The Risks of Hazard

The Risks of Hazard has, for a few years now, been advocating that the insurance industry needs to start closing the protection gap on US flood. To do that, it will be necessary for insurers to begin covering risks beyond the NFIP (not just replacing it).

It’s the Return of the Bill, as the Flood Insurance Market Parity and Modernization Act has been reintroduced to congress with bipartisan support. As every reader of this blog knows, that’s the bill that will help open up the U.S. flood insurance market for insurers, offering property owners options beyond the National Flood Insurance Program (NFIP) for protection.

All the trade groups are behind it, including Big I, PCI, NAMIC, and others.

But the main reason for excitement is the benefit to society – there remains an enormous Protection Gap on U.S. flood. Every time we read about big floods, one of the statistics is how many damaged homes and buildings were NOT covered for flood – in the Baton Rouge flooding in autumn 2016, it was about 80% of damaged property that was without coverage. Let that sink in…Louisiana (home of some of the most famous floods in history) had only 20% coverage for these floods. It is crazy.

Critics of the NFIP frequently point to its historical deficit ($23B, and counting) as the most damning evidence of its failure. From society’s perspective, it is this lack of coverage for property owners that makes it a failure.

So, the passage of the flood bill is an important first step to fixing this messed up system. But only the first step – ensuring property owners have protection from the very real threat of flooding will be the success that matters. For that to happen, flood insurance needs to become a peril covered by all property insurance.

A few weeks ago there was a piece published on AIR’s In Focus blog about how to use a cat model for underwriting. The piece immediately caught my attention because I spend my days discerning the difference between underwriting and accumulation management/financial modeling. They’re different, and here was an article about how to use one for the other.

There is a great long piece at Carrier Management on how two of the most pressing challenges on insurance are related. Those two challenges are the ubiquitous, dreaded legacy systems (i.e. old technology) and the lack of young talented people entering the industry. The following quote from Michael LaRocco, CEO of State Auto Insurance Companies, sums it up perfectly, and vividly: 

The reality of our crappy technology and our old legacy systems and the old way we do business is part of that problem. It’s not going to be attractive for someone to come to a company and work on a green screen. That’s not going to do it for them. 

When stated so well, it’s obvious. Insurance has historically struggled with technological innovation, and that struggle has made aging demographics a problem. The essay goes deeper into that crux, but really, these two sentences are all they needed to publish – it’s a proper money quote, and impossible to disagree with. 

Two weeks ago, Insurance Thought Leadership published a piece on innovation by Devie Mohan, and there’s a thread in there that deserves a bit of a deeper dive.

The article is called Three Major Areas of Opportunity, and lists three ways that technology / innovation will impact insurance in the near future. Nothing controversial in the choices – they are the calling cards of “innovation” for insurance:

1. Underwriting automation
2. Connected devices (i.e. IoT)
3. Cyber

Naturally, we’ll take a deeper look at the underwriting piece, with IoT and cyber stuff beyond the Risks of Hazard horizons.

Ms. Mohan lists six benefits than underwriters can realize with the modernization of their systems, and it is hard to argue with any of them. Here are all six, with quotes from the article and comments:

1. Data

• Ms. Mohan states: “Automation in the insurance industry can make underwriting both more efficient and more precise”.
• We here could not agree more: using underwriting analytics that increase automation is a sure way to reduce underwriting leakage.