Tag Archives: Best’s Review

The new ABCs: AI, Blockchain, and the Cloud

Insurance customers expect personalized, agile, and on-demand delivery from carriers nowadays. Insurers must keep up with technological advances and implement them to provide solutions that address these expectations. In her Best’s Review article “Mind your ABCs,” Milliman’s Pat Renzi explores why insurance companies must center their strategic initiatives on using emerging technology like artificial intelligence (AI), blockchain, and the cloud. She also explains how partnerships that feature diverse experts will see faster, smarter, and more successful disruption.

Life insurers and regulators prepping for principle-based reserving

The life insurance industry is preparing to implement a new reserving methodology, principle-based reserving (PBR), to help carriers produce better assumptions for the industry’s new range of products. “A customized approach,” an article in Best’s Review, quotes Milliman’s Karen Rudolph providing perspective on why PBR is needed.

“The evolution of PBR is a proactive response to the current statutory valuation design, which includes many regulatory guidelines meant to interpret the requirements. However, regulators find it difficult to stay in front of product design,” said Karen Rudolph, principal and consulting actuary at Milliman. “While it took a long time for PBR to come to fruition, it will provide a set of rules that accommodate future products.”

As with any change, insurers face several challenges related to PBR, like learning the new system and how to administer it. PBR will also push regulators to enhance their actuarial expertise. Karen and fellow Milliman consultant William Sayre discuss the steps insurers and regulators are taking in advance of PBR’s effective date of January 1, 2017.

The NAIC has launched a PBR Pilot Project with 12 companies, which will implement PBR in the same manner they would for actual PBR reporting and then submit their reports to regulators for review. The pilot is designed to shed light on the process for companies as well as regulators, Rudolph said.

“Companies were in a wait-and-see mode because there was skepticism that PBR would be adopted by the states,” said William Sayre, principal and consulting actuary at Milliman. “But now the industry is moving rapidly to get their ducks in a row. It is a resource-intensive exercise, but once they have those resources, it should become a routine exercise going forward.”

How can insurers enhance risk culture and governance control?

An insurance company’s overall culture consists of a set of subcultures. Experts within those subcultures make decisions differently. In his Best’s Review article “Culture Compass,” Milliman’s Neil Cantle explains why insurers need to approach modern business governance with less rigidity. He also describes how understanding culture can help a company empower its experts to make local decisions in harmony with established risk appetite and corporate values. This process produces an overall risk culture essential to the company’s governance framework.

We need to recognize that there is more than one valid perspective to be heard when deciding a course of action. Cultural Theory shows that four such views are always present: pragmatists believe that the world is uncertain and unpredictable; conservators believe the world is high risk; maximizers see the world as low risk and fundamentally self-correcting; and, managers know the world is risky, but believe it can be managed.

In conducting our work we want to ensure that each of these views is considered and debated, the surprising outcome being that the result of such a discussion is not a compromise, suboptimal for all, but rather will be a solution that actually works better for all parties. Creating a culture where this type of debate is acceptable is therefore an important, and often overlooked, part of the governance framework.

It turns out that culture is actually a much more important feature of our business than we might have thought—not just a nice-to-have after all, but actually an integral part of our control framework. When the board sets the risk appetite, it is establishing the tone for how business should be done. It must be clear what the objectives are and how you feel about the uncertainties associated with their delivery. By describing the types of risks that are to be actively sought, in return for a reward, those that are to be accepted and those that are to be avoided, the board is providing a set of guiding principles that staff can use when making its daily decisions about which actions to take next. In any situation, someone can ask: “Is this a risk we should be taking, and how much of it can we take?” Testing the likely consequences of the action against the risk appetite provides a way to move forward. The question also requires them to know what is going on more widely. Assuming the company has a finite appetite for risk, the answer to the “how much” part of the question requires you to know how much appetite has already been used elsewhere. This requires a culture that supports and promotes knowledge-sharing across department boundaries.

Safety bonus plans can wrap up workers’ comp claims

The inclusion of safety bonus systems within owner- and contractor-controlled insurance policies (wrap-up programs) may reduce workers’ compensation claims. In her article “Safety first,” published by Best’s Review, Milliman consultant Emily Allen explains how safety bonus systems function.

How might a bonus system plan work? Let’s take one example. If an owner or general contractor wants to reduce slip-and-fall claims, a per-claim, slip-and-fall allocation of, say, $10,000 would be applied to the subcontractor’s claim experience target (or expected claim level). If the subcontractor’s claim experience target was forecast at the program’s outset to be 10 claims but its actual claim experience turned out to be only six, the subcontractor would be paid 40% of the total available bonus.

The distributed bonus could be paid simply as cash or could be used to buy updated safety equipment, participate in training, research new safety materials, or any of dozens of other initiatives to improve safety. The bonus system would also allow for considerable flexibility in the establishment of the claim experience target and the method of distribution of the bonus based on an owner or general contractor’s relationship with individual subcontractors. The subcontractors’ adoption of bonus supported safety measures can translate into claim costs savings, not just in the following year but year after year, as safety continues to improve.

Using traditional actuarial methods, the claim experience expectation can be tailored to each subcontractor based on its individual historical loss experience. Developing a reasonable claim expectation—levels on which the subcontractor can improve but that do not guarantee a safety bonus—is critical to the success of a bonus program.

Geographic information systems can help insurers price flood risk

Insurers have been cautious about reentering the homeowners flood insurance market, which is due to high risks related to floods. In his Best Review’s article “High water mark,” Milliman’s Matt Chamberlain discusses the reasons behind the industry’s trepidation. He also provides perspective on how geographic information systems (GIS) can help insurers develop granular rating plans. Here is an excerpt:

There are several reasons why flood has been considered an uninsurable risk. First, flood is a localized peril; a distance of a few hundred feet, or less, can make a large difference in risk. This produces an information asymmetry, because the insured has a clear understanding of the local topography, while the insurer does not. The insured knows how far the house is from water, and whether it is on the top of a hill or if it is in a depression.

Insurers, on the other hand, typically use large rating territories for homeowners insurance, in some cases larger than a county. If these territories were to be used for flood insurance, it would create the potential for adverse selection. Insureds that were at highest risk of a flood would be most likely to want the coverage, and if insurance companies do not have a means of distinguishing higher-risk from lower-risk policies, anti-selection would result….

Geographic Information Systems, when coupled with the new flood catastrophe models to provide a very granular rating plan, may help insurance companies overcome these risks. Territories can be based on “hydrological units,” or watersheds, so that areas that water is not likely to flow between are not grouped together. Within a territory, appropriate rating factors are distance-to-coast (relating to storm surge risk), distance-to-river/stream (relating to river flood risk), and elevation (because all else being equal, there is lower flood risk at higher elevations).

Using all of these rating factors produces a rating plan that is able to distinguish different levels of risk even among points that are near each other. This produces true risk-based pricing that is likely to be sustainable in the long run. The top map at right shows this approach and compares it to the traditional method of rating flood insurance used by the NFIP, shown at bottom.

The video below presents an example of how GIS can improve pricing strategy.

Policy language affects pollution liability claims

The terms and conditions of pollution liability policies have often created disputes between insureds and insurers, resulting in litigation. In a recent Best’s Review article, Milliman’s Christine Fleming explores three oft-disputed areas of these policies: “the definition of a ‘claim’; the timely notice requirement; and the ‘known loss’ condition.”

The following excerpt offers perspective concerning the meaning of a claim:

Most pollution liability policies are claims-made, meaning that the claim has to be made against the insured during the policy period. Although this requirement seems clear, the question of what constitutes a claim has been the basis of coverage disputes.

For example, in Hatco Corp. v. W.R. Grace & Co., the insured was a prior owner of a contaminated site. The insured received a letter from the current owner of the site that included an administrative order directed to the current owner, and a warning that the current owner would hold the prior owner liable for any costs it incurred in connection with the administrative order.

The insured had a pollution liability policy in which “claim” was defined as a “demand for money.” The court held that the letter was not a demand for money, but rather a threat. Thus, the court reasoned that it was notification of a potential future claim and not a claim as defined under the policy.

In another case, Alan Corporation v. International Surplus Lines Insurance Co., the insured purchased a pollution liability policy. The government contacted a third party, not the insured, during the policy period regarding contamination at the insured’s site. That third party spoke to the insured about the contamination, also during the policy period. After expiration of the policy period, the government initiated action against the insured related to the site.

The insurer’s position was that no claim had been made against the insured during the policy period. The insured argued that the communication with the other party discussing the contamination constituted a claim because it set off a chain of events that eventually led to the government action. The court held for the insurer, and rejected the insured’s position that a claim had been made during the policy period.

The Takeaway: Don’t assume that a “claims made” policy resolves the issues raised by occurrence policies, or that the report date will now be clear. Questions will continue to be raised and litigation will continue to revolve around when a claim was brought against the insured and, indeed, even what it means to have a claim.