Misconceptions regarding pandemic business interruption cover- contributing to preconceptions for future programs?

These may not be ideal times for the U.S. commercial insurance industry.  Sure, that is stating the obvious as COVID-19 business interruption claims encounter denials of cover, and now civil unrest damage claims overlay the undercurrent of BI disappointment. It is hard to imagine that the trillion-dollar Covid-19 issue can be significantly affected by a billion-dollar […]

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Can’t know the pandemic fund players without a scorecard

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It’s getting more and more difficult to keep track of economic responses to COVID-19 without a scorecard; new or updated grant, loans, fund discussions and press releases fill the news each day.  And why shouldn’t that be the way?  It’s a multi-trillion (fill in currency of choice here) issue for economies with current and future ramifications.  This column has discussed COVID-19’s effects in depth since February; let’s consider a response score card as this week’s effort. And for those who are patient to the end- some bonus business interruption content!

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’.

Before we fill in the current scorecard let’s agree that governments’ central monetary authorities have been throwing a lot of liquidity into the markets, and treasuries have been distributing direct funds and issuing loans to buoy up businesses during lock down periods.  That’s all well and good but it’s reactionary, inefficient, and ignores in most part the resources of private capital markets.  Ironically in some fashion government efforts have been ‘sending riches to the rich’ through distributions that end up in those same cap markets.

Setting government actions aside we again find not much from the indemnity world of insurance, although John Neal of Lloyd’s and Evan Greenberg of Chubb might disagree since their published assessments estimate that COVID-19 insurance exposure is $100 billion.  Place that estimate in perspective of the pre-COVID insurance market that approximates $5 trillion annual revenues and its magnitude becomes less impressive.

Let’s not belabor what is known and focus on how the industry and governments are working to anticipate responses to future like events. Any chosen option needs to be affordable for businesses, provide prompt and/or efficient payment, not be politically expendable over time, have stable, uniform funding, and not be complex to administer. That’s all.

There are several prominent fund/backing proposals and while the exemplars are not exactly all apples or all oranges, we can contrast them by:

    • Sponsor
    • Constituency
    • Fund size
    • Distribution model
    • Backing /funding
    • Admin

First chart

*Proposed

**Proposed by coalition of the National Association Mutual Insurance Companies, Insurance Information Institute, American Property Casualty Insurance Association

That scorecard shows the who’s, how’s and how much, but what of potential fund efficacy?

second chart

Review of these general data prompts some caveat observations:

  • Often the correct answer is not the right answer, as is suggested for option C. Having pre-purchased recovery insurance at a level supported per each customer’s business activity is smart, but will the program be caught by moral hazard issues, and what of those businesses that do not participate?  Another (yet smaller) PPP experience?
  • Option G is untried collaboration in private insurance and capital markets, but will government backing be available for early years of the program?
  • A, C, and D require significant government funding or admin. Considering that administrations change and budget issues crop up, will the finds have political interest that outlasts short memories?
  • F existed before COVID-19 was known, with no takers. What will change that reality now?
  • Will B have the buy in of the balance of the EU, or will the members need to revert to individual plans?
  • How scalable are E and F, or will other carriers need to come on board?
  • Are any of the plans looking to leverage private capital markets?

There are scores but we don’t know the score- yet.  What is certain after the discussion is as was at the beginning- it’s a multi trillion (fill in the currency here) concern that needs one or more solutions.  Status quo keeps all with zeroes on the board.

(Full disclosure- the author is a co-founder of the Ten C’s Project, but is agnostic on which type of fund is supported as long as insured companies benefit.)

Now for your bonus-

I came across a fascinating infographic representing COVID-19 insurance around the globe  published by P2P Protect Europe :

infography-covid-insurance_orig

I reached out to the firm for any further comments they may have to accompany the infographic and my expectations were exceeded by the comments made by P2P President/Managing Partner, Tang Loaec.

Mr. Loaec provided a different view of business interruption (I’ll use the full quotation):

“As regard property insurance and the embedded business interruption insurance, there is a catch 22 between the desire to exclude the massive concentrated financial impact – which can threaten insurance stability – and on the high frustration of the insured which remains exposed while they thought their business interruption insurance was ensuring their business continuity.

What  P2P Protect Europe recommends to its insurance clients is to approach it from an assistance logic. For example, if you want to include a mechanism protecting a university against the impossibility to use its premises when pandemics strikes, you may extend the coverage not by opening you to monetary claims (the sky is the limit sometime), but by integrating a pedagogical continuity service with a dedicated online classroom provider such as for example LiveClass.fr to deliver protection against the business interruption risk without opening up to massive liabilities. Similar approaches can be envisaged for many other types of business activities. Through innovative assistance services, we can improve the resilience of our society to pandemics, reduce the negative impact on the insured business, while not bankrupting insurance either.”

Well that gives the issue a whole new viewpoint.

You’re welcome.

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Dominoes have fallen – what insurance learnings have we so far from COVID-19 business disruption?

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When this article was first posted in late February 2020 the COVID-19 outbreak was still focused on China, but its effects were menacing the globe.  At that time the concern was supply chain issues and a less than one hundred coronavirus cases distributed primarily on the east and west coasts.  As this article is reread one can consider what parts were on point, and if on point, was there anything that really could have been done to mitigate the then unimagined scope of what was to come?  Let’s revisit three months ago, think of what might be done next time, and also discuss with insurance agents how the market’s customers have changed in the ensuing time period (if at all.)  Text from the original article will be noted in italics.

 

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’.

February 27- It’s clear there is much of which to be concerned regarding novel Coronavirus 2019 (aka COVID 19), including  the direct impact of illness and death among those who have contracted the disease, and the indirect effect of closure of travel, quarantine, closures of schools, businesses, and frontiers. 

Who is considering the effect of the virus on local, regional, and global business?  Whether you believe in the extent of virility of the virus or not, one thing is certain- businesses across the globe are showing symptoms from COVID 19.  Is this an insurance disaster or unexpected new market?

Disaster or opportunity?  Sun Tzu notes in “Art of War”, “In the midst of chaos there is also opportunity.”  Certainly Sun Tzu’s intent was far from discussion of business and insurance, but the principle still applies- when there’s turmoil purposeful persons leverage opportunities.  My agent colleague, Brett Fulmer of Maxwell Agency Insurance Services in southern California recounted in a recent discussion, “I have been able to develop a broader presence within my connections and local industry through hosting and participating in virtual sessions.”  In essence, Brett capitalized on the new ‘Zoom environment’ to become an influencer, an action that has resulted in some unexpected business referrals.  Would this have happened outside a forced virtual new world? Perhaps, but in contrast to many who may have retracted into a safety zone that agent saw beyond just the next sale.

Bradley Flowers of Portal Insurance in the state of Alabama (and co-host of the Insurance Guys Podcast) advises his agency’s business has held its own so far during the work from home period, and he has been able to find opportunity in that virtual chaos by ‘patching up holes in the business’ since he has some unexpected management freedom by not being collocated with staff.  He didn’t say so, but one might say his staff have grown in their ability to make decisions, their initiative to serve, and through forced learning due to separation from colleagues’ input.  Perhaps the virtual model will be found to be an unexpected boon for the agency.  Ryan and Andy Mathisen founders of Glovebox, a virtual tool for agents’ and customers’ use in organizing insurance information, reiterated Bradley’s point about virtual work- many are wondering about the utility of offices and requirements thereof, not full disappearance of analog offices, but growth of remote work options based on COVID-19 environment experiences.

The business world lives with the two-edged sword of global interaction; on one edge a manufacturer in Barcelona can economically design and digitally source machine parts from a ten person shop located in Hubei Province in China, on the other edge is the disruption that may occur to the Spanish manufacturer if the machine shop is inactive or unable to produce a custom part. What of the cascading effects of supply chain disruption?

This has been proven true in more ways than can be considered.  Access to personal protective equipment is the poster child instance of this actuality- the bulk of the supply chain for PPE is housed in China, and a combination of business shutdowns there, ill-preparedness and slowness to act in most markets caused those products to be of dangerously low supply when most needed.

Unless your business was affected by the SARS outbreak in 2004, affected by the more localized (but terrifying) Ebola virus, or mosquito borne diseases like Dengue or Zika, the business effects of outbreaks are typically small- unless you are immersed in the outbreak.

For this article a deep dive into what’s covered by insurance and what’s not will not be taken- that would be too lengthy an effort for a Daily Fintech reader who needs an overview.  I can say that Business Insurance and Marsh and McLennan have a good summary document here, “Liability policies may respond to coronavirus” .  Travel insurers typically do not afford coverage if a traveler simply decides not to travel due to perceived risk (some policies have the ‘cancel for any reason’ option but it’s an exception placement.)  Suffice it to say that effects of outbreaks do no not fit well into insurance cover.

So what’s the point for this article?  Or, in this case, an updated version?

Awareness and consideration of how outbreak ‘dominoes’ can affect your business, and are there insurance options that might provide financial protection?

Let’s consider the potentials for risk management working backwards from end businesses: 

      • Most business interruption covers are based on an occurrence of direct physical loss, either on premises or within a supply chain. Unfortunately, disease outbreaks are seldom considered direct losses, and in most cases are excluded causes of loss.

Hasn’t this been proven to be the COVID-19 economic disaster for every economy?  Business interruption cover was never designed for pandemics, even to the point of minimal reinsurance capacity being present for that risk.  As such a multiple month shutdown in the U.S. has caused unreimbursed trillion dollar ripples across the twenty five million or so small and medium sized businesses, local and state governments, has overwhelmed banks as they work to administer federal response programs, and even has a ripple effect with health care organizations.

Continuing, we still are uncertain of effects that will be produced from:

    • Worker’s compensation
    • Liability from infection from customers being on premises
    • Directors and Officers cover if business results flag due to alleged poor planning
    • Supply chain risk- all along the supply and transportation chain? Has just in time become a liability
    • Loss of suppliers due to failures of businesses in the worst outbreak areas
    • Actions of governments? Legal ramifications of non-compliance
    • Employee actions due to extended periods of no work
    • Loss of key staff due to inability to maintain salaries
    • Interest rate risk from speculation
    • Inability to travel to affected areas where management oversight is critical
    • Increase of cyber risk due to reduced attention to risk and opportunistic bad players
    • Reduced productivity due to requirements for and inefficiencies of virtual work

There were other items listed in February’s version but if you are purposeful and look back to this article you’ll see we are all too well knowing of those issues’ outcomes.

John Neal of Lloyd’s recently published an estimate of COVID-19’s estimated effects on the global insurance industry across all lines- $200 billion.  Even if the $100 billion or so of investment portfolio losses are set aside from that number the remaining projected underwriting loss of $100 billion remains an unprecedented amount for the industry.  The terrible national catastrophe years of 2017 and 2018 did not reach that level.  The unique nature of the insured losses due to COVID-19 effects will not be fully realized for years as many of the affected covers produce long-tailed claims.  Recognition of the extent of the potential claim costs will prompt significant reserve levels being  marked by carriers, which will be an anchor on profits and constriction on ready capital.

It was just a few months ago that global broking houses were eyeing the hardening commercial markets favorably in terms of rising rates and growth of available products.  Contrast that outlook now with carriers rebating premiums and global brokers pulling P&L guidance.  If a main global firm like Aon acts to reduce staff and executive suite salaries (see PC360 article here ) due to the outbreak, there is clear indication that the pandemic’s effect goes well beyond SMEs’ business interruption cover concerns.

Going forward there are learnings for the risk management industry, and for any business that might be affected by issues related to outbreaks.  The availability of parametric insurance may become more commonplace, and the practicality of its inclusion in insurance plans will increase. 

There is no practical answer for pandemic insurance cover within the indemnity model.  Even a parallel fund such as was established by the U.S. Congress for terrorism effects (TRIA) would potentially fail under the weight of the volume of claim handling, and under the enormous gravity of trillion-dollar severity.  Claim administration of just ten percent of potential SME customers’ claims would potentially consume fifty million man hours of adjuster labor. And, since TRIA backstopping is legislated to cap at $100 billion, extending TRIA claim demands at the level of what is an average Paycheck Protection Program principal of $200,000, times 2.5 million claims and the ask of the fund becomes $500 billion, an amount that would need legislative approval.  Industry capital would be fully consumed addressing the claims, and government reimbursement would be- uncertain at that level.

Carry the parametric principle to supply chain interactions, or any business interaction where a disruptive trigger, or index can be identified, and a risk amount can be applied.  Business disruption due to a specific government command, for example, or supplier closure due to a WHO declared outbreak.  There may be many reasons why indemnity covers are unable to be written, but parametric options must be considered. 

The key is that global outbreaks do occur, and while perhaps not as potentially costly as COVID 19, significant none the less. 

Global reach, fragility of supply chain interactions, and business continuity demand different approaches, and provide the insurance industry new opportunities for risk products.

We are three months and a lot of economic heartache separate from our initial discussion of coronavirus’ potential effects.  Three months from now it would be good to be focusing on the opportunities the industry has found in the COVID-19 chaos.

I appreciate the additional input received in preparation of the article from insurance consultant and innovator extraordinaire, Chris Carney .

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Economic reality sharpens future vision for insurance and pandemics

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I have been writing about the potential and now actual insurance effects of COVID-19 since late February, and the discussion has evolved from what might be, to what is, to what is not, and to what is now how the industry must begin taking action on what might be for a next pandemic or other systemic risk. 

It’s no longer sufficient to allow coverage gaps to exist for global-effect occurrences, even if another like outbreak may not occur for years or decades- the economic shock presented by being unprepared is simply too great.

 

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’.

The historic pattern is clear in how global economies react to systemic risk events- wailing, gnashing of teeth, rending of garments and governments stepping in to backstop the losses.  For the U.S. and elsewhere the needed government action is due to the outcome of businesses expecting their insurance policies to help cover economic losses due to the mandated shutdowns, and insurance companies never expecting BI losses to be part of insurance coverage.

As of this article’s writing the effect of COVID-19 is exemplified in the U.S. 2020 Q1 GDP results-   -4.8% on an annualized basis, coming on two months of growth and one COVID-19 affected March.  A similar result for Q2 would be unexpected as April and May could produce even less robust results.  Percents and projections, resulting in real-world declines of a few trillion dollars, and mirrored results in other countries.

Can a first step in planning be an understanding of the vagaries of business insurance and business interruption cover?  Not having easy access to policy forms for carriers outside the U.S. market we’ll just have to use the U.S. policies as exemplars.

Description of BI (Business Income or Business Interruption) coverage per U.S. carrier websites:

  • Carrier A– “Helps replace lost income and helps pay for extra expenses if a business is affected by a covered peril.” Lost income being described as revenues minus ongoing expenses.
  • Carrier N– “Helps you pay bills, replace lost income and cover payroll when a covered peril forces you to close temporarily.”
  • Carrier TH– “Can help replace any income your business loses if you can’t open for a time after a covered loss.” Income being total revenues less business expenses, operating costs.
  • Carrier H– “Will pay you the income your company would have made during the period it’s out of action due to a covered loss…including normal operating expenses incurred…most of employee payroll.” Income being revenue less normal operating expenses.
  • Carrier T- “Helps replace income and expenses.”
  • Or per ISO form CP 00 30 04 02
    • Business Income means the:
      • Net Income (net profit or loss before income taxes) that would have been earned or incurred; and
      • Continuing normal operating expenses incurred, including payroll.
      • Must be caused by direct physical loss of or damage to property…in the Declarations.

The carriers’ descriptions of BI cover seem similar, but each has its unique wording and intention.

To highlight varying benefits across the spectrum of the carriers noted above, consider a small business scenario as follows:

  • Monthly revenue- $25,000
  • Payroll- $15,000
  • Rent- $2500
  • Utilities/other expenses- $3500
  • Taxes- $2000
  • Net income- $2000

A one month disruption of the business due to physical damage to a covered loss, insured unable to conduct any business, payroll and expenses are continued, provides the following estimation of the BI cover outcomes:

chart

$2000 BI cover, or $25,000?

Of course the devil is in the details of the policy coverage verbiage, but the tendency is clear- policies differ, there’s a significant variance between policies that cover loss of income alone versus policies that cover loss of revenue and ongoing expenses, or policies that cover ongoing expenses and loss of income.  What is uniform is that BI cover stems from, 1) a cause of loss a policy covers, 2) physical damage to covered property, and 3) no exclusions to coverage applying. Unfortunately, with COVID-19 the drivers of cover are not present in most BOPs and the BI costs are not covered.

That good first step in grasping the gravity of the coverage problem starts with the scenario noted above, and the economic effects extended to the U. S. business economy at large.

There are by estimation anywhere from thirty two to forty million businesses in the U.S., 99.9% being small/medium businesses, with an estimated thirty million being insured by business owner’s policies (BOP), and all being affected by COVID-19 shut down effect- some more than others but the majority affected entirely with full business interruption.

The potential BI data are stark:

  • Thirty million policies with a modest coverage limit of $50,000 would represent a probable maximum loss in a similar pandemic of $1.5 trillion.
  • Thirty million businesses claiming BI damages for one month- even if the claims average $20,000- equates to $600 billion.
  • Thirty million BI claims constitute an estimated $22.8 billion in adjusting expense.
  • Thirty million BI claims would require 600 million man hours to prepare, and
  • 300 million man hours to adjust, or ten man weeks for every claim staffer employed in the U.S. P&C insurance industry.

The U.S. is two months into a shut down, so the potential BI loss cost grows to $600 billion plus LAE (loss adjustment expense).  Want to guess what the entire amount of available cash and investable assets are for U.S. P&C carriers?  $1.75 trillion.  Considering these numbers- having business interruption cost financed by traditional indemnity insurance cover is as carriers have known- untenable.

However, insurance carriers cannot be blind to the economic effects of COVID-19 because they affect the viability of a large segment of the carriers’ business base- the SMEs. Economic pressures from legislators and litigation are presenting potential ex post facto cover, and if the outcomes pass constitutional muster the end effects are enormous in implication.  The inability of the industry to deal with the logistics of handling the claim demands are clear.

There must be plans to shift expectations from no response to some response, indemnity investigation to parametric,  avoidance of customer responsibility by all to collaborative and shared responsibility by insureds, insurers, the capital markets, reinsurers, and government.  Early efforts in the UK in devising a fund in parallel with Pool Re, France working on an insurance backstop for pandemics, and early U.S. efforts to craft a similar plan as the terrorism TRIA fund are meaningful, but absent serious consideration of parametric options not meant to solve the BI cover problem but to take a big edge off of it will carry the industry to a similar place as now.

There are additional efforts being made to build discussion; Lloyd’s Lab is sponsoring varied innovation programs focused on COVID-19 matters, and insTech London is in the midst of its sponsored podcast series on pandemics and what might come next for insurance (yours truly participating with Dr. Marcus Schmalbach , Laurie Miles and Matthew Grant in the 5/05/20 session).  These efforts as well as those of the nascent Ten C’s Project (more to come) are the counter to having no insurance response, or inconsistent, impractical indemnity programs that cannot apply as designed.

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Insurance- the great water balloon- squeeze here, bulges there

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Insurance is not a new business, but its functionality and appearance to the public may be in the post COVID-19 world. Plenty of thought is being given to the future of many types of insurance cover, its underwriting, distribution, and claims, etc.  But what about the ‘right now’ for insurance lines during COVID-19 operations?  Insurance is a global $5 trillion business, and while there are sectors that will be depressed, business marches on and so does insurance cover. So what factors may be affecting lines of cover, and what is the outlook going forward in 2020?

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’.

Without question 2020 will be a down year for global GDP, with one estimate supporting an overall decline of 2.4% (Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP .)  Will insurance premiums decline by that amount, more less, increase?  It’s certain that the global economies will continue to require risk management. Having mandated shut downs does not allow for shut down of insurance cover for a business; liability remains something for which protection must be maintained. Motor cover has been shown to be less important by the mile, but still mandated in most jurisdictions.  The thought process carries on, and the process seems a good exercise for us this week, perhaps will generate some thoughts and discussion.  I’ll lead off, give my 2p and you can chime in.

Business Interruption

We’ll get the obvious cover out of the way.

COVID-19 has exposed business interruption cover as the factor no one knew that everyone needed.  There will be two main efforts for BI- litigation for those who insist their policy included it, and looking for purchase for those who know they will need it for the next pandemic. Government pressure for mandated cover (if successful) for BI would make all arguments moot- the BI response would cripple the industry for all covers.  As for availability of BI cover that addresses pandemics? A sea change for BI cover would be needed to exempt the cover from needing a covered physical loss, and removal of exclusions (or establishment of endorsements) related to pandemics. Oh, and the pesky needs for capacity, underwriting understanding, planning for claims, etc. Nothing available soon, at least in an indemnity product.

Two interesting related facts- Marsh and Munich Re had offered pandemic cover- Pathogen Rx as recently as Fall, 2019, but had little demand for the cover. And Amsterdam’s DGTL Festival ‘accidentally ‘ had event cancellation cover for pandemics due to an admin error by the organizer’s staffer who checked off a box for pandemic in error .  A $2.3 million error to the good.

Workers’ Compensation or Employers’ Liability

The cover that is a looming monster due to potential latent effects of COVID-19 being contracted after businesses begin to reopen. The WC cover in the U.S. while slightly differing state to state in large part will afford cover for employees who claim contracting the virus on the job. There’s not a heavy burden of proof so medical costs and loss of wages will accrue to the WC policies- all new peril costs for the systems.  India has similar potential for excess costs, the UK’s Employer Liability cover that mirrors WC a little will be limited for severity but will have frequency effects. For all jurisdictions there will be an expense increase as WC claims are cumbersome and heavily involved in unstructured data.

Business Owners/General Liability

If fewer feet are through the door there is less exposure to claims, so this cover will be a function of the length of shutdowns. What will affect the liability portion will be allegations of customers claiming COVID exposure and those businesses that are not careful and organized in their operations regarding safe methods and clear notices to customers may be higher frequency targets for lawsuits. And in similar fashion to WC and BI claims, handling the claims will consume adjuster production time. Carriers will be less able to simply deny/repudiate claims as regulatory oversight will be heightened. The UK’s FCA has opined that while it’s not the regulators place to determine cover, the carriers had better be thorough and prompt in determining cover and making payment where warranted.  The post-COVID environment would be an unfortunate place for a carrier to engage in coverage shenanigans.

Motor/auto

This cover has been the poster-child response cover for carriers in recognition of less service frequency needed, fewer claims, and the need to rebate premiums due to the reduction in exposure. Many carriers have taken those steps in handing premiums back or establishing forward looking credits (summarized well here by Nigel Walsh. )

An aspect of significant reductions in claim costs will be reduced loss ratios (surely a 1/1 rebate will not occur), but absent significant reductions in cost structure one might expect increased expense ratios due to earned premiums be reduced by rebate amounts.  It’s a big water balloon, isn’t it?

Property/Homeowners

Might just be a push- higher occupancy periods to detect issues sooner, but also higher occupancy rates to task mechanical systems and prompt sudden failures with ensuing damage.  No rebates offered quite yet, but one is never surprised.

Credit Risk

The ability to pay invoices will be hamstrung across many business sectors and severity concerns are already transmitting through to reinsurance products focused on same, and hedge vehicles have had the elevated risk priced into their trading prices already. Another form of credit risk- supply chain activity- will experience fits and starts as suppliers have reservations about purchasers’ ability to pay, and associated insurance costs will increase.  More water balloon action.

Mortgage default risk

Seems intuitive- higher unemployment, gradual recovery, delayed benefits flowing from the government, and those who live month-to-month will have less ability to pay mortgages, both individuals and businesses. Artemis.bm indicates approximately $9 billion in ILS/bonds related to mortgage default risk; combine that volume with the significant drop in the EurekaHedge ILS index during the month of March and while the data are not directly correlated they are related and suggests one’s pause for thought.

Health insurance will be left out of the discussion- that is the wild west in terms of severities prompted by COVID-19 treatments. The corollary however is that elective surgery has been curtailed as has regular health oversight, both high costs for insurers.  Combine the assistance governments have been providing and health insurer positions may not be as bad as one would expect. May not.

Reinsurance has little exposure to COVID-19 and so far pricing has been favorable for renewals and new placements based on market factors for those lines, see an example reported by SCOR here .

BIG water balloon, insurance.

The industry also must keep a weather eye on the next occurrence of systemic risk, including a pandemic, and the response would not serve well if it’s a fully government funded program. Too slow, inefficient, needlessly expensive and would overlook strengths the insurance industry and capital markets would bring. All the players affected by and influencing risk management need to work to collaboration- would make all the lines of cover more stable. #TenCsProject

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The best product insurers provide is empathy. It’s been missed in COVID-19 response.

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Strategy sessions begin now for the insurance industry- addressing coverage gaps, policy forms, staff utilization, remote working methods, customer engagement, scalability of digital methods, virtual claim adjusting techniques, parametric products, and business interruption cover among others, and the big challenge of the insurance world- systemic risk.

 And the big, big elephant in the room- selling empathy as a key deliverable.

 Outside of health cover being broadened in most countries, there are few COVID-19 positives the insured public have seen recently from the insurance industries, and several negatives.

How to avoid repeating the COVID-19 outcome?  Learning starts now. 

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’.

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Late December 2019 into early 2020 there were indications that business interruptions would become a concern for commercial customers operating in China.  The city of Wuhan was quarantined by the end of January, the Hubei Province by mid-February, Starbucks closed branches in the immediate coronavirus outbreak areas by mid-February, hotels and non-essential businesses closed shortly thereafter.  Global supply chain partners became aware of the COVID-19 problems, the effects on normal business became clear to all, as were the concerns the outbreak would spread into other parts of the globe.  Risk managers would have been examining their portfolios and projecting financial effects from what was and what probably would be.

At that time there was little being reported regarding the greatest insurance exposure- business interruption.  The cover was surely being considered as Claims Pages published  “Many Global Firms, Excluded From Epidemic Insurance, Face Heavy Coronavirus Costs,” on January 29.  Carriers were moving into defensive postures since BI losses were surely to be claimed, and the financial breadth of global BI while not certain at the time, would have been anticipated to be in the billions (now known to be in the trillions of dollars.)

In knowing that in most cases BI claims would be found to have no coverage carriers simply planned the defense- less said seemingly, the better.  No one carrier (or the industry) could have anticipated a pandemic, but in the post-SARS and post MERS insurance environment there were clear actions taken by carriers to exclude pandemics or disease outbreaks from business cover, absent specific endorsements. Additionally, the industry-wide expectation of no need for financial protection from an outbreak is found in the fact that little or no reinsurance for pandemics existed at the onset of COVID-19.  That is not wrong, that is simply traditional risk management.  Where insurers, governments, and insureds went wrong was not having alternative paths in place to deal with an outbreak, and for insurers, not taking a more public, empathetic position for their customers.

This quotation from Lombard Opinion Editor Kate Burgess in the Financial Times hits the sentiment well ( “Insurers show we are not in this together”):

“A look in Lombard’s crystal ball reveals three possible outcomes of turning a deaf ear to reputation risk: first, customers will ask what’s the point of insurance if it doesn’t pay out at the time of greatest need. Many will self-insure. Second, politicians will threaten to force insurers to pay up. Already US state legislators and lawyers have threatened to force the payment of virus-related claims. Third, businesses in extremis will band together to launch class actions.”

Indemnity models for pandemics remain a non-starter for P&C products; simply too difficult to rate, and if rated, too expensive for those who might choose the cover.  But that does not preclude insurers from recognizing a need to help.

A timely posting by Dr. Marcus Schmalbach speaking on alternative risk management techniques cites parametric products as an apt option for systemic risk, mentioning this key phrase:

“Parametric insurance is based on inclusion rather than exclusion.” 

Indemnity insurance models are generally tied to proof of loss, estimated values, etc., all time consuming and processing heavy lifts, and subject to what is NOT covered.  Considering parametric options for the next pandemic allows an agreed payment based on an agreed, readily measured trigger (index), and fully transparent policy expectations.  All that’s needed for payment is the index being reached, all the processing can be automatic, even leveraged through distributed ledger technology for transparency among the parties.

Keep in mind- parametric products will not satisfy all costs as an indemnity model/policy might, but parametric products can fill the immediate need gap.

That’s a big start to what to do next time, and other thoughts:

  • There can be global efforts to build catastrophe vehicles (as have been discussed in prior articles.)
  • There can be carrier outreach that simply serves as information and advice.
  • There can be collaboration among carriers, government agencies, and legislatures to ensure focus is not lost between COVID-19 time and the next pandemic or other systemic risk occurrence.
  • There can be learnings to get in front of disasters in lieu of efforts to hide behind policy provision walls.
  •  There can be empathy expressed early and often.

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

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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’.

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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.

 

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

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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.

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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.

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Addressing some symptoms of insurance issues, and not the underlying causes?

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There’s an odd contradiction in some of what the insurance industry does; the industry is built on predicting risk and strategizing risk sharing, yet in many ways it is victim of knowing its own concerns and reacting to and pricing the reaction, and not working to mitigating the effects of the outcomes.  And in at least one case looking to backfill its model to fit corporate strategy and perhaps not customer choice.

 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’.

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Backfilling or buyer’s remorse?

Allstate Insurance (US P&C carrier) recently announced its digital insurance brand, Esurance, will be discontinued as part of Allstate’s migration into being an omnichannel carrier where customers have options under one access point/model for agency based or digital insurance acquisition and service.

Looking back to 2011 with Esurance being a $1 billion acquisition by ALL wherein the company’s CEO announced, “Allstate is uniquely positioned to serve different customer segments with unique products and services,” said Thomas J. Wilson, Allstate’s president, chairman and chief executive officer. “This transaction provides immediate incremental growth in customer relationships and makes Allstate the only company serving all four major consumer segments based on their preferences for advice and choice.”

Appears that ALL figures customers in 2020 expect only one access point that will provide purchase options.   Here’s the thing- Allstate had internal rules that inhibited customers from switching agents and/or internal brands, not external barriers; this change will reportedly alleviate the ALL system problem, and empower agents to better serve customers (per leadership and aligned with a previously announced commission decrease) as ALL migrates into being an insurance technology company.  But what of the 1.5 million Esurance policyholders who consciously chose the Esurance model, and may balk at being tied in with the legacy brand?  And, will marketing costs truly be saved if digital customers still need targeted messages?  It’s certain that Allstate’s advertising partners will create a clever omnichannel ad campaign, but legacy brand is legacy brand, and buying culture is buying culture- can ALL be a cleverer digital carrier under the parent name than was Esurance?  Additionally, will rolling the Esurance policies into the parent change how staff handle claims?  Perhaps, but the effects of several years of underwriting losses for the Esurance PIF will not disappear simply because those claim customers are now called Allstate customers.  Would it have been a more direct action to fix the Esurance claim handling issues? And what does this move in combination with centralizing customer service away from agents suggest for the agency model?

 

Maybe a good idea earlier in the finance value chain?

Swiss Re announced this week the placement of US $225 million in parametrically triggered cat bonding for Bayview Asset Management’s MSR Opportunity Fund, covering mortgage default risk for Bayview’s loan portfolios in the states of California, Washington, Oregon, and South Carolina.  Bayview does manage ‘credit sensitive’ loan portfolios and derivative funds that include packaged mortgage portfolios, so a parametric product is an immediate hedge in the case of an event that meets the USGS survey index associated with the bond.  Seems a suitable move for the management company as it does not have direct ownership of properties but does have exposure to indirect loss if there are mortgage defaults for its funds mix of loans.  Makes one think- loan originators would be doing the market a service if along with property insurance requirements for loans in the respective states there would be either an EQ insurance requirement, or even a parametric option for mortgagors in the event of a trigger occurrence.  Hedging ‘up the food chain’ is good for the portfolio manager but does not help address the potential cause of default.  Swiss Re also has the unique opportunity to market the parametric default risk products to primary mortgagees.  It’s a changing risk mitigation world.

Problem hiding in plain sight

First California, now Australia in the news due to property owners encountering challenges with property underinsurance and unexpected increases in property repair costs.  These concerns are not new and become front burner issues each time a significant regional disaster occurs, always attracting the attention of those who sit at the head of the political insurance table, the insurance commissioners.  California’s commissioner enacted a moratorium on policy cancellations in brushfire areas (1 million property owners involved), and Australia’s Treasurer Josh Frydenberg recently asked Aus property insurance carriers for detailed information to help the government and population better understand where insurance recovery efforts stand.   Not Dutch boys with fingers in the dike, but certainly ex post actions for circumstances that pre-existed the respective regions’ disasters.

At least in California the primary drivers of the problem are property owner valuation knowledge (or lack of it), ineffective underwriting valuation tools, policy premium and market share competition driving carrier lack of enthusiasm for change, and unpredictability of post-disaster rebuilding costs. Also- misconception on the part of the public- few policies (close to zero) include wording of restoring to pre-loss condition, or replacement with like kind and quality.  The reality of the underinsurance problem is that there is now a de facto rise in insureds’ ‘deductibles’ after a disaster due to inadequate coverage limits. The ‘deductible’ effect is mitigated by insureds employing personal property settlement proceeds in the dwelling rebuild costs, but all in all it’s a relative fools’ game.  The worst effect is the extreme hardening of the property insurance market to the point where dwelling insurance becomes unavailable and/or unaffordable. The easy fix is better upfront estimation of rebuild costs, but even with that there is then a problem for carriers- the marginal premium increase suggested under current methods in moving from a $500K limit to a $750K limit is far less than a comparable change from $250K to $500K, so is there an overarching lack of motivation to raise coverage limits?  An unexpected related potential effect for carriers- earlier triggering of reinsurance treaties due to the weight of maximum losses and lessening of rei appetites for renewals under existing agreements.   Without question structural changes (no pun intended) are needed in property policy valuations and underwriting for areas where the frequency of regional disasters is high.

*Contrarian viewpoints of an industry observer, not to be confused with that of mainstream press, and presented in the light of knowing that there are many forward-thinking players in the industry who will work to lessening the effects noted above.

#innovatefromthecustomerbackwards  #newinsurancebalance

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Is Lack of Trust a First Order Function in Narrowing the Insurance Protection Gap?

image The Geneva Association released an ambitious discussion of trust and its effect on insurance transactions, particularly in the perspective of well-known ‘protection gaps’ that are pervasive across many lines of insurance within mature economies.  Is, as Jad Ariss, Association Managing Director notes in the publication’s foreword, a “lack of trust fundamentally impeding insurance demand,” […]

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