AAIS had a strong turnout for its 2009 Main
Event conference, and interest is strong for the 2010 event, April
11-13 at the Sanibel Harbour Resort & Spa in Ft. Myers, Fla.
Below is a description of some of the 2009
conference sessions.
Howard
Mills has some good news for property/casualty insurers concerned about
the fate of their industry under regulatory restructuring proposals in
Congress.
According to Mills, former insurance
superintendent in New York state, now chief advisor for the insurance
industry group of Deloitte LLP, congressional Democratic leadership
acknowledges that regulatory restructuring will take longer than
previously anticipated.
For now, at least, regulation of P/C
carriers appears to be a secondary consideration to identifying and
managing systemic risk to the global financial system.
In his address at the AAIS Main Event,
Mills said that "discussion of systemic risk slows down the movement of
regulatory reform. It gives Congress something to chew on.
'The appetite of the federal
government for regulating insurance is very broad but very shallow," he
continued. "Congress does not want to get into the weeds of insurance
regulation."
If that's true, the bill recently
introduced to create a federal insurance charter and national regulator
faces an uphill battle. The dynamics of deliberations could
change, however, for several reasons.
One reason, according to Mills, would
be if a huge storm were to collapse what he called the "house of cards"
set up by Florida to control insurance rates and use mandatory
assessments to fund hurricane reinsurance.
Some experts believe Florida's
state-run system is under-reserved for a major catastrophe, and that a
huge hurricane there could trigger losses with systemic impact.
"The entire Florida system is built on
the assumption there will be a federal bailout if it collapses," Mills
said. He predicted that would set off an intense debate whether the
costs of living in storm-prone regions should be subsidized by people
outside those regions.
In addition, there are renewed
attempts to repeal the McCarran-Ferguson Act, which grants insurer a
limited antitrust exemption for sharing premium and loss data and
developing standardized policy forms.
If McCarran were repealed, P/C
advisory organizations might find their activities curtailed or subject
to regulation by the Federal Trade Commission.
"Repeal of McCarran-Ferguson provides
a good sound bit when members of Congress have nothing else to offer,"
Mills said. The act's provisions had nothing to do with the nation's
financial crisis, he said, and its repeal "would accomplish nothing of
any benefit.
"At the end of the day, I don't think
you'll see a repeal of McCarran-Ferguson."
Nonetheless, Mills warned his audience
that congressional debates are at a point where "good politics leads to
bad policy."
Referring to institutions that have
received federal bailout funding, he said that "it's good politics to
bring these companies up before a congressional committee, but is that
really going to help them recover and give the government's money back
and get the government out of their board rooms?"
People
throughout the U.S. are asking if recent moves by banks to reduce limits
on unsecured credit will adversely affect their credit scores.
The same questions pertain to
credit-based insurance scores, now used almost universally by
property/casualty carriers as a component of their personal auto and
homeowners insurance pricing.
Many people would be surprised to
learn that credit scores and credit-based insurance scores have improved for
most consumers in recent months, according to Lamont Boyd, director of
insurance market scoring for Fair Isaac Corporation, a leading developer
of predictive scoring.
"The vast majority of people have seen
their scores increase (improve)," Boyd said in his address to the AAIS
Main Event. "It would take a lot of deterioration in a lot of scores to
have a substantial reduction in scores."
Credit for that goes, in part, to
consumers themselves, who are becoming more prudent with credit. "Cautious, conservative people are
becoming even more so," Boyd said.
Responding to skepticism in the media
and among regulators about the validity of credit-based insurance
scoring (CBIS), Boyd noted that numerous studies, including one
conducted by the Federal Trade Commission, found CBIS scores to be
"objective tools" that "benefit most consumers."
Boyd noted that the CBIS developed by
Fair Isaac and used by most carriers take no account of a consumer's
race, religion, age, gender, marital status, or other factors that would
make for unfair discrimination.
To the surprise of some, CBIS also do
not take into account one's income, occupation, employment history, and
other factors that impact or reflect a person's economic condition.
According to Boyd, a person's
credit-based insurance score is built upon five principal
factors--payment history, outstanding debt, length of credit history,
pursuit of new credit, and credit mix--that most consumers can control.
How
do you account for what you don't know?
That's the question facing insurers as
they consider emerging new exposures in underwriting, said Gerry Finley,
senior vice president for casualty treaty underwriting for Munich Re
America, in his address to the AAIS Main Event.
In contrast to the typical review of
emerging exposures, Finley laid out a
conceptual framework for integrating what a company doesn't
know about potential new causes of loss into the management of its
books of business.
Odd as it seems, Finlay suggested that
prudent insurers won't wait until they've heard of a potential new
exposure before they begin reserving for them.
"These are exposures on our balance
sheets right now," he said. "This accumulation of reserve risk
threatens our companies. If we haven't reserved for
these exposures, and they become paid losses, it becomes a threat to
solvency."
To illustrate, Finley reminded the
audience that asbestos was once regarded as a "wonder mineral that made
the Industrial Revolution possible."
The challenge for insurers is to be
constantly monitoring economic, social, legal, and technological changes
to identify latent loss exposures and project the frequency, severity,
and extent (through lines of business) of the losses they might cause.
Whereas it was once difficult to find
sufficient information on emerging exposures to underwrite and price
them, today, said Finley, "the challenge is ferreting through all that
information to determine what's relevant, what really has meaning."
Thanks
to the recession, property/casualty insurers may have different reasons
for embracing predictive analytics, but they are embracing it
nevertheless.
According to independent
consultant Mark Gorman, survey research of P/C executives indicates that
companies that initially utilized analytics to increase market share
have shifted their strategic orientation to protecting existing books of
business.
However, that does not imply
that interest in analytics is flagging.
"The debate is over," Gorman
told the audience at the AAIS Main Event. "This is now a given part of
how organizations, especially large organizations, are doing business."
In his presentation, Gorman
said that 70%-80% of P/C survey respondents have predictive analytics
projects underway for a range of specific applications in underwriting,
claims, marketing, and enterprise risk management.
According to Gorman, who did
the research in conjunction with Insurance Networking News, more
than 70% of respondents found it to be difficult or moderately difficult
to collect and prepare the data needed to develop predictive analytics,
to build and validate the models, and to implement the models.
Given the investment
required to implement predictive analytics effectively, Gorman said many
companies need to commit to a cultural change within their organizations
while they develop their analytics capability.
"Today, most insurance
organizations reward operational excellence," he said. "You are
typically paid according to the number of people reporting to you and
your span of organizational control."
In the age of analytics,
Gorman said that companies need to "start rewarding thought leadership,"
even though the importance of new ideas is much less certain and
discernible only in the long-term.
"Data mastery" is one of the
new buzzwords in insurance, but the term often means different things to
different people, said James Barber, sales director of property/casualty
warehouse solutions for Information Builders, in his presentation at the
AAIS Main Event.
To information technology
professionals, the term suggests the development and management of a
large data warehouse. To business executives, however, "data mastery"
suggests the identification and use of specific metrics that measure
company performance.
Successful companies, said
Barber, will develop a common outlook toward data mastery throughout
their organizations.
"The most frequent answer I
hear is that data mastery means empowerment," Barber said. "People are
saying, 'I want the data I need to make decisions.'"
After a corporate commitment
to data mastery is established, a company must develop and organize the
two principal elements that make up data mastery: Company data and the
personnel to analyze it to make decisions.
Too often, said Barber, once
business strategists decide on a data management strategy, they "throw
it over the wall" to IT professionals to develop a system, often without
adequate input from the professionals who would use the system.
Companies should carefully
weigh the costs of developing a proprietary data warehousing system
against those of purchasing one already built, in essence, by a vendor.
According to Barber, the competitive value of a proprietary system can
erode substantially over the time it takes to develop it.
Companies may be surprised
to learn, Barber said, that developing the "people skills" necessary to
achieve data mastery has often been found to far more challenging to P/C
carriers than the "data challenges."
