The 2012 AAIS Main Event program was certainly timely--eerily so, you could say, as the lead speaker flew out of Oklahoma the very day severe tornadoes touched down in that state.
The theme of the program was "Seeing Your Way Through," intended to suggest that executives needed to steer their companies through turbulence--literal and metaphorical--in the years to come.
Over the course of the conference, attendees honored the man who has seen AAIS through decades of changes and challenges: Paul Baiocchi, CEO (pictured), who will retire at the end of 2012 after 37 years with AAIS, 25 of them as president and CEO.
AAIS Chairman Christopher Taft, president and CEO of Preferred Mutual Ins. Co., New Berlin, N.Y., said in his chairman's report that, "under Paul, AAIS has been devoted to its customers first, last, and always, and the industry is better off for his years of service."
A separate report is available on AAIS-specific announcements, including Paul's comments and a product update. There is also a separate report on the Main Event's inland marine session.
Recent tornadoes not necessarily a 'new normal': Weather expert
As bad as their human and financial toll has been, the unusually frequent and severe tornadoes recently seen in the U.S. are not necessarily the sign of a "new normal," according to John Ferree, severe storm services leader for the National Weather Service (NWS).
In his address to the Main Event, Ferree said recent frequencies of tornadoes do not result from unprecedented climatic conditions, but have been seen before in 20-40 year intervals.
Tragically, however, the deaths that resulted from tornadoes in Tuscaloosa, Ala., Joplin, Mo., and hundreds of other communities in 2011 and 2012--five in Oklahoma a day before the Main Event opened--were something most observers believed were in the past.
"There were a lot of people in our business who thought they would never see that again," Ferree said.
In his remarks, Ferree noted that the experience of 2011 demonstrated how difficult it still is to predict major storms and manage their impact.
"On April 27 (the day of the deadly Tuscaloosa tornado) everybody expected a big day (of tornadoes) and they got a big day," he said. "On May 22 (when a tornado devastated Joplin), that was the only big tornado that day."
Climate forecasting continues to improve, Ferree said, with scientists now able to analyze sunspot activity and other types of "space weather" for its impact on the earth's weather. With new sophisticated weather modeling techniques, "we will be able to predict a storm before it forms in the atmosphere."
Ferree added, however that improved weather forecasting is no substitute for intelligent land use, building, and safety practices in preventing loss of life and property during tornadoes. He emphasized the importance of "safe rooms" on lower levels in limiting the number of fatalities during a tornado. Safe rooms were a major factor in avoiding a single fatality during a severe April 2011 tornado in St. Louis, he said.
Data, technology, government acceptance make private flood coverage a possibility
"In many parts of the world, flood is a standard peril or insured by many [private] companies," Andrew Castaldi told attendees at the AAIS Main Event.
Castaldi, head of Swiss Re's natural catastrophe team for the Americas, then explained why it may be time for U.S. property insurers to consider writing private flood coverage.
For one thing, insurers accustomed to hearing of the financial distress of the U.S. National Flood Insurance Program (NFIP) may be surprised to learn that many of its accounts perform well from an insurer's point of view.
"If you look at the average flood losses [under the NFIP], they range from 10-20% of the limits purchased," he said. "That's not too big. If you look at only [accounts exposed to] rising water, and not velocity-driven water (storm surge), average losses are less than 10% of limits."
The structure and pricing of federal flood coverage creates many opportunities for private carriers to "cherry-pick'' the better risks, said Castaldi, and the federal government won't stand in their way--as long as private insurers don't compete to write flood as a single peril.
The opportunity, said Castaldi, comes from the fact that the NFIP charges every account in a flood zone the same rate, even though risks in different locations within a zone have different levels of exposure to flood loss. (NFIP rating does distinguish among structures with different characteristics, such as walk-in basements, no basements, crawl spaces, and below-grade construction.)
"Would you expect to charge someone living in Miami Beach the same as someone living in Albany, New York for their wind policy?," he asked rhetorically. "You wouldn't, but the NFIP is [doing essentially the same thing], and that creates an opportunity for some insurance companies."
"If you offer [flood coverage] to select risks that are not exposed to certain high hazards, you can probably be very, very competitive against the NFIP," he added.
At the same time, he said, providing some level of flood coverage in a property policy can prove to be very valuable to people who never expected they would need the protection.
"A large portion, 30%, of flood losses are actually in locations that are not considered to be flood threats," Castaldi said. "There is a significant chance for flooding even if you're not in a flood zone. So it's important that all insureds try to consider [covering] this peril."
Insurable
Although the flood peril has long been considered uninsurable, new data and technologies have emerged that allow insurers to identify flood risks they can take on.
Precise detail about the location of a risk is critical to underwriting flood coverage, Castaldi said. Two homes in the same neighborhood may have roughly equivalent exposure to wind, wildfire, crime, and other perils, but the slightest difference in elevation can give them dramatically different exposures to flood loss.
Extremely precise data on topography is becoming available, he said. "NASA has approached one of our partners and said it can provide data that tells you the elevation every two centimeters."
"We have extensive data on precipitation," he added. "We know hurricane tracks. We have more than 4,500 river gauge stations that tell you the water levels on a daily basis. We have digital elevation models that show where the drainage is, and where the water will run.
"We have storm surge models that can predict where we would see inundation after a hurricane. You put these all together, and you have a model [for flood loss]."
Castaldi cited examples of several private carriers that are undertaking initiatives to insure flood in the private market. These include a single-state writer that wants to move its profitable NFIP accounts onto its own books, an MGA looking to provide private coverage in excess of NFIP limits, a foreign-owned company whose parent is accustomed to writing flood coverage, and others.
When asked how the NFIP feels about private companies "cherry-picking" flood risks, Castaldi replied that the NFIP accepts that it may become a small residual market of high-risk accounts.
"The government wants you to expand your writing of flood [insurance], not retract it," he said. "[Federal officials] recognize this and accept it. They also believe that, if a company starts writing more and more flood, and they start expanding that premium base, [private companies] might start eventually going into those areas of higher risk."
Catastrophe models only part of the risk management puzzle
Insurers can be disappointed with the results if they put too much reliance on catastrophe models and neglect important, fundamental components of risk management.
That was the message from Ryan Ogaard, senior vice president of model product management for RMS. Inc., in his address to the AAIS Main Event.
In recent years characterized by high levels of catastrophe losses, "there may have been a little complacency among some users [of catastrophe models]" Ogaard said. "Some users built their whole business around the model. A broader view of risk looks at the landscape beyond the individual cat model and the assumptions it contains."
"By necessity, when we build a cat model, it's 'one size fits all.' But, no matter how well we build a model, there's almost never a complete view of risk when using a cat model.
"We know there are certain things cat models don’t do. We don't have models for [loss adjustment expense]. We don't have [models for] debris removal, mold, beach erosion. Those sorts of things are simply not there.
"Getting a complete view of risk is emerging as a best practice in enterprise risk management. You'll be quizzed by S&P and Best about this," Ogaard said.
"We're talking about painting a whole picture of risk. Can you take the same metrics you're using to understand your cat loss, and follow them into underwriting, pricing, and risk selection? Is that a consistent process?"
Aging and diversity to characterize insurance market of the future
When people are asked to think of a large population group, "grandparents" is probably not the first thing to come to mind.
But, consider this: While there are approximately 50 million people labeled "Hispanic" in the U.S., according to demographer Peter Francese, but there are 65 million grandparents.
The importance of grandparents in an aging society was one of several themes discuss by Francese in his remarks at the 2012 AAIS Main Event.
"Baby Boomers are still your bread-and-butter," Francese told the group, "and many of them are grandparents."
Grandparents are increasingly caring for their grandchildren, either financially of directly, and that role conditions their outlook toward life and the companies they do business with.
"As a parent, you'll do a lot for your child," Francese said. "As a grandparent, you'll do anything for your grandchild." Understanding the needs and motivations of grandparents can be the key to success because "grandparents are loyal and will recommend your company to others."
Of more direct interest to P/C insurers, however, is the fact the Baby Boomers have increased needs for insurance due to their unusual propensities to own second homes and to operate a business from their home, even in their so-called "retirement."
"Baby Boomers are the biggest buyers of vacation homes," he said, "and new business formation among semi-retired Baby Boomers is a rich source of new customers for your business."
'Millennials'
At the other end of the spectrum, Francese said that "Millennials," young people age 16-35, constitute a potentially huge but still latent market.
Millennials are more numerous than the Boomers, Francese noted, and they are much more ethnically diverse.
Looking out at a mostly white, middle-aged audience, Francese said "Your customers of tomorrow are (ethnically ) not like your family, your friends,and your co-workers.
"Offices in America are rarely that diverse," he said. "What you look at every day is not representative of America."
Yet, those Millennials have had a slow start economically during the Great Recession.
As a result, "the rate of household formation over the past three years has been about half the rate of previous years," Francese said. This leaves homeowners insurers, in particular, with a market growing more slowly than most P/C professionals today have ever experienced.
In addition, Francese said recent census numbers reported record low percentages of Americans moving to a new location, a sign that conditions in the the job and real estate markets had locked many people into their homes.
Apart from the growing ethnic diversity, Francese expects other socio-economic trends to revert back toward normal levels in a few years, and cautioned his listeners against giving too much credence to human interest stories that supposedly exemplify trends that often are not trends at all.
Francese says he is alarmed by one trend, however: A decline in the proportion of men attending college. According to Francese, women now comprise 53% of all college students. Among men age 30-34, only 28% have attended college.
"Fewer and fewer men have chosen to go to college," he said. "They're consigning themselves to a life of poverty."
Insurers need to respond to changes in homeowners market
The real estate market may be sluggish for years to come, but people still need a place to live, and homeowners insurers should update their programs to reflect that, said Linda Brobeck, principal of Brobeck Analytics Consulting, in her address at the AAIS Main Event.
The slowdown in home sales and in the percentage of people moving coincides with a corresponding increase in remodeling activity. According to Brobeck, the Builders Residential Remodeling Index hit its highest level in more than eight years in January 2012.
"People want to stay put," she said. In response, property insurers need to be increasingly vigilant about maintaining accurate valuations of insured locations and adequate levels of insurance to value.
That won't be easy, however, because of a growing gap between declining home values and stable or increasing costs of reconstruction. Homeowners who've experienced a loss of equity and are seeking to save money will be more inclined than in the past to question their building property limit.
Also, insurance valuation efforts in the recent past were aided by refinancing activity, which generated up-to-date appraisals and inspections, and served as a signal for possible remodeling activity. Home equity lending has slowed since the real estate collapse.
The economic crisis is expected to drive home ownership rates down from its historic high of 69% of households to levels last seen in 1993-94, Brobeck said. It follows that a growing percentage a American households will be renters for some time to come.
"A lot of companies have not focused on maintaining their forms and rates for renters," she said. They will now have to refocus on doing so.
The best news for homeowners insurance, according to Brobeck, may be the widely and rapidly growing range of automated features that are making homes safer with less exposure for insurance loss."