New Rules for California Large Deductible Programs

In a move aimed to curb carrier insolvencies in the State of California, there is a proposed rule up for discussion in August to change the carriers able to offer these types of programs as well as the way they are administered by those less then an AM Best straight “A” rating.  Specifically…

The draft rules would require that carriers writing large-deductible policies maintain a minimum credit rating of “A” with A.M. Best Co., a rating of “A” or “A” with Standard and Poor’s, a rating of “A1” or “A2” with Moody’s Investment Services, or a Fitch Ratings Inc. rating of “A” or “A.”

The other oddity is that they think carriers do not already collateralize large deductible programs…

“Carriers that do not meet both the credit rating and capital requirements would be required to collateralize the amount they expect an insured to pay as reimbursement for claim costs. Carriers could satisfy the security requirements by ensuring that an employer sets aside money for the exclusive purpose of collateralizing the large-deductible policy.

That happens every day?

I find this rule shortsighted as it is not the rating of the carrier that is as important as the way the carriers manage these programs.  Institutionalizing minimum financial ratings for large deductibles in my opinion is just a “cya” for regulators, hurts the open market and limits this product to the “big boys”.  The regulators  need to pay more attention to the process, the carriers and filings that govern them and they would continue in a business-friendly atmosphere and not suffer the hits to the guaranty fund.

Finance Department Projects Millions in Savings From Large-Deductible Rules

Soon-to-be-proposed rules that would increase capital and credit requirements for carriers writing large-deductible workers’ compensation policies in California could prevent insolvencies and save tens of millions of dollars a year, according to the Department of Finance.

The Department of Insurance plans to start the formal rule-making process Friday by opening up a public comment period on proposed regulations intended to ensure that insurers writing policies with deductibles of $100,000 or more are able to handle the risk of a covered employer becoming insolvent or failing to reimburse the carrier for claim costs, according to an agency official who spoke on the condition that he not be identified.

The department plans to hold a public hearing on the proposed rules in August.

Although officials were not ready Friday to speak about the rules publicly, the department submitted draft rules to the Finance Department. That is required when state agencies estimate that the impact of a regulatory proposal may exceed $50 million in costs.

The draft rules would require that carriers writing large-deductible policies maintain a minimum credit rating of “A” with A.M. Best Co., a rating of “A” or “A” with Standard and Poor’s, a rating of “A1” or “A2” with Moody’s Investment Services, or a Fitch Ratings Inc. rating of “A” or “A.”

Additionally, the rules would require carriers to maintain a sum of paid-in-capital — the amount of money invested in a company used to represent earnings from selling equity — of at least $500 million.

Carriers could also satisfy the requirement by being part of a holding company group that maintains a qualifying credit rating and has sufficient equity.

Carriers that do not meet both the credit rating and capital requirements would be required to collateralize the amount they expect an insured to pay as reimbursement for claim costs. Carriers could satisfy the security requirements by ensuring that an employer sets aside money for the exclusive purpose of collateralizing the large-deductible policy.

Irena Asmundson, chief economist for the Department of Finance, said in a May 21 letter to the Insurance Department that the proposed rules are estimated to increase costs to employers by about $20 million per year. However, the rules are expected to prevent one insurer insolvency every four years, and fewer insolvencies are expected to save about $42 million a year.

Asmundson said the projections were based on the department’s representations in a standardized regulatory impact assessment submitted in April.

An impact assessment summary, signed by Deputy Insurance Commissioner Geoffrey Margolis, says four insurance carriers have become insolvent over the last 15 years “largely because of their involvement with high-deductible workers’ compensation insurance policies.”

Nationally, the four companies had an estimated $624 million in combined incurred losses, $360 million of which arose from the Golden State and were passed on to the California Insurance Guarantee Association.

Margolis said mitigating the risk of insurer insolvencies would shield CIGA from incurring liability for some claims and reduce assessments the guaranty association charges to carriers.

The Department of Insurance has reviewed data for all work comp carriers in California and determined only nine that are writing large-deductible policies would fall short of the proposed credit risk requirements, according to the impact assessment.

The full impact assessment says the nine insurers could pursue mergers or acquisitions, start writing different lines of insurance or phase out large-deductible policies to raise capital to meet the $500 million threshold. But the “most reasonable plan of action” would be for the nine carriers, who are not identified by name in the assessment, to collateralize their deductible receivables.

The carriers have an aggregate $200 million in deductible premium for work comp policies in California. The Insurance Department estimates that the total amount that would need to be collateralized to protect against the risk of potential unpaid future deductibles is about $800 million.

“By requiring that employers obtain additional collateral that is set aside specifically for paying workers’ compensation deductibles, an insurer may protect its obligations without significantly alienating its client employers who might otherwise have to alter their business operations,” the assessment says.

Margolis said during a telephone interview Friday that he wouldn’t discuss specific provisions until regulatory language is proposed at the start of formal rule-making process. Speaking generally about the pending rules, he said, “Insurance Commissioner (Dave) Jones’ goal is to provide reasonable, tailored guides for insurers writing high deductible policies and reduce the risk of insolvency associated with them.”

It’s not clear how carriers view the proposal.

Jeremy Merz, western region vice president of state affairs for the American Insurance Association, said he had not seen the copy of the draft rules posted to the Department of Finance website and could not comment on them.

Rules on the Finance Department’s website are different from an earlier draft that the Insurance Department released before holding a stakeholder meeting to discuss the proposal in March.

Mark Sektnan, vice president of state government relations for Property Casualty Insurers Association of America, was not available for comment on Friday.


Young Consumers Willing to Let Insurers Spy on Digital Data – If It Cuts Premiums

As a sociology major and Orwellian it is hard for me to not think about “Big Brother” when reading these types of reports.  My gut would tell me that the younger generation of people that understand data management the most would be most conference about data collection – seemingly not the case –

The majority of people between 18 and 34 would be willing to let insurance companies dig through their digital data from social media to health devices if it meant lowering their premiums, a survey shows.

In the younger group, 62 percent said they’d be happy for insurers to use third-party data from the likes of Facebook, fitness apps and smart-home devices to lower prices, according to a survey of more than 8,000 consumers globally by Inc.’s MuleSoft Inc. That drops to 44 percent when the older generations are included.

As consumers share more of their personal data online, governments increased their scrutiny of how it’s collected and used following the harvest of 61 millions Facebook users’ accounts by U.K. firm Cambridge Analytica. The European Union’s new privacy law, known as the General Data Protection Rules, took effect on May 25.
Of the older generations, 45 percent of 35- to 54-year-olds are happy to allow insurers broad access to their digital identity, while 27 percent of those 55 and older would do so.

Insurers are investing millions improving their digital offerings amid growing competition from fintech startups. But that’s a work in progress: 58 percent of the survey’s respondents said that systems don’t work seamlessly for them, with many citing difficulty filling out a form online. And 56 percent said they would switch their insurance provider if digital service is poor.

“Insurers are already struggling to deliver a connected experience,” said Jerome Bugnet, EMEA client architect at MuleSoft. That is happening “before even considering how they bring all these new data sources into the equation.”

Why Insurance Industry Should Embrace, Not Fear, Artificial Intelligence

When discussing the use of artificial intelligence in insurance, there is often a glaze that develops in the eyes of many an underwriter.  Is it lacking the understanding of what it is? or fear of losing ones role to a computer?  

These types of statements make many wince as this is a large amount of payroll that could be removed or better allocated:

“…We’ve been hearing some scary stuff about AI. For instance, that it is on track to kill some 2.5 million financial jobs by around 2033. Should our insurance professional readers and listeners be worried about this?”

What this article misses the point on is predictability and accuracy as a result of AI versus the replacement of humans for computers.  The machines may be dead on in their predictions, but someone still needs to cull the data, interpret the data and most importantly give advice based on the data.  

Too much in insurance is done based on the subjective – instinct and intuition.  The true pros know there is an art and science to underwriting… and AI makes the science that much better to allow the underwriter more time in evaluating the art — 

Why Insurance Industry Should Embrace, Not Fear, Artificial Intelligence

By | May 22, 2018

Artificial intelligence isn’t the cold, job killing disruptor many fear it to be – at least it won’t be for many years to come, says Jeff Somers, president of Insureon.

Insureon, a bit of a disruptor itself, is a national online platform for small business commercial insurance.

According a recent report from U.K.-based Autonomous Research LLP, 2.5 million financial services employees in the U.S. are exposed to AI technologies.

And AI will be hard to resist for organizations looking to cut costs. AI represents a potential cost savings of $1 trillion to U.S. companies across banking, investment management and insurance, according to the report.

Somers, however, believes reports of the demise of insurance agents and brokers are premature, and that AI machine learning can actually benefit agents by augmenting what they are doing and making them more efficient and effective so they can spend more quality time on the most important tasks.

Jeff Somers, president of Insureon

Somers talked to Insurance Journal to offer his thoughts on AI. This has been edited for clarity and brevity.

Insurance Journal: We’ve been hearing some scary stuff about AI. For instance, that it is on track to kill some 2.5 million financial jobs by around 2033. Should our insurance professional readers and listeners be worried about this?

Somers: When I think about artificial intelligence and machine learning, I think about it in three waves, where the first wave is really about automating simple tasks. The second wave is effectively what I think of as an AI assistant wave. The third wave is the AI and machine learning technology taking the place of an expert. The expert wave.

I think the good news for insurance professionals is that most of what they do today is in that third wave. Which is not to say AI and machine learning won’t have an impact on their jobs and how it might help and provide experiences and service to customers, it’s just that this idea that they’re going to be replaced anytime soon by a platform like that is, I believe, probably a little misguided at this stage.

IJ: Isn’t it inevitable that we will all be having less and less contact with real humans in the future?

Somers: I think what’ll happen is that you’ll find that you’ll be in a situation where, as a customer, probably what matters most is getting to the information and answer you want quickly. In the past, the best way to do that certainly has been through talking to a person. As systems and platforms develop more data, get more intelligent about what customers are asking about, and then use technologies like AI and machine learning to guide customers to the right answer, I think that customers will become more and more accustomed and comfortable with dealing with a non-human, so long as they can have a great experience in getting to the answer they need.

IJ: How do you think AI will benefit the industry?

Somers: I think, to start with, you’ll find that AI and machine learning can automate some of these simple service tasks that might consume a typical agent or broker’s time today.

So, when you think about why a customer may call in, whether it’s for a certificate, whether it’s because they have a billing question, whether it’s because they want to provide some new information about their business for example, these are all theoretically conversations that could take place with a chat bot, for example, that could provide that customer with an experience that would allow them to either again get at that answer they’re looking for quickly, or provide information quickly that would then help the agent really focus on what they do best. Which is the expertise around understanding the markets, the services, the products, the carriers, and bringing the right solution back to the customer based on the information the customers provided to them.

IJ: Do you think AI will ever be smart enough to replace an agent, or a claims adjuster, or an underwriter or a president?

Somers: Forever is a pretty long time. So, the answer is unquestionably, “Yes,” it’s just a question of how long it takes before that actually happens. I think, again, as with most industries, what we’ll find is that the technology will allow us to step away from the tasks that are less value-added than other tasks that we might be able to provide on behalf of our customers.

So, if there’s a lot of time being spent by an agent, by a broker, by a president today on certain tasks that can be automated, that frees up that person to spend more time on the tasks that can’t be automated and those that are probably more complex and require that human touch, and frankly, that human brain to go get done today.

IJ: Anything else you’d add?

Somers: I think it’s an exciting time for sure. It’s not unusual when you see a new wave of innovation like this coming along to have that sense of concern or worry about what it might mean and what change might come with it.

Generally speaking, again, as a civilized world, we’ve been able to embrace these kinds of innovation changes and allow them to accelerate our growth and development. If that’s something we can do here, this is an incredibly powerful technology to harness and to help us evolve essentially.

But it does require some thought and it requires us to step into it with the understanding that we are going to have to live with some disruption, some change to some of the things we may have grown used to today. Ideally, when we come out the other side, it’s a better, safer, more interesting world that we live in as a result.

Where Will the Wind Blow this Year? …Ask Europe

As the owner of a coastal home, the start of hurricane season always gets my attention along with the predictive models that come with it.  As an early storm spins in the gulf, the threat of windstorms once against is on the forefront.

As a data geek, of huge interest is the data pools collected, weights they are given, intervals of understanding them and algorithms produced and interpretations made as a result.

Out of the shoot some fun facts from our friends at the National Oceanic and Atmospheric Administration (full article at end of blog):

  • “A total of 10 to 16 named storms, tropical-strength or stronger, will likely cross the basin…one to four may become major hurricanes with winds of 111 miles (179 kilometers) per hour or more”
  • “Along the Atlantic and Gulf coasts there are more than 6.6 million homes with an estimated reconstruction cost of $1.5 trillion”

Unfortunately the past has not fared well for NOAA’s US predictive model (GFS) versus that executed by the European Center for Medium-range Weather Forecasting (ECMWF)  An article from last year that highlights the weaknesses of the US  v European model…  is accessible from the below link with highlights below.

  •  “The issue gained prominence after Hurricane Sandy struck New Jersey in October 2012, which the European model hinted at at least a week in advance. The GFS model, however, didn’t catch on to the storm’s unusual track until about 5 days in advance”
  • Critics of the GFS say it needs to be improved with greater computer processing power. In addition, they say, the model needs to process weather information in more advanced ways, with greater resolution in both the horizontal and vertical scale, since the weather on the surface depends heavily on what is going on in the mid-to-upper atmosphere.
  • “Michael Farrar, who heads the Environmental Modeling Center (EMC), which is the lead office within the National Oceanic and Atmospheric Administration (NOAA) that develops and operates computer models, said “it’s no secret” that the GFS has been behind the competition. “While it’s continued to improve remarkably over time… it’s consistently behind the European model,” Farrar said in an interview. “

Because you have a predictive model means you have some basis to understand the future, but not necessarily the best.  The breadth of data ingested along with the timeliness in which it is done along with the proper weightings within are paramount to properly forecasting outcomes.

“Forecast skill score comparisons, maintained by Brian Tang at the University of Albany, show that the European model was far superior to the GFS model during the long trek that Hurricane Irma took from off the coast of Africa, through the northern Leeward Islands, the Caribbean, Bahamas, Cuba, and then into the mainland U.S.”

“Here’s how to read this chart: The GFS model is represented by the acronym, AVNO, while the ECMWF is the European model. All the others are models from other countries and groups, such as the CMC, or Canadian model, and the UKM, from the UK Met Office. Also, the acronym, “OFCL,” represents the official Hurricane Center human forecast.”
To be succinct, this shows we were half as predictive with GFS versus ECMWF.

Annotated version of model verification scores for weather models' forecasts for Hurricane Irma.

“For now, forecasters are stuck with a temperamental model that can fail to catch on to upcoming threats until days after the European model has sounded the alarm.”

As the most innovative country on the technology front, ever… we need to step up our game in predictive analytics on the weather front – volume, velocity and variety – in order to be the world’s front line in understanding the course of “Acts of God”.  For now, the better answers appear to be across the Atlantic.

What NOAA Forecasts for 2018 Atlantic Hurricane Season

By | May 25, 2018

On the heels of the costliest hurricane year on record, the Atlantic is expected to produce five to nine of the mighty storms during the six-month season that starts June 1, the National Oceanic and Atmospheric Administration said.

A total of 10 to 16 named storms, tropical-strength or stronger, will likely cross the basin, threatening people, real estate, crops and energy resources in the U.S., Mexico and the Caribbean, according to the agency’s annual forecast Thursday. Of those, one to four may become major hurricanes with winds of 111 miles (179 kilometers) per hour or more

“Regardless of the seasonal prediction, Atlantic and Gulf coast residents need to prepare every year,” Gerry Bell, a forecaster with the Climate Prediction Center, said during a conference call. “There are over 80 million people between Atlantic coast and Gulf coast that can be affected by a hurricane.”

Hurricane season is closely watched by markets because about 5 percent of U.S. natural gas and 17 percent of crude comes out of the Gulf of Mexico, according to the Energy Information Administration. In addition, the hurricane-vulnerable coastline also accounts for 45 percent of U.S. refining capacity and 51 percent of gas processing.

Florida is the world’s second-largest producer of orange juice. Along the Atlantic and Gulf coasts there are more than 6.6 million homes with an estimated reconstruction cost of $1.5 trillion, according to the Insurance Information Institute in New York.

Costliest Year

Last year the U.S. was hit by three major hurricanes — Harvey, Irma and Maria — that helped drive total losses to more than $215 billion, according to Munich Re. It was the most costly season on record, surpassing 2005 which produced Katrina. Overall 17 named storms formed in 2017, which fell in line with NOAA’s prediction of 11 to 17.

The forecast is influenced by conditions across the equatorial Pacific. Earlier this year La Nina collapsed and the ocean returned to its neutral state with the possibility of an El Nino forming later this year. El Nino, when the Pacific warms and the atmosphere reacts, ,,increases wind shear across the Atlantic that can tear apart hurricanes and tropical storms, reducing the overall numbers.

Conditions in the Atlantic will also play a role. Hurricanes need warm water to fuel growth and the basin is currently running colder than normal. Forecasters are currently watching a system in the Gulf of Mexico that may become a tropical depression by Saturday.

An average to above-average season means there is a greater chance the U.S. coastline and Caribbean islands are at risk, said Bell.

“When you have a more active season you have more storms forming in the tropical Atlantic and those storms track further westward,” Bell said. “Certain areas have been compromised from last year’s storms that makes hurricane preparedness ever more important this year.”

When in every other financial vertical machine learning and artificial intelligence are not just buzz words but practical applications, the fact this is the case in insurance can be seen as primal… or a wonderful opportunity for the first adopters.

“Approximately 83 percent of respondents said that there is moderate or very limited understanding of advanced analytics models outside of their modeling teams.”

Insurers See Some Obstacles to Expanding Use of Advanced Analytics

May 9, 2018

Property/casualty insurers in the U.S. have big plans to boost their use of advanced analytics and data in their businesses in multiple ways, but there are potential roadblocks, according to a new Willis Towers Watson survey.

Approximately 83 percent of respondents said that there is moderate or very limited understanding of advanced analytics models outside of their modeling teams.

Companies also said they see challenges ahead including infrastructure, data warehouse limitations, data accessibility, difficult integration, lack of coordination and information technology/services bottlenecks.

“Insurers still have work to do to improve the levels of understanding around advanced analytics outputs for those who use them within their business,” Ben Williams, senior consultant, Insurance Consulting and Technology for Willis Towers Watson, said.

Williams added that “the benefits of advanced analytics are hard to attain if companies can’t access and use data at the right time, in the right place and deploy it to the right people, including the end customer, in a comprehensible way.”

Even so, the Willis Towers Watson survey found that U.S. property/casualty insurers have three main priorities with data and advanced analytics:

Customer Experience. Insurers said they’re trying to boost the customer experience, with 67 percent pledging to use data to create faster service, 65 percent promising to use it for easier information access, 61 saying they’ll weld it for more personalized experiences and 53 percent responding they’d use it to help create mobile-friendly applications. The use of data will else help 76 percent of respondents develop more customer-centric experiences, with customer interactions/surveys a focus of 69 percent who will use data to shape processes. About 57 percent plan to focus on data in terms of auto telematics.

Claims. Approximately 74 percent of respondents said they’d harness the technology to evaluate claims for litigation potential over the next two years, compared to 15 percent now. About 82 percent said they’d boost their use of advanced analytics through the same time period for evaluation of claims-related fraud potential, versus 26 percent now. Claims triage is also a priority, with 80 percent promising to use the technology within two years, compared to 26 percent now.

Telematics. Most respondents said they expect telematics to grow beyond auto. About 65 percent said they expect to use it and related technologies connected to the Internet of Things to personalize risk assessment for homeowners insurance (versus 0 percent today). Approximately 38 percent will use the tech combo for commercial property, versus none currently. Around 90 percent said that telematics will impact their pricing over the next two years, while 80 percent said it would influence underwriting.

Meanwhile, 70 percent of personal lines insurers expect to use UBI within two years, with 61 percent pointing to greater use of unstructured internal claim information over that period. Approximately 52 percent disclosed they’d incorporate smart home/smart building data, unstructured internal underwriting information and social media. For commercial insurers, 92 percent said they’d use more unstructured internal claim information and 54 percent would rely on other unstructured customer information.

Insurers also plan to use more artificial intelligence and machine learning to help identify high-risk cases and build risk models that lead to better decision making, Willis Towers Watson said.

Willis Towers Watson said 51 P/C insurers participated in their web-based survey, which was fielded in the 2017 fourth quarter. Broken down, that included 33 multiline carriers, 14 commercial lines carriers and four personal lines carriers.

Source: Willis Towers Watson

Greetings from the NCCI Annual Issues Symposium (AIS)

The National Council this morning gave its annual update on the state of the workers’ compensation line.  As always, Chief Actuary Kathy Antonello did an awesome job of updating the most senior workers’ comp professionals across the globe on all of the relevant economic performance indicators that help us to understand this line of insurance.

The full report can be found off the NCCI website…

…as well as other conference highlights.  Some key points to me from the report:

  • The expected combined ratio for this year is the lowest in almost half a century at an 89.  This is 5 points lower then last year’s 94.  This indicates an operating margin of 11 points on average.
  • The investment income gain went from 10.4% to 12% this year, effectively providing an overall return to workers’ compensation insurers of 23%
  • The overall market volume dropped from $45.6b to $45b in premiums, mostly due to rate drops countrywide.
  • The top five class codes (hardest to place) in the residual market are:
    • Carpentry 5645
    • Roofing 5551
    • Local Trucking 7228
    • Painting 5474
    • Long Haul Trucking 7229

I’d expect a lot of capital support for the line due to these results.

Always a great event and wonderful to catch up with so many friends –

Travelers Group the Largest Writer of Workers’ Compensation in 2017

As a former Liberty Mutual guy, it shocks me they have dropped to 7’th.  For years and years they were #1 on this front…
Amtrust continues to ascend and now at #4 with almost $3B written…
6 of the 25 are competitive state funds with New York at #8 the largest — California (SCIF) now being #13 with the largest overall workers’ compensation premiums speaks to the competitiveness of the overall market…
Lowest overall loss ratio was SAIF (Oregon State Fund) at an incredible 39.44% against the average of 56.9% and the high of 89.14% (AIG)…
Very interesting to see the diverse range of DCC (ALAE) charges… some companies are double digits, while others under 1% to the overall loss ratio…
I’m guessing that the NCCI will be announcing another profitable year for workers’ compensation in Orlando this week during the “State of the Line”…
See you there!

Buffett Not Eager for Berkshire to Be Cyber Insurance Leader

Some intriguing comments from Warren Buffet on the State of cyber insurance.  My favorite (which I agree with), “I don’t think we or anybody else really knows what they’re doing when writing cyber” insurance, Buffett said Saturday at his firm’s annual meeting in Omaha, Nebraska. “We don’t want to be a pioneer on this.”

From both sides off the table (agent and underwriter) there is still much more to learn in this burgeoning insurance product line which has increased premiums written 35% in the last two years.

Buffett Not Eager for Berkshire to Be Cyber Insurance Leader

By and | May 7, 2018


Warren Buffett said he doesn’t want Berkshire Hathaway Inc. being a leader on cyber insurance because neither he nor others in the industry really know the risk.

“I don’t think we or anybody else really knows what they’re doing when writing cyber” insurance, Buffett said Saturday at his firm’s annual meeting in Omaha, Nebraska. “We don’t want to be a pioneer on this.”

Buffett said that cyber risk is part of his estimate that every year carries about a 2 percent chance of a super catastrophe that would cause $400 billion or more of insured losses. While that kind of disaster will wipe out many companies, Berkshire will aim to keep its exposure low enough to remain profitable in such a year, the 87-year-old chairman said.

Buffett said he’s fine with writing some cyber policies to remain competitive, but doesn’t want to be among the top three in the industry. Anyone who claims to know the base case or worst case for losses is “kidding themselves,” he said.

[Property/casualty insurers wrote $1.35 billion in direct written premium for cyber insurance in 2016, a 35 percent jump from 2015, according to reports by Fitch Ratings and A.M. Best.

According to the reports, the largest cyber insurance writers are American International Group, XL Group and Chubb. These companies had a combined market share of approximately 40 percent at year-end 2016. The top 15 writers of cyber held approximately 83 percent of the market in 2016.

Completing the top 10 writers of cyber ranked by direct premium written are: Travelers, Beazley, CNA, Liberty Mutual, BCS Insurance (owned by Blue Cross licensees), AXIS Insurance Group and Allied World.]