Best to be a skilled juggler to be an insurer in today’s environment

manikin-juggler-question-marks-orange-cartoon-character-juggles-blue-white-background-35303354

It’s no longer just a water balloon; insurance has become a water balloon morphed with a Rubik’s Cube.  Squeeze here, bulges there, twist row here, colors change there.  Insurance is not a business for the faint of heart but needs to be an industry WITH heart.  Focus has been on COVID-19 issues but all those other perils and occurrences must still be attended and planned for, and the industry’s reputation- always a fragile characteristic- needs consistent effort to prop up.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Contrarian’s reality of business interruption cover

The insurance world sat on its hands during the early emergence of the coronavirus outbreak, aware that supply chain issues were occurring in China, businesses were being shut down, and economic ripple effects were being felt into western economies, comfortable in the exclusion of cover for systemic risks.  However, as the insurance effects of COVID-19 became more acute when business interruption cover was being considered and denied for cover, insureds, legislators and the plaintiffs’ bar held sway over the narrative.  Seems the concerns have gone a little underground but that just may be a fools’ game to believe.  Insurance companies defend the multi-hundred billion dollar issue on a 9-5 basis; plaintiffs and eager attorney firms team up 24/7.  Sure, insurance industry orgs like NAMIC and APCIA have put out position papers describing the many problems ex post facto changes to insurance contracts re: business interruption insurance changes would cause the industry, and of late the US Treasury Department has advised it is in opposition to having insurance companies take undue responsibility for the BI claims, but of course insurance in the U.S. is not regulated by federal law, and zeal within local jurisdictions is swayed by sentiment.

In addition, policies and coverage differ across the spectrum of carriers’ contracts and certainly across what bespoke risk underwriting provides.  I wonder if insurance carriers are taking the issue seriously enough to have internal ‘war games’ where policies need to be defended provision by provision? Determining cover with a lean to the customer now is much less costly in terms of direct financial cost and indirect reputational cost litigation would present, even as the issue in the U.S. potentially progresses toward a constitutional battle.

Even with this news today out of the state of Louisiana via Business Insurance, Louisiana-lawmakers-scrap-bill-to-make-interruption-coverage-retroactive, insurers need to find other ways to provide risk management service for their customers.  Just because some peril or circumstance isn’t covered- now- doesn’t mean other avenues to assistance can’t be considered.

Insurers in the UK are dealing with a similar issue and business sentiment, just to a lesser economic degree per the Evening Standard.  Whether the concern is a “shortcut to insolvency” as the Association of British Insurers stated in response to U.K.-based risk management association Airmic Ltd’s remarks urging carriers to be responsive to insureds’ needs:

With many corporates facing an existential threat from global governments’ lockdown measures and a deep recession likely to follow, we expect brokers and insurers to demonstrate fairness and flexibility with regards to claims and renewals. The harsh market is already straining relations with many corporate clients, and insurers’ rigid interpretation of wording regarding the pandemic could accelerate this deterioration.

Airmic believes insurers have a choice. They can either interpret ambiguous contract wordings with their balance sheet in mind, or they can act as partners to long-standing customers who seek business protection. All parties will benefit from a partnership approach to the current crisis.

 

it’s clear that the concern remains on the front burner per reporting in Business Insurance.

24/7 efforts and networking of attorneys, insureds, and plaintiff advocates vs. 9-5 defense. Perhaps still a false security (digital communication works, collaboration is effective, and 33 1/3 % of tens of billions of USD is a lot of motivation.)

Insurance and reinsurance company capital buffers have become smaller as a result of stock markets being down 20% or more- does that matter?

Insurance companies are often considered more holders of float than risk managers; a less than stellar underwriting performance in a given year can be mitigated for effect by effective investment of premium float- use of premium dollars paid in that have yet to be accounted for as earned based on policy duration.  Berkshire Hathaway’s founder and CEO, Warren Buffet has been the industry’s float cheerleader for many years, and that attitude has served him and his company well.  However, even the estimable Mr. Buffet’s firm has been rocked by the loss of value due to the effects of COVID-19 and volatility within stock exchanges (see below.)

Sample of insurance company performances- US P&C carriers

Ins Perf 2020

One quarter does not a trend make, but it’s expected investment results for the second quarter of 2020 will be as volatile, and long-term expectations for P&L performance is uncertain.  Underwriting performance for personal lines may reflect better than average based on auto usage and stay at home efforts lessening some homeowners’ policy claim severity.  U.S. Fed actions will settle markets some, but carriers have less appetite for higher return but higher risk vehicles for that portion of float that is not bound to Stat accounting requirements. Perhaps carriers need to begin to plan for intangible asset variances from a risk management standpoint, something that seemed a very company-localized concern just a few months ago.  Is there now a market for parametric products that deal with trigger events relative to macro consideration of intangible assets?  Another look at the work of John Donald  and Dr. Marcus Schmalbach (See “Heartbeat in the Fog” ) gives some thought on the subject.

There are aspects of insurance reserves that do not get as much scrutiny, that being reinsurance and insurance linked securities (ILS).  Rei authority Artemis noted recently that as global stock markets ran 20% or more lower along with impairment of other assets classes the “capital buffers of reinsurance companies have become smaller as a result.”  Lesser values for primary insurers’ securities portfolios, and potentially less capacity in and higher cost for reinsurance- certainly not an ideal short or mid-term prospects.  As for ILS- even though that aspect of risk financing is a relatively small part of the whole that sector remains tight from significant events from 2017-18 (thanks for the perspective, Tom Johansmayer of Verisk PCS.)

For now P&C carriers have wiggle room on the claim side, but new territory to navigate in terms of investment.  If for some significant reason carriers feel they need to establish large reserves to defend and potentially pay BI claims that will affect loss and expense ratios.  Managing core businesses- sales, claims, and service needs to continue with a weather eye on securities’ markets.

 

You get three free articles on Daily Fintech; after that you will need to become a member for just US $143 per year ($0.39 per day) and get all our fresh content and archives and participate in our forum.

The post Best to be a skilled juggler to be an insurer in today’s environment appeared first on Daily Fintech.

Whose perspective is it? Insurance remains not what it seems at first view

goofy_school_cartoons3

It’s beginning to wear on the insurance industry.  COVID-19?  Kind of.  Moreover it’s the unexpected ripple effects of the outbreak on how lives are led, how insurance intersects life, how perspectives color how insurance news is celebrated or questioned.  We’ve discussed much of COVID-19’s current effects on business and how the future of insurance will need to adapt.  Let’s take this week to see insurance happenings through different lenses, or from a reverse of the Insurance Elephant- from differing perspectives as per sight-impaired gents in the image.

image- MA Devine

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

  • COVID-19 cannot be overstated as being a health danger/terror. People have minimal control over exposures, and no control over the extent of symptoms if infected.  Similar thought process applies in business livelihoods of employees and SMEs – there’s little control for an individual over business operations, closures, availability of customers, and recovery funds.  Social distance helps in one aspect, but could be business fatal for the other.

 

  • Reductions in driving due to implementation of working from home protocols and staying at home is resulting in renewal of discussions for mileage-based auto cover. While that’s being considered carriers in the US announce premium rebates (Allstate, Liberty Mutual/Safeco, American Family, and now Progressive) and/or premium credits for renewals (GEICO).  Overall the rebates/credits are estimated to total $3.5 billion;  contrast that with the findings of  The Consumer Federation of America estimating US carriers are benefiting in additional profits in the amount of $2 Bn per month.  Carriers need to ensure this does not become a PR issue like business interruption cover has.  The upside?  Fewer auto accidents.

 

  • Government financial recovery programs have been announced in most countries, building optimism for the citizenry and businesses. Problem with government programs for disasters like pandemics is it’s easier to ramp up politicians/ rhetoric than it is to implement and produce the programs’ results.  Example- US Small Business Administration has an effective economic injury loan program, in essence a working capital backstop.  Plenty of funding has been planned but few loans processed to date.  Scaling up and staffing has been a significant challenge.

The time is nigh for the SBA to hand off disaster financial response to fintechs and InsurTechs– the vetting process for disaster loans is just right to digitize, from app to approval to funds distribution.  Just need to change some of the Code of Federal Regulation.

  • AXA’s CEO, Thomas Buberl, has suggested formation of a government/insurer risk pooling scheme to hedge future pandemic responses by insurers. Other similar schemes exist for property damage; need to ensure more than just cost hedging is planned (see Ten C’s Project  and broadening the spectrum of change).

 

  • Lloyd’s offered a parametric hotel product last fall that would provide payments to hoteliers when occupancy rates fell beyond an agreed index. Few chose to participate; all now have regrets post-COVID.  Whether there was sufficient capacity to take care of all potential interested parties will not be known.  My drumbeat – parametric will become the cover of the coming decade.

 

  • Worker injuries will be reduced due to business closures and work from home status (hmmm- what if an employee gets injured during mandated work from home sessions?), but potential high severity COVID-19 claims will be prompted for WC due to exposures during work. It’s not just state regulators in the U.S. who see the virus as a potential occupational disease, the Social Security Organization in Malaysia has deemed the disease as such, India has guidance to employers that WC applies if an employee contracts the disease (and has advised salary compensation applies for quarantine ordered staff).  The Province of Ontario, Canada has also followed suit for WC guidance for essential workers .

 

  • A promising entry into risk financing is the principle of Insurance Linked Securities (ILS), or capital vehicles used to hedge risk, provide coupon return, and widen the source of risk funding into the huge capital pool. Who wouldn’t want to obtain a return on bond investment that is greater than Treasuries,  and certainly better than potential negative rates?  Well seems the reinsurance world has some early grumblings that ILS are muddying the water and softening the rei market.  The remarks in the market that ILS have a destabilizing effect can be read through as injecting some competition and perhaps scraping some cream off the glass of whole rei milk. Thanks to AM Best and Steve Evans of Artemis.Bm for that commentary.

 

As is typical- insurance doings are strongly influenced by perspective, and little is as it first seems. Stay safe and well.

You get three free articles on Daily Fintech; after that you will need to become a member for just US $143 per year ($0.39 per day) and get all our fresh content and archives and participate in our forum.

The post Whose perspective is it? Insurance remains not what it seems at first view appeared first on Daily Fintech.

Flood insurance- where the rising tide has NOT raised all ships

after-the-floodstl2___700x340

The problem is known, the data lakes related to the problem are deep, there are huge costs associated with it and plenty of human suffering.   Whole sectors of predictive data businesses have grown to better understand what is behind it, options abound in an attempt to mitigate its effects.  Governments around the globe spend billions in preparation for and response to the events.

So why isn’t flooding, flood damage mitigation, flood damage repair costs/financing, and flood insurance availability less of a global problem?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

image

The breadth of the problem

Aon indicates global economic losses due to flooding between 2011-19 exceeded $600 billion US, with only $111 billion insured, an amount that surely does not include all infrastructure and productivity losses, or loss of life.  A $500 billion cumulative coverage gap; surely things have improved during the nine-year period, yes?  No.  The latest three-year period indicates a coverage gap of 84% of flood losses, worse than the cumulative 81% during the decade.

Innovation’s Data Analysis Effects

Much has changed in flood risk prediction since the early 1970’s when public flood programs were introduced (e.g., National Flood Insurance Program in the US).  At that time and until recently efforts expended in determining flood risk for a subject area were through elevation mapping devised from physical surveys of respective areas.  These elevation determinations in conjunction with hydrologic data were the default tool.  Problem was that there were few if any insurance carriers that would write flood cover without subsidy from an area’s federal government. In fact, in some jurisdictions (like the US) flood cover could only be written within a government program.  Too much risk of a regional Probable Maximum Loss event, actuarial premiums would have been prohibitive, adverse selection would be the driver of the coverage chase, etc.  As such government programs were the default option, and even at that participation was low.  In the US an overall participation rate in flood insurance even as late as 2017 was less than 15% of properties.

There have been remarkable advances in mining and analyzing data to identify a property’s relative flood risk, and the probability of a significant flood event, some examples being:

  • FloodIQ.com, a product of tech innovator First Street Foundation allows the user to input an address within the US and obtain an idea of rising water’s effects
  • Previsico , not only has developed tech do assess probability of flooding in the UK, but includes live modeling during flood events and includes warning capabilities
  • FloodMapp , before, during, and after services- modeling, dynamic prediction and flood damage quantification for claims
  • Hazard Hub , has risk modeling data that in addition to NFIP flood maps model surge and even tsunami risk by property address
  • https://floodscores.com/ – provider of property specific flood risk info (thanks Sam Green)
  • https://www.floodinsuranceguru.com/- included this resource due to the firm’s unique approach to mastering flood tech methodology and applying that knowledge to risk assessment through flood maps.
  • Leveraging social media for warnings- Sri Lanka has had success notifying more remote villages of impending storms/flood potential. Penetration of smart devices provides a warning platform.  Other chronic flood regions like Bangladesh are beginning to see the need of tech warnings due to recent flood events.

Funding risk management

The extensive flood protection gap suggests that private funding of flood risk has been just a small part of overall flood insurance.  The US market has primarily had NFIP response (or ex post government/emergency funds to account for the coverage gap)- a US government flood insurance market that has continuously functioned as a deficit program due to subsidized rates, significant adverse selection/moral hazard issues, being seen more as a constituent response vehicle than an insurance scheme by congress, being administratively under-funded, and not being a mandatory participation plan so the volume of participants is too low to be self-sustaining.

Properties in flood-prone areas within the UK market of late have benefited from the Flood Re program where UK insurance carriers contribute to the flood insurance plan (as do property owners).  Without belaboring the functioning of the plan (take a look at the website) one can say it’s as much an effective hybrid industry/government/property owner plan as found anywhere.  Its plan is to function as is for a few decades then convert to a fully private plan.

In most countries the largest volume of response is in the form of government emergency finds, particularly for cleanup, infrastructure repairs, and immediate populace support.  While significant, these government responses are inefficient at best and typically delayed by legislative inaction. 

Where there is much optimism for funding is in the capital markets- catastrophe bonds and insurance linked securities (ILS).  Per the data found at artemis.bm, ILS and funds held for flood risk are a small portion of the more than $40 billion US held in the reinsurance/ILS market.  There is plenty of capital in the market, however, and the appetite for returns over those of typical financial market vehicles is building interest in ILS.  The complexity of reinsurance/ILS deals is increasing, as is the level of apportioning tranches of risk across hedging deals.  The key is that as private flood insurance becomes more available the need and interest in alternate risk financing will grow.  An 80+% coverage gap for a peril that is becoming increasingly more frequent, in combination with the trillions of dollars of property at flood risk will find ways to attract capital markets’ involvement, and as data availability and granularity increases the pricing of the vehicles will become even more sophisticated. 

Flood insurance going forward

A problem not considered often in the flood peril aftermath is that flooding affects not only individual property owners, but everyone within a flooded region.  Even the elevated property that is not flooded is affected; its residents are prevented from venturing out, cannot not shop at a flooded store, are unable to get municipal services due to closures, etc. And- the cost of government responses in the absence of insurance are borne by all within a community.  The other factor that is often overlooked?  Insurance proceeds ‘jump start’ recoveries with funds for local businesses; lack of widespread flood insurance cover leads to much less money on the street after an event.

Consider flood insurance penetration within the US- less than 15% of all property owners hold flood cover, and most who do keep it due to mortgagee requirements.  A recent article shared by RJ Lehman of the R Street Institute about the Mississippi flooding occurring as this article is written reinforces that most property owners will be left without a financial backstop for flood recovery (by the way- in the US an article like that is written after every flood or hurricane, the only copy that seems to change is the name of the city/town and the number of policies in force.)  The recovery will come without insurance- slowly, funded piecemeal until finally government funding will be made available.

Is it time for regional parametric programs funded by taxes and made available immediately after a trigger event?  Seems a really good idea since no matter what in the flood peril world the government is the funder of last resort, why not make it the quick response at no more cost than we are used to source? FloodFlash has proven event-based parametric flood cover to be effective option for property owners in the UK, and per Artemis’ reporting SJNK (Japan) is rolling out similar cover for property owners there.

Is it time to make flood insurance a requirement of all homeowners insurance holders?  Flood Re seems a reasonable model to follow, and even with disparate regulatory bodies action can be taken to have an entire region/state/country participating.  Flood perils are growing, so are costs, so is the exposure to critical economic areas.  Smarter approaches to private flood insurance that is based on knowledge of not only insurance but on the factors behind flooding and risk as is used by Chris Greene at FloodInsuranceGuru are needed.  Partnerships such as experienced with Previsico and Loughborough University need to be supported.  Subsidized premiums are OK, but much greater breadth of participation is required to make programs even remotely viable.  The underwriting, mapping, and response tech is there, the political and economic will must be also.

 

You get three free articles on Daily Fintech; after that you will need to become a member for just US $143 per year ($0.39 per day) and get all our fresh content and archives and participate in our forum.

 

The post Flood insurance- where the rising tide has NOT raised all ships appeared first on Daily Fintech.

Pulling back the curtain to shine light on ‘scary’ insurance phrases

triggershock_lions-and-tigers-and-bears

Reinsurance/ILS, Blockchain, and insurance financials.  Not quite lions, tigers, and bears, but for many who follow insurance the three concepts are as daunting and pose discomfort in understanding. Why then the mention?  Because in an earlier social media post I noted that the three words do not generate a lot of media content traffic, and if there is a related posting, not much response.  A wise connection dropped the key hint to that puzzle- the words need to be discussed in context that makes sense to the reader.  A cool idea, Modern Accelerator .

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.  Image

Let’s dive into the three concepts with a full recognition that this blog will serve merely as an overview and whetter of appetites causing the readers to want to consume more. Fair warning- even keeping the topics brief- TL:DR may apply.  That’s OK.

Insurance Financials

There is plenty of government oversight for accounting that dovetails with plenty of regulation, we can’t touch on all the respective countries’ agencies and regulators but in essence they all serve the key roles of making uniform 1) how insurers account financially for their business, and 2) how insurers account for how solid they are in being able to serve their policyholders relative to the agreed scope and cost of risk.

It’s an alphabet soup of government orgs or standards: GAAP, FASB, SAP, IRDAI, NYDFS, SEC, IFRS, FCA, FSDC, SUSEP, NAICOM, ICLG, ASIC, APRA, etc. (almost) ad infinitum.

Fundamentally there are three accounting principles (of the many) with which insurers must comply, just in a slightly different manner from most business organizations :

  • Revenue Recognition Principle
  • Matching Principle
  • Historical Cost Principle

Without complicating things too much, insurance companies have financial stability burden to prove continuously- a carrier’s ability to fund the risk costs that it has agreed to.  All those policyholders have an expectation of indemnity or payment if a loss or occurrence to which their policy agrees to cover /pay comes to fruition.

The three principles noted above are part of the key differences between insurance companies and others, primarily because what insureds receive for premiums is a risk agreement that elapses over time.  Receive $1000 for an insurance contract today for twelve months’ cover.  Money in the bank for a promise over time.  So in respect to compliance with the Matching Principle, premiums are deemed  ‘written’ only until an increment of the policy’s time is expired, wherein the portion of the premium that matches the period is booked as ‘earned’.  One month’s policy duration allows 8 ½% of the written premium to become earned, six months’ earns 50%, and so on.

So you can see how a carrier with a ton of cash on hand might not be as liquid as one thinks if there are an according ton of policies on the books whose expiration extends over twelve months or more.  Written and earned- key concepts.

Here’s an example of a P&L statement showing the written and earned premiums, from German insurer, DFV_AG or Deutsche Familienversichurung:

DFV Inc

The sharp eye will note in addition to written and earned premiums there are lines showing the ‘Share of reinsurers’; that will be touched on in the Reinsurance portion of our discussion.

Traditionally the written and earned difference followed a solid calendar pattern due to typical annual expiration of polices.  But what of on demand or ‘gig’ policies?  The covered period may be a few hours or days, so there is little lag between written and earned status.  Knowing a carrier’s business model has become more important than ever since a heavily funded entrant’s cash may be more restricted if it’s a traditional style insurer in comparison with an on-demand player.

Carrying the discussion to the Matching Principle (matching costs to the period in which the costs were incurred) suggests a few important financial factors:

  • Costs of policy acquisition is matched to immediate written policy premiums, e.g., agency/brokerage commissions, marketing, admin office costs, digital format costs, etc., but
  • Costs of policy administration, e.g., adjusting expense, loss costs paid, etc., may be charged to earned premiums in a different incurred cost period.

As for the Historical Cost Principle, regulators want to know concretely what amount a carrier assigns to portfolio assets.  Insurers need to be liquid in their asset portfolio so assets can easily be converted to cash if loss payment volume so demands.  For example, bonds might fluctuate in value over time due to variances in interest rates, but carriers need to maintain a historic cost to keep regulators content for solvency calculations.

Quite a rabbit hole are financials, so the conversation will conclude with THE common comparative measures for P&C carriers-  loss ratio, expense ratio, and combined ratio.  These measures will give the reader a clear idea if earned premiums (revenue) exceed or are exceeded by expenses and loss cost.

So,

loss ratio = claim payments + adjustment expense/earned premiums, expressed as a %

expense ratio = expenses other than adjustment expenses/earned premium. Expressed as a %

combined ratio is a sum of the LR and CR.

Ideally CR is < 100%, meaning earned premiums exceed costs and underwriting activity is profitable.

What must be remembered as carriers are compared- the maturity of a carrier in terms of time in business, how aggressive is growth relative to existing book, the nature of the carrier’s business and how that affects reserves (immediate draw on profits.)  Entrants may have LR that are in the hundreds of %; consider trends or peer comparisons before your lose your mind.

Reinsurance

Reinsurance is insurance for insurance companies.  There, that was easy.

Rei was once an easier financial concept to grab- carriers would sign treaties with reinsurance companies to help protect the primary insurer from loss outcomes that exceeded typical loss expectations.  Primary carriers do not plan (or price) for an entire region to be affected at the same time, but sometimes things happen that require excess over planned loss payments, e.g., wind storms, wildfires, tornadoes, earthquakes, etc.  Primary carriers will purchase reinsurance that for a specific period, and in an amount that is triggered once a carrier’s loss payments for the treaty peril or perils is incurred.  Pretty direct and expected by regulators, and part of claim solvency calculations.

What has occurred over years is that reinsurers have evolved into other types of excess risk partners, covering more than just catastrophe losses, and becoming excess risk options.  If you again review DFV_AG’s income statement and consider the premium and loss cost portion of the carrier’s P&L shared with reinsurers, you’ll understand the firm has ceded premium and costs to backers to help smooth growth and provide backstop to the firm’s ability to pay claims and serve its customers.  This has become a common methodology for startups and existing carriers, allows more product variety for reinsurers and spread of risk.

Another evolution over the past years beyond reinsurance is the advent of Insurance Linked Securities (ILS), capital vehicles that are designed solely as alternative risk financing.  Insurance-linked securities (ILS) are derivative or securities instruments linked to insurance risks; ILS value is influenced by an insured loss event underlying the security.  What’s that?  ILS are capital vehicles that simply are designed to pay on an outcome of a risk, e.g., hurricane, earthquake, etc., sold to investors looking for diversified returns in the capital markets.  A hedge against a risk for insurers, an option for better than normal market returns for the holders.  Often referred to as Cat bonds, these bonds serve an important role in the risk markets, and are an opportunity for holders for income.  Often ILS are sliced and diced into tranches of varying risk bonds to smooth the outcome of a linked event.  Don’t be surprised if ILS become a more accepted means of financing more common, less severity risk within the industry, or in use in unique new risk applications, an example being pursued by Rahul Mathur and colleagues.

Blockchain

So much promise, so much confusion, overreach and failure to launch.  Or maybe Blockchain’s connection with the perceived wild west of value transfer, crypto currency, has colored the insurance world’s relative arm’s length view of the concept.

A quick search of definitions produces many references to bitcoin and other crypto currency (I’ll leave those to my knowledgeable Daily Fintech colleagues), but we simply want a definition that maybe doesn’t sound simple (Wikipedia):

“By design, a blockchain is resistant to modification of the data. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority. Although blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. “

Open. Distributed. Peer-to-peer. Decentralized. Immutable. Cool for generating crypto, but not so much for the wild data sharing needs of insurance.

So why is Blockchain not taking hold for insurance?  The use case is tough for carriers- unstructured data (of which carriers have a ton) do not play well in a Blockchain (Blkcn) environment, many changing players in an insurance claim, and so on.  Blkcn holds data securely, but doesn’t guarantee cyber security outside the ledger. Blkcn can be more cumbersome for data retrieval across consortia-based ledgers.  Multiple writers to the ledger, multiple efficiency issues to overcome.

But what of uses for reading data once placed in the ledger? Can be very cool. Anthem is a US health insurance provider serving millions of subscribers nationally, the company recently initiated a Blkcn pilot wherein the company is making ledger access an option for the test participants, with patient records stored in the ledger, and individual subscribers given the option to give providers access to health records via use of a QR code that has an expiration date.  Subscribers have the power over their records and access is given for read only permission.  There are many potential benefits to health insurance Blkcn but the options must dovetail with data security.

Another positive scenario for Blkcn application- crop insurance in previously under-served markets.  OKO Insurance provides micro crop insurance policies in Africa, backing by reinsurance but administered in part by distributed ledger, each farmer’s information residing in the ledger, and access provided to underwriting and reinsurance.  And- if payment is made a partnership with digital payment systems to facilitate settlement.  An active Blockchain as a service company, BanQu, is expert at facilitating these frameworks and has a portfolio of projects around the globe where ‘first mile’ and ‘last mile’ data are administered within a ledger for the respective customer and its affiliates/suppliers.  Permissioned but not written by multiple players, QR codes to allow involved sources access to a supply chain.  And the sponsor of the ledger has a clear data record of each step in a supply or value chain.  Speaking with the firm’s business development executive, Brady Bizal, we discussed how a Blkcn ledger such as BanQu provides could serve as an ecosystem initiative for regions, including the details of insurance for a farmer, payment records, link to in country digital payment systems, risk mitigation firms, and as warranted, the transaction/finance data can be accessed by permissioned bankers at the customer’s choice- the magic of QR codes.  It’s an entrée to a trust system that may otherwise not exist.  Opportunity.  Maybe not the original thinking for Blkcn and insurance, but sit for a few minutes and you will think of many similar possibilities for blockchain use in health insurance alone.

Sorry, there is so much that could be written about the three concepts and I’m hopeful the article answered some questions about finances, blockchain and reinsurance/ILS.  It’s certain readers and experts will advise me of missing sections, and that will be the foundation for a next article on the subjects.

You get three free articles on Daily Fintech; after that you will need to become a member for just US $143 per year ($0.39 per day) and get all our fresh content and archives and participate in our forum.

 

The post Pulling back the curtain to shine light on ‘scary’ insurance phrases appeared first on Daily Fintech.

When a traditional risk fix isn’t the fix, and sometimes a fix needs to be found for a risk

solution_impact

It’s an increasingly connected world- digitally and physically- and that means occurrences there increasingly have effects on business existence here.  ‘Effects’ means risk, risk means exposure, and exposure means need for insurance.  Climate/environmental occurrences, urban congestion, or virus outbreaks have far reaching consequences.  It used to be that businesses simply dealt with consequences over which they had no control in mitigating, and who was dealing with the issues were local to the effect or involved in the business or its collaterals. Is that true in today’s insurance world?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Daily Fintech– a top financial blog per Feedspot for Financial Technology Pros for 2020.

Image

Few risks are more terror-inducing than an unmanageable viral outbreak with unconfirmed causation such as is the coronavirus outbreak focused on the Wuhan region of China.  What to do other than quarantine the outbreak area, and limit individuals’ movement into other areas.  Prudent.  So, what do businesses do that are reliant on the movement of and visitation by persons?  Airlines, hotels, transport, tourism, and commercial businesses will have significant direct and indirect effects of the virus due to reduced attendance from travel, tourism and just regular business.  Compounding the effects for business is as reported by Insurance Journal, “companies are set to face billions of dollars (US) in losses linked to events and travel cancellations and closures of businesses.”  Most standard commercial insurance policies have had exclusions placed for communicable diseases in the wake of the SARS, Ebola and Zika viruses, leaving the insureds to self-insure for these occurrences.

But what of parametric options?  If you are a cruise ship operator whose business is reduced by 1/3 due to customer fear of an outbreak that happened across the globe, is there not a trigger/index that can be factored for in a parametric policy?  Even more common for that business is passenger count reduction for a single cruise due to norovirus outbreak- or fear thereof.   Same principle can apply to larger firms that may be affected in other industries- beaches, theme parks, tour providers, hoteliers, airlines, etc.  The Sydney (Australia) Morning Herald reports that the country’s economy may be affected to the tune of $2.3 Bn (Aus) due to the coronavirus’ effects as students and tourists remain home.

The Wall Street Journal reminds the business world of the far-reaching effects of outbreaks in densely populated areas- the need to repatriate employees from outbreak areas, and mass closures of businesses, e.g., Starbucks, McDonald’s, IMAX, and other widely distributed businesses.  China does mandate that employers reimburse employees for lost wages, but on a practical basis the effectiveness of those regulations is low.  Risk exposure with little sharing of the cost of risk.  But is there an opportunity for a micro-insurance product to protect individuals?

Are there other risks to which property owners or business operators are exposed without easy access to risk sharing?  Sure.  Regional perils, environmental perils, and/or climactic risks such as earthquake, flood, temperature extremes are a few of these.  Flood insurance has been available for some decades but is not an easy match to insurance limits needed, and most often that cover is government subsidized and regulated, and is expensive if a subject property is in a flood frequency area.  But what of those persons who own property in less sophisticated emerging markets?  Well, more and more governments are looking to collaboration with other countries in establishing risk response pools, catastrophe bonds, or leveraging insurance linked securities (ILS) in smoothing the cost of disaster response.  These are products that may not have existed as little as ten years ago, and even when present in a country’s emergency portfolio may not provide the expected benefits.

Take for example the risk vehicle Mexico placed prior to Hurricane Odile (2014), providing reinsurance for the country’s Fund for Natural Disasters (FONDEN).  The bond was established as a hedge for when a hurricane met a certain central pressure trigger within a ‘box’ regional area.  Good idea, unless the index values are not clearly defined in how the values are confirmed.  The index was not met at that time but might have, except there was only one index measure point managed by one observer.  Even if triggered the basis risk the country was exposed to would not have been met by the full release of the bond’s principal, supporting natural disasters as being global basis risk issues.

Considering the disaster ‘protection gap’ being most notable in emerging markets (on average only 5% of disaster losses having cover in poorer countries), there are organizations such as Global Parametrics(GP) that are working to improve access to cover by means of parametrics products.  GP’s CEO, Hector Ibarra reports that a recent placement of parametric product produced advance payment to Oxfam and Plan International in anticipation of Typhoon Ursula in December 2019.  The use of forecast-based indices (payments triggered on forecast of certain conditions) provided communities in the Philippines payment before the actual typhoon landfall, allowing evacuation funding for residents.  Proactive risk sharing, with immediate payment upon reaching an index value.  Not a perfect answer to all similar events, but certainly a start from which to build.

Are the principles behind parametric products adaptable to local risk factors that regions or businesses encounter but cannot find effective indemnity products for?   Weather risk parametrics have gained a foothold within emerging ag markets in the form of micro-parametric products, with index factors of ‘on the ground’ conditions being verified by new techniques (sensors, satellite, drones).  Larger scale weather-related ag parametric products are slowly getting traction and are beginning to supplant traditional crop insurance.  In discussion with Norm Trethewey of Weather Index Solutions of Australia there are now more companies willing to underwrite smaller ag weather parametric or derivative products, say a $200K cover that used to be passed on by firms like Swiss Re and Munich Re.  The presence of wider and deeper data sets there can be indexes established that in the underwriters’ estimation will be profitable and responsive.

The exhibit noted below shows some of the relative complexity of cover that is supported by available data and the sophistication of index monitoring:

Para

There is not the same concerns of basis risk for ag parametrics because the value of the crop is known (within a range) so what remains is the farming business to calculate premium cost versus potential loss of yield.  This sounds straight forward enough but changing the ag industry’s thoughts on what to do about Mother Nature becomes the nuance of the product.  One thing is certain- as available data improves even more the underwriting of these parametric options will become more commonplace, for developed and emerging markets.

And for more extreme climate like there typically is in Australia, and where ag production includes upwards of 20 million exportable bushels of broad acre crops, having a spectrum of risk management options to include parametric and derivative covers is a potential stabilizing factor during spikes in conditions.

To wrap up this column is a short discussion of risks that simply may not have indemnity or parametric solutions, e.g., the number of, confusion caused, and accidents experienced through use of okadas (motorbikes) and kekes (three-wheeled vehicles) within the city of Lagos, Nigeria.  One of the most populous urban areas on the African continent Lagos has waged a continuous battle against sprawl and traffic congestion.  Add to that the easier acquisition of motorbikes and trikes compared to autos, and the growth of informal ride sharing using the more informal vehicles and you have traffic mayhem.  The state government has banned the vehicles’ use, presenting survival mode for commercial ride sharing companies like Max.ng, Oride, and gokada.ng.  Traffic risk, government risk, and no easy solution other than tossing the figurative baby out with the bathwater, and exacerbating the very commuting challenge for the city’s residents that prompted the popularity of the bikes and trikes.  Thanks to the East African for the reporting on the ban.

You get three free articles on Daily Fintech; after that you will need to become a member for just US $143 per year ($0.39 per day) and get all our fresh content and archives and participate in our forum.

The post When a traditional risk fix isn’t the fix, and sometimes a fix needs to be found for a risk appeared first on Daily Fintech.

InsurTech Topics and Cascading Consequences

image TLDR   “If you wait by the river long enough, the body of your next article will float by.” (apologies, Sun Tzu) ” My colleague and friend, Thomas Verduzco-Weisel asked me recently about articles I write, “Do you keep a topic list or inspirational thought list?” I wish I was that organized and purposeful.  My […]

The post InsurTech Topics and Cascading Consequences appeared first on Daily Fintech.