rating plans.
According to Kucera, Progressive introduced number
of occupants and age of named insured as rating factors, some of the
first attempts to introduce factors that captured information on the
occupants of a residence, and not only its construction and protection.
Since then, companies have been incorporating new
rating factors incorporating information on, among other things, the
number of children in a household, the presence of animals, the number
of years the insured has been in the residence, whether the insured is
the original owner of a home, and the percentage of equity an owner has
in a home.
Thanks to the growing speed and functionality of
computers, use of such variables has been combined with sophisticated
analysis of loss costs by peril to produce ever more refined homeowners
rating.
For example, said Kucera, one company determined
that people who had animals on their living premises generally had
higher loss costs for all types of loss, not just liability loss.
"For people with pets, all perils perform worse," he
said.
In addition, major carriers are researching
variables that correlate with the profitability of a policy, even if
they don't have a direct connection to loss ratios.
Along this line, companies are looking at factors
that are likely to increase the longevity of a policyholder account. The
longer a household is expected to remain a customer of a carrier, the
less important it is to recapture acquisition expenses in the early
years of a policy.
"You're going to start seeing a lot more of this in
rating," said Kucera. "There is more emphasis on retention."
"The customer who is going to stay with us 15 years
is a lot more valuable than the customer who is going to stay with us
two years," he said.
In light of the innovations underway in homeowners
rating, Kucera told the audience that they become involved in
identifying and developing new rating variables.
"Don't get hung up on the fact that you might not do
it perfectly right out of the gate, "he said.
A free market in insurance
pricing, monitored by a streamlined, state-based
regulatory system, is the best way to relieve
property insurance problems in distressed
markets and keep coverage available and
affordable throughout the U.S., according to
members of a CEO panel at the 2008 AAIS Main
Event conference.
In his opening comments as a
panelist, Robert Wadsworth, chairman and CEO of
Preferred Mutual Ins. Co., New Berlin, N.Y.,
said that the P&C business has consistently
responded well to natural catastrophes, and
noted that an estimated 95% of claims from
Hurricane Katrina were settled within a few
months of that historic disaster.
Given that record, Wadsworth
said, it is not necessary for the federal
government to create special disaster pools, at
least for perils currently insured under
standard policies. "If you allow companies and
reinsurers reasonable freedom to operate, you
will see capital flow into this industry," he
told attendees.
Robert Restrepo, chairman
and CEO of State Auto Insurance, Columbus, Ohio,
agreed, but urged the insurers in attendance not
to simply retreat from distressed coastal areas.
"Collectively and individually, we can't go
running away from the coasts," he said. "If we
are going to be responsible risk partners, we
have to work with the state wind pools."
The prospect of a federal
charter and regulator was put to the panelists,
prompting some disagreement between Wadsworth
and Restrepo. Wadsworth has served in the past
as chairman of the National Association of
Mutual Insurance Companies (NAMIC), which
generally opposes a federal role in P&C
insurance, and Restrepo has served as chairman
of the American Insurance Association, which
supports the idea.
"[P&C] insurance is a very
state-specific business," said Wadsworth. "To
relinquish control to the federal government
would not serve companies or policyholders."
"Companies looking to expand
want to have a choice [in charters]," Restrepo
said.
Wadsworth and Restrepo were
joined by Darin Kath, president and CEO of
Jewelers Mutual Ins. Co., Neenah, Wis., who
commented that the growing importance of Indian
firms in the jewelry business was one example of
how insurers needed to develop the ability to
insure exposures globally.
They were also joined by
George Dale, former insurance commissioner of
Mississippi, who said that repeated occurrences
of major disasters raised the question whether
people should be allowed to live in areas prone
to loss. Dale noted that federal funding for
relief in the Gulf States far exceeded that of
other famous disasters, saying that, "You have
been generous to the Mississippi Gulf Coast, and
I hope we will be grateful."
The panel was moderated by
James Sullivan, president and CEO of
Co-Operative Insurance, Middlebury, Vt., and
current chairman of AAIS. The Main Event
concludes tomorrow, April 22, when Kath is
expected to succeed Sullivan as AAIS chairman.
Catastrophe modeling is an "accurate but not
precise" means of estimating insured losses from catastrophic events,
according to Robert Healy, senior vice president of ABS Consulting,
Oakland, Calif., which recently acquired the modeling firm EQECAT.
In an address to the AAIS Main Event, Healy
explained to attendees that "cat models" are "probabilistic tools" that,
despite their limitations, allow primary carriers and reinsurers to
engage in a level of planning that would be impossible without the
models.
"There are not enough exposures in an underwriter's
life" to replicate the predictive power of modeling," Healy said.
While insurers, public officials, and the general
public complain that models are often "wrong" about the actual losses
that occur during disasters, these complaints often ignore factors that
are outside the control of the modeling firms, according to Healy.
Variations in claims practices and the quality of
data are two of the most important limitations on the ability of
modelers to produce precise predictions of disaster losses, he said.
"There are things that create fuzzy areas," Healy
said. "You make a number of sweeping generalizations to come up with an
industry loss estimate."
Regarding the question why the modeling process can
produce so many variations among modelers, Healy said that: "There are
so many moving parts in the models. Just changing a few assumptions can
lead to different results."
On the first day of the AAIS Main Event, attendees
received a very bullish assessment of the prospects of a globalized
economy. On the second day, they received a sobering reminder
of one of the pitfalls of globalization: The products liability
associated with hazardous imports.
While Michael Cox, chief economist of the Federal
Reserve Bank of Dallas, spoke of the great potential opportunity for
Americans in China's modernization and growth, attorney Josh Greenbaum
of the Philadelphia firm Cozen O'Connor reminded attendees that 98% of
imported products that had to be recalled for safety and health reasons
were from China.
Tracking the products liability for such
products--and protecting one's domestic insureds from claims--is a
daunting process, according to Greenbaum.
To start with, it is very hard to track shipments
unless a particular shipper has a regular record of importing over the
course of a year, but in 2006, 45% of shipments were "one time"
deliveries, according to data Greenbaum presented from the U.S. Customs
and Border Protection Service. Another 35% of shipments are labeled
"infrequent," and only 20% are made by shippers who import on a
"frequent" basis.
Even if you can track the route of a product,
identifying and isolating a faulty component is the second daunting
task. As an example, Greenbaum spoke of an imported telephone that had
caused fires throughout the United States. "It was necessary to take it apart and determine
where the injurious part cam from," he said.
Once the nature and the source of a damaging
component is determined, claimants have a difficult task finding a
foreign court to hear a case--leaving them more inclined to pursue a
domestic manufacturer or distributor in a U.S. court.
"How do you get a particular company into a
particular court?," Greenbaum asked rhetorically. "Ultimately the
problem is in holding the offending company responsible, without leaving
the U.S. company holding the bag."
The Hague Convention provides procedures for serving
a complaint in a U.S. court to a company overseas, he noted, and there
are various criteria for establishing that a foreign company has a
sufficient U.S. presence to be sued in a U.S. court.
"The more control a foreign company has over the
distribution of its product in the U.S., the easier it is to establish
jurisdiction," he said.
Even when U.S. claimants identify a guilty foreign
supplier and win a judgment against it, Greenbaum reminded the audience
that a judgment in a U.S. court is not automatically enforceable, as
there are no treaties or agreements in place for the enforcement of such
judgments.
In light of the legal difficulties associated with
imports, Greenbaum encouraged the audience of insurers to encourage
their insureds to utilize the strictest due diligence and contractual
provisions to protect themselves.
