AAIS had a record turnout for its 2008 Main Event conference, April 20-22 in Ponte Vedra Beach, Fla., and interest is strong for the 2009 event, April 26-28 in Half Moon Bay, Calif.
As usual, 2008 conference attendees had good things to say in their evaluations:
- “Keep up the good work. You guys do a great job.”
- “The format was excellent [and] the speakers were very good.”
- “I thought it was great and I don’t know how you could top this year’s meeting.”
- “The event was excellent. Good blend of topics. [Good] mix of high level view and business-specific breakout [sessions].”
- “The program is well-planned and the presenters are excellent.”
- “Absolutely a superb conference!!”
- “Great. Well organized.”
- “The format is very good and would be hard to improve on.”
- “Good meeting, good speakers, good topics.”
- “Another great event.”
- “Well worth my time.”
Do you know why the insurance industry uses a distance of five miles from a responding fire station as a standard benchmark in homeowners insurance rating?
It’s a holdover from the 1950s, said Jeff Kucera, consulting actuary in the Chicago office of EMB America, in his address to the AAIS Main Event on “The Growth and Evolution of Homeowners Rating Variables.”
According to Kucera, geographers in the 1950s estimated that the time needed for a typical fire truck to travel five miles equaled the time needed for a fire to reach the point of flashover, where a fire creates its own fuel and totally consumes a structure.
From that observation developed a standard feature of homeowners insurance rating that persists to this day, Kucera said.
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To compete effectively, property/casualty insurers need greater ability to segment and price risk without having their rating procedures become overly complex and burdensome.
AAIS is responding to that demand through a series of initiatives, said Deborah Summerlin, AAIS vice president of insurance lines, in the “AAIS Update” segment of the AAIS Main Event.
In her review of AAIS product development work, Summerlin said AAIS was developing greater rate refinement capabilities by providing more rating territories and more windstorm/hail deductible options, and introducing separate rating by peril.
To cite one example, Summerlin said, AAIS recently modified the earthquake rating information in one state to provide 2,800 “price points.”
“Our new earthquake rating information reflects loss costs for 28 ZIP-based territories, two construction types, 10 levels of coverage, and five different deductible options,” Summerlin reported.
The ability to develop and support such rating refinements is greatly enhanced by AAIS’s recent agreement with EQECAT, one of the nation’s leading catastrophe modeling firms, to license software for modeling losses due to hurricanes, tornadoes and hail, earthquakes, and fire following earthquakes.
“With the EQECAT catastrophe model in-house, modeled data can be produced on demand and we can approach the need for more refined rating information from a variety of directions,” Summerlin said.
To prevent having rating refinements result in unwieldy pages of loss costs, AAIS is moving forward on the implementation of factor rating. Summerlin reported that a Businessowners filing in Louisiana, now underway, introduces a factor rating system that provides separate base loss costs and relativity factors for wind/hail, other perils besides wind/hail, and liability.
To date, Summerlin reported, AAIS had already received approvals from more than 40 states for the expansion into five classifications of the “protected” category of its simplified fire protection classifications (“protected,” partially protected,” and “unprotected”).
She also said that the AAIS inland marine team has introduced use of the Modified Mercalli Intensity Scale (MMI) into the earthquake rating procedure for the Builders Risk class of the AAIS Inland Marine Guide. The MMI is a scale that projects the likely intensity of earthquakes in a region and the damage likely to occur to an insured structure.
Looking ahead, Summerlin said AAIS was preparing to file a comprehensive revision of its Boatowners Program in the spring of 2008.
Looking further ahead, Summerlin reported that AAIS is developing an experience rating plan to be introduced under its Homeowners Program. The plan, scheduled to be filed in 2008, will provide carriers with premium credits and debits based on an insured’s claim history and tenure in the insured residence, with an additional credit available to insureds with no claims.
Also on the horizon is the introduction of a farm commercial liability program designed for insuring large-scale farms and written as a monoline policy or packaged with a property program, including the AAIS Agricultural Output Program.
“Our vision recognizes the growing importance of ‘micro segmentation’ in property/casualty product development,” said AAIS President Paul Baiocchi at the AAIS annual meeting held in conjunction with the Main Event.
“To help companies price more precisely and compete more effectively, we know that we must help them segment risks into increasingly smaller classifications, and we must help them develop new risk variables,” Baiocchi said. |
That anecdote summed up the message of Kucera’s presentation, which was that homeowners rating has evolved from reliance on a highly simplified selection of factors based primarily on fire loss to an increasingly complex mix of factors reflecting property and liability exposures.
According to Kucera, about half of all companies writing homeowners insurance today, accounting for about 85% of the premium in the line, utilize some form of predictive modeling to rate their policies.
“All the large companies have accepted this,” he said. “It’s not an option. It’s the price of being in the game.”
Kucera credits Progressive Insurance’s brief foray into homeowners insurance with helping to shake the industry’s strict reliance on simplified rating plans.
According to Kucera, Progressive introduced the number of occupants and the age of named insured as rating factors, some of the first attempts to introduce factors that captured information on the occupants of a residence, and not only its construction and protection.
Since then, companies have been incorporating new rating factors incorporating information on, among other things, the number of children in a household, the presence of animals, the number of years the insured has been in the residence, whether the insured is the original owner of a home, and the percentage of equity an owner has in a home.
Thanks to the growing speed and functionality of computers, use of such variables has been combined with sophisticated analysis of loss costs by peril to produce ever more refined homeowners rating.
For example, said Kucera, one company determined that people who had animals on their living premises generally had higher loss costs for all types of loss, not just liability loss.
“For people with pets, all perils perform worse,” he said.
In addition, major carriers are researching variables that correlate with the profitability of a policy, even if they don’t have a direct connection to loss ratios.
Along this line, companies are looking at factors that are likely to increase the longevity of a policyholder account. The longer a household is expected to remain a customer of a carrier, the less important it is to recapture acquisition expenses in the early years of a policy.
“You’re going to start seeing a lot more of this in rating,” said Kucera. “There is more emphasis on retention.”
“The customer who is going to stay with us 15 years is a lot more valuable than the customer who is going to stay with us two years,” he said.
In light of the innovations underway in homeowners rating, Kucera told the audience that they become involved in identifying and developing new rating variables.
“Don’t get hung up on the fact that you might not do it perfectly right out of the gate, “he said.
A free market in insurance pricing, monitored by a streamlined, state-based regulatory system, is the best way to relieve property insurance problems in distressed markets and keep coverage available and affordable throughout the U.S., according to members of a CEO panel at the 2008 AAIS Main Event conference.
In his opening comments as a panelist, Robert Wadsworth, chairman and CEO of Preferred Mutual Ins. Co., New Berlin, N.Y., said that the P&C business has consistently responded well to natural catastrophes, and noted that an estimated 95% of claims from Hurricane Katrina were settled within a few months of that historic disaster.
Given that record, Wadsworth said, it is not necessary for the federal government to create special disaster pools, at least for perils currently insured under standard policies. “If you allow companies and reinsurers reasonable freedom to operate, you will see capital flow into this industry,” he told attendees.
Robert Restrepo, chairman and CEO of State Auto Insurance, Columbus, Ohio, agreed, but urged the insurers in attendance not to simply retreat from distressed coastal areas. “Collectively and individually, we can’t go running away from the coasts,” he said. “If we are going to be responsible risk partners, we have to work with the state wind pools.”
The prospect of a federal charter and regulator was put to the panelists, prompting some disagreement between Wadsworth and Restrepo. Wadsworth has served in the past as chairman of the National Association of Mutual Insurance Companies (NAMIC), which generally opposes a federal role in P&C insurance, and Restrepo has served as chairman of the American Insurance Association, which supports the idea.
“[P&C] insurance is a very state-specific business,” said Wadsworth. “To relinquish control to the federal government would not serve companies or policyholders.”
“Companies looking to expand want to have a choice [in charters],” Restrepo said.
Wadsworth and Restrepo were joined by Darin Kath, president and CEO of Jewelers Mutual Ins. Co., Neenah, Wis., who commented that the growing importance of Indian firms in the jewelry business was one example of how insurers needed to develop the ability to insure exposures globally.
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Stuart Henderson, president and CEO of Western National Insurance Group, Edina, Minn., is the newest member of the AAIS board of directors, elected at the AAIS annual meeting held in conjunction with the AAIS Main Event, April 20-22 in Ponte Vedra Beach, Fla.
Henderson replaces Thomas Claude, vice president and secretary of Pharmacists Mutual Ins. Co., Algona, Iowa, who stepped down from the board after serving seven years.
Other board members continuing on are:
- Roy Bubeck, president and CEO of Badger Mutual Ins. Co., Milwaukee, Wis.;
- Judy Jackson, president and CEO of NLC Insurance Companies, Norwich, Conn.;
- Darin Kath, president and CEO of Jewelers Mutual Ins. Co., Neenah, Wis.;
- Jeffrey Kusch, president and CEO of Austin Mutual Ins. Co., Minneapolis, Minn.;
- Jack Rader, executive vice president and COO of Farmers Alliance Companies, McPherson, Kan.;
- Thomas Rozema, vice president of underwriting for
Brotherhood Mutual Ins. Co., Fort Wayne, Ind.;
- James Sullivan, president and CEO of Co-operative Ins. Cos., Middlebury, Vt.;
- Christopher Taft, president and COO, Preferred Mutual Ins. Co.,
New Berlin, N.Y.; and
- Paul Baiocchi, AAIS president.
In his address at the annual meeting, Sullivan, the outgoing chairman of AAIS, said that "AAIS projects and initiatives show great progress toward achieving our organizational goals.
“Our strategic planning process has recognized the importance of providing AAIS member companies with more refined rating information,” he continued. “At this conference, we’ve heard how AAIS is implementing enhanced rating information, particularly through the use of catastrophe modeling software, revisions of the fire protection definitions, development of experience rating plans, and partnerships with outside resources and expertise.”
In the face of new challenges from arising from state and national politics, Sullivan said, “I am confident that the board and officers of AAIS will ensure that this association remains a viable organization providing essential services to its member companies and the industry in general.”
In his remarks, Baiocchi announced that AAIS would be debt-free at the close of the current fiscal year after paying off the cost of its Wheaton, Ill. headquarters, which opened in 2000.
“The new building we constructed eight years ago has turned out to be a great investment and is now a working asset for AAIS,” he said. (For more comments from Paul Baiocchi, see the conclusion of the “AAIS Update” report on page 28.)
“Because our expenses are under control, we are able to reinvest in AAIS operations. This investment includes contractual partnerships with information suppliers as well as substantial investment in our internal operations.” |
They were also joined by George Dale, former insurance commissioner of Mississippi, who said that repeated occurrences of major disasters raised the question whether people should be allowed to live in areas prone to loss. Dale noted that federal funding for relief in the Gulf States far exceeded that of other famous disasters, saying that, “You have been generous to the Mississippi Gulf Coast, and I hope we will be grateful.”
The panel was moderated by James Sullivan, president and CEO of Co-Operative Insurance, Middlebury, Vt., and current chairman of AAIS.
Catastrophe modeling is an “accurate but not precise” means of estimating insured losses from catastrophic events, according to Robert Healy, senior vice president of ABS Consulting, Oakland, Calif.,
which recently acquired the modeling firm EQECAT.
In an address at the AAIS Main Event, Healy explained to attendees that “cat models” are “probabilistic tools” that, despite their limitations, allow primary carriers and reinsurers to engage in a level of planning that would be impossible without the models.
“There are not enough exposures in an underwriter’s life” to replicate the predictive power of modeling, Healy said.
While insurers, public officials, and the general public complain that models are often “wrong” about the actual losses that occur during disasters, these complaints often ignore factors that are outside the control of the modeling firms, according to Healy.
Variations in claims practices and the quality of data are two of the most important limitations on the ability of modelers to produce precise predictions of disaster losses, he said.
“There are things that create fuzzy areas,” Healy said. “You make a number of sweeping generalizations to come up with an industry loss estimate.”
Regarding the question why the modeling process can produce so many variations among modelers, Healy said that: “There are so many moving parts in the models. Just changing a few assumptions can lead to different results.”
On the first day of the AAIS Main Event, attendees received a very bullish assessment of the prospects of a globalized economy. On the second day, they received a sobering reminder of one of the pitfalls of globalization: The products liability associated with hazardous imports.
While Michael Cox, chief economist of the Federal Reserve Bank of Dallas, spoke of the great potential opportunity for Americans in China’s modernization and growth, attorney Josh Greenbaum of the Philadelphia firm Cozen O’Connor reminded attendees that 98% of imported products that had to be recalled for safety and health reasons were from China.
Tracking the products liability for such products--and protecting one’s domestic insureds from claims--is a daunting process, according to Greenbaum.
To start with, it is very hard to track shipments unless a particular shipper has a regular record of importing over the course of a year, but in 2006, 45% of shipments were “one time” deliveries, according to data Greenbaum presented from the U.S. Customs and Border Protection Service. Another 35% of shipments are labeled “infrequent,” and only 20% are made by shippers who import on a “frequent” basis.
Even if you can track the route of a product, identifying and isolating a faulty component is the second daunting task. As an example, Greenbaum spoke of an imported telephone that had caused fires throughout the United States. “It was necessary to take it apart and determine where the injurious part came from,” he said.
Once the nature and the source of a damaging component is determined, claimants have a difficult task finding a foreign court to hear a case--leaving them more inclined to pursue a domestic manufacturer or distributor in a U.S. court.
“How do you get a particular company into a particular court?,” Greenbaum asked rhetorically. “Ultimately the problem is in holding the offending company responsible, without leaving the U.S. company holding the bag.”
The Hague Convention provides procedures for serving a complaint in a U.S. court to a company overseas, he noted, and there are various criteria for establishing that a foreign company has a sufficient U.S. presence to be sued in a U.S. court.
“The more control a foreign company has over the distribution of its product in the U.S., the easier it is to establish jurisdiction,” he said.
Even when U.S. claimants identify a guilty foreign supplier and win a judgment against it, Greenbaum reminded the audience that a judgment in a U.S. court is not automatically enforceable, as there are no treaties or agreements in place for the enforcement of such judgments.
In light of the legal difficulties associated with imports, Greenbaum encouraged the audience of insurers to tell their insureds to utilize the strictest due diligence and contractual provisions to protect themselves.
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Conference Report on the 
