The Risks of Hazard

A few months ago, Dr. Anand Rao of PwC published an article in Carrier Management that explored a few of the psychological barriers to innovation. It was an article that stood out because it’s not really insurance-focused, but entirely relevant to insurance and its laggard approach to innovation thus far (right, Mr. Wilson from Aviva?).

Dr. Rao identifies three biases that sand the skids of change. Here they are, quoting his article:

• Status Quo Bias: Over the past couple of decades, behavioral economics has documented human bias toward the status quo. This individual bias manifests itself at the organizational level, as well—very seldom do organizations willingly want to change—and change usually occurs because of external factors.
• Risk Aversion: Evolution has programmed us to avoid risks. The amygdala, the integrative center for emotions in the brain, inclines us to avoid risks. This individual trait carries over to most institutions, except for the few that deliberately have been designed to be risk-seeking. By their very nature, most insurers are very careful about which risks to take.
• Self-Serving Bias: People often conflate what is fair with what benefits oneself. Similarly, we are open to making by gut instinct decisions that favor ourselves.

Last week, during the lull of Thanksgiving, AM Best published one of their most interesting articles of the year (mind the subscription wall). Regular readers of the Risks of Hazard will know that a study called Systemic Risk of Modelling in Insurance: Did your model tell you all models are wrong? is a winning topic. Thank you to the authors at Amlin and Oxford for initiating this three-year study (which is just getting going).

As we move into the Thanksgiving weekend, I would like to wish everyone who has explored location-based risk analytics with Risks of Hazard a happy holiday season.

It’s an exciting time around the world for flood insurance, with new mass markets opening up through the introduction of the necessary analytics and (in some cases) reinsurance capacity. In Canada, for example, it was nearly impossible to get flood coverage on residential property — until last year. After the floods of 2013 in Calgary and Toronto, it was inevitable that flood insurance would become available, but it was uncertain how it would be implemented. The Insurance Bureau of Canada (IBC), the federal and provincial governments, and the insurance industry have explored the possibilities together, and now flood insurance is about to really happen.

Unlike the United States, where flood insurance is evolving from a centralized and subsidized program to the private market, Canada has no legacy that needs to accommodate new flood products. Historically, water damage was only covered for “sewage backup”, which proved to be inadequate for everyone in 2013. When entire streets of urban homes are submerged, it’s highly likely that dirty water will enter houses through the sewage lines. But most of the water damage in such circumstances is definitely not caused by the sewer back-up. The resulting claims were mutually unsatisfactory: homeowners were technically not covered for most (if not all) the damage they sustained but they nonetheless claimed the damages with nowhere else to turn; insurers paid the claims for which they had not collected premium to avoid public relation disasters. By 2014, it was clear that Canada needed generally available flood insurance.

This blog is a joint collaboration between Ivan Maddox and Susan Parks.

Cloud computing has rapidly become the method of choice for countless applications across many industries. Insurance is a relative newcomer to cloud computing, but most software solutions for insurance now at least offer a cloud option (if it’s not entirely based in the cloud). However, there are still concerns that cloud computing is not the right technology for insurance solutions. Those concerns are usually based on a misconception, though. To help clear things up, here are four common myths about “the cloud” debunked.

Myth #1: It is unreliable.

The opposite is usually the case. Most providers of cloud services (most commonly, Microsoft and Amazon) bend over backwards to offer backup options, and the cloud can actually be more reliable than other types of infrastructure platforms. The cloud provider can easily back up data to multiple locations to provide an additional level of protection through redundancy. Usually, the cloud service provider and the application vendors will automatically send you emails updating you on critical events.