The Risks of Hazard

There are two distinct analyses needed to underwrite property: risk assessment and accumulation. The first is the evaluation of a risk based on information specific to the risk, so that it can be accepted and rated, or rejected. The second limits the writing of new risks within a defined geographical area to prevent excessive losses from a single event. Both are important for underwriting cat risks: assessment because of the potential of losses up to the full value of a property (and beyond), and accumulation because cat events cause damage to swaths of properties at once.

For many cat perils, though, much of the data used to assess the risk is not specific enough – it is generalized and inadequate for underwriting. Underwriters that use generalized data for risk assessment and depend upon their accumulation to manage their portfolio are goldfish underwriters; they keep writing risks until they fill up their aggregation limits, like goldfish keep eating until they fill up their bowl.

One of the best talks I’ve heard on insurance innovation is The Changing Landscape of Risk presented by Robert Schimek of AIG (SVP and CEO of Americas Region). He was speaking at MarketScout’s Entrepreneurial Insurance Symposium in Dallas in December.

The fact that only the people in the room, plus 63 people on YouTube, have heard it is a shame. It is super informative, very entertaining (on the Insurance Technology Lecture scale), and (for me) it accomplished the elusive goals of a good talk: it asked questions that changed the way the audience thought of problems, and provided answers to questions the audience didn’t know they had. As a bonus for blog writers, it is a gold mine of material – I will be visiting Mr. Schimek’s material over and over.

The overall subject of the presentation was the importance of entrepreneurial innovation in insurance. He had to lay a little groundwork, because AIG’s view of innovation is likely to be different from pretty much the rest of the industry’s; i.e. 63,000 employees and they pay ~ $110M in claims every day…not quite your typical insurance company. Because of this, he is also able to bring some interesting holistic macro viewpoints to the conversation.

Last week, Property and Casualty 360 published a post by Sean Allen entitled 4 areas for the Insurance Industry to Modernize. The article is based on the consensus after the Xchanging London Market Conference last November, and it starts with:

Fair or not, many look at insurance as an outdated industry, lagging behind others of similar stature and scale when it comes to innovation.

In August 2015, Lloyd’s and JBA Consulting published a white paper called California Flood – Central Valley Risk Analysis. At the time of publication, it was received with raised eyebrows as the state was in an historic drought. Characteristically, Lloyd’s took the long view and they released the study, knowing El Niño was on the way.

The report is very much focused on the accumulated flood risk in the Central Valley, including property, crop, and business interruption, and the figures it cites are as huge as expected – a potential loss exceeding $24B.

Last week, I had the pleasure of meeting representatives from three Lloyd’s syndicates for the first time. It was an exciting time for me and my product (InsitePro™), because Lloyd’s is always a milestone for any new product serving insurance. The real beauty of the meetings, though, was that they were not in the City of London, but rather, in a small American prairie city.

The Lloyd’s market is an icon of insurance, with its vast history, its innovative approach to risk management, and its global reach. To many people, Lloyd’s of London IS insurance. I always thought, though, that my first meetings with a Lloyd’s syndicate would be in London at their famous headquarters. Nope.