The Not Unreasonable Book Club-Episode 1

Today I’m kicking off a new series tentatively called the Not Unreasonable Book club to be co-hosted with Steve Mildenhall (who is running for the board of the Casualty Actuarial Society, so vote for him!). Steve is an assistant professor at St John’s University’s school of risk management and former head of Analytics at Aon Re. Steve’s an all-around smart dude and I’m looking forward to learning from him and hopefully disagreeing once in a while!

Books and papers discussed in today’s show (youtube, mp3):

On Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Richard Posner and Eric Glen Weyl

Steve: The basic idea was that you have a wealth tax that would be a self-assessed so you would post your reservation price on assets you own particularly property and you would be taxed according to that to that value but if someone else came along and they wanted to buy it they could buy it at the value that you had posted it

David: that’s your sell price

Steve: yes, it’s kept you honest in your assessment.

David: if you put your too high your tax bill goes up and if you put your price to low somebody will buy your property

Steve: It’s a way around eminent domain problems and hold-outs against construction. If you’re bought every other house along the Train or the right of way or whatever and you know this would be a way of ensuring that those projects that would maybe have a greater of social value would be able to proceed.

David: what do you think about the argument?

Steve: I mean it’s I like it’s concept it sounds great

David: it’s cute

Steve: it is cute. As someone who lived in the same house for 25 years and had an unreasonable attachment to, I didn’t like the idea that someone could come along and just move me out of my house. I did think they missed a couple of points. Presumably if I could post a low price, they could post a price and I could just buy it back. It would be like sniping on eBay auctions where you’d have your listed price and in the back you’d have an actual price you’d bid up to. So it would be a more complicated market than they described. The piece that I struggled with was that they identified the use with the highest value as the use to which the use to which the person who’d be willing to pay the most would put the property and I don’t think that actually is true.

Capitalism without Capital: The Rise of the Intangible Economy by Jonathan Haskell and Stian Westlake

David: one of the ideas that I just love thinking about is the idea that intangible assets have increased as a share of total assets.. insurance companies are maybe not a great example because they’re entirely made of intangible capital..

Steve: Well I’d argue that they’re entirely made of tangible capital

David: Cash

Steve: The cash is the only capital. This is an interesting discussion. It comes down to when a you set up an accounting standard which is what we’re talking about here is what is the objective of the accounting standards and therefore what should I count an asset. And if you think about insurance companies, statutory accounting is around ensuring that claims are going to be paid and so can only count assets that can turn into Cash. If that asset that is not going to turn into cash it shouldn’t be on the statutory balance sheet…

David: Let me go back and try and defend my view that insurance is entirely intangible assets…

The Theory of Risk Bearing: Small and Great Risks by Ken Arrow

Steve: Arrow’s paper has a number of implications for how risk should be shared and what is paper says is risk will end up being shared through a large number of bilateral contract and the net effect of it is that all risk will be thrown into pool and then everyone will Quota Share the pool. And if you do that all of the diversifiable risk has gone away because all the risk is in the pool and you’re just left with the systematic risk ‘what’s the size of the pool’ is the only risk variable that’s left.

David: the only variable that should inform pricing.

Steve: Risk, and people.. sort of the share can come back is inversely proportional to my risk aversion so if I’m more risk-averse I’m prepared to accept a smaller share back in exchange for having gotten rid of all of the risk, right. Less risk averse people will take greater share of volatility. And this was Arrow’s theory that risk was implemented through Arrow-Debreu securities which you may have heard of, which pay $1 in one particular state of the world. So that’s the most fundamental insurance contract if you will and from that I can price any security because any Security is just a combination of these fundamental Arrow-Debreu securities. So this is a wonderful theory when it all works kind of nicely.

David: Except it doesn’t

Steve: It works nicely in theory, I should say. So Ken Arrow’s observation around this is well there should be a lot of risk sharing going on and we also noticed that there’s no place for an insurance firm is in this Arrow-Debreu world… and yet we see them everywhere.

The Nature of the Firm by Ronald Coase

David: An interesting paper that won the Nobel Prize I think in economics which was amazing really for another really short paper and easily readable paper written in 1937 still resonates today. And the question is why do we have firms at all in any industry because if the market mechanism allocates things efficiently to your point there I think but I don’t know if arrows theorem had been.

Steve: It was afterwards.

David: It was afterwards, but we’ll just take it for granted that the economic economic allocation of resources is efficient because of market transactions because you have the price system that governs the value and Ronald Coase says why the heck do we have companies then because companies are not markets they are command and control organizations where you have a CEO telling somebody else what to do and they do it and there’s no price transaction between them.. why? Steve, why don’t you give us the answer.

Steve: [laughs] So the argument against command and control is a sort of amusing everyone looks at the government and oh, the government is necessarily going to be inefficient and stupid at doing things it is so amusing to me or ironic maybe the better would that the theory that sealed that came about just after the second world war that was won entirely on a command-and-control basis.

David: Sure, militaries are the original corporation.

Steve: Governments get this bad rap, but what’s the difference between working in a government and working in a firm…

Do listen to the whole thing!

Many thanks for Steve and feel free to email me with ideas for books we can cover in future episodes at david@notunreasonable.com.

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, for the price of a CAS webinar you get unlimited access to content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

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Analyzing Lloyd’s results with Rob Johnson

Greetings from Canada!

Every year we head back to the motherland for a couple weeks to unwind, reconnect with friends and my wife’s family, tow the kids around on a boat and… talk about the financial results of the Lloyd’s marketplace!

Rob Johnson (youtubemp3) returns (here’s the original!) to the Not Unreasonable Podcast for a deep dive into the financial results of the Lloyd’s market. Rob almost always has a contrarian view of insurance company results. Usually when an insurer is lamenting their results they’re much better than they seem. And when they’re pumping up their performance, that’s a warning sign!

Rob has taught me that insurance companies are remarkably resilient institutions and amid all the hand-wringing of the Lloyd’s market’s results he remains more sanguine than you’d think!:

First comment would be that the underlying loss ratio is a phenomenally good. Across all those 17 years that the gross loss ratio is about 65.. that’s gross. I should warn you I always talk gross, and deal with reinsurance as a cost. So the gross loss ratio is 65 and it’s been down under 50 for quite a few years. Last year it 85. I think 2005 it was 112. It’s actually a good figure.Then there’s expenses, net expenses are declining, that’s masked a little bit by the way insurers and Lloyd’s account for quota share reinsuraces. I reverse that out.. if you reverse that out, the acquisition costs have gone from 19-20% to 26-27%. that’s a very big increase and the cost of administering the business has been 6% or 7%.

It’s clear that the original brokerages and commissions have gone up. The originators of the business have a lot of market power and it’s in their interest to push up the rate of brokerage. The other comment I’ll make there is that up until recently Lloyd’s did not specifically report on brokerage it is just netted off. It was in the bottom line but it was not there as a line item and I personally think that’s been a mistake over the long term. If you don’t measure it and report it you won’t control it.

Thanks for listening!

Demotech is The Disruptor with Joe Petrelli

My guest this week is Joe Petrelli (mp3, youtube), the founder and CEO of Demotech, a rating agency based in Columbus, Ohio. This interview was a particular delight for me, folks, because I’ve finally found a real example of classic Clay Christensen Disruption in Insurance. Demotech has been quietly disrupting what he calls “the legacy rating agencies” for decades.

THIS is what real disruption looks like:

JP: We were actually the first company to review and rate independent regional insurance companies. The Legacy rating agencies back in the late 80s, the Legacy rating agencies would rate a small independent company if it was part of a large group but there was no one reviewing and rating independent Regional and specialty companies. And we heard that from Fannie Mae and Freddie Mac about smaller companies that they had been doing those sorts of analysis on their own to qualify a company for offering homeowners insurance coverage in the in the secondary mortgage Marketplace selling off the the mortgage of the home that was insured [DW: the mortgages needed homeowners coverage from a “rated” insurance company to qualify for the secondary mortgage market]

JP: and at that point in time they contacted the Legacy rating agencies who would not rate the independent Regional and Specialty Company so we got to talk..

DW: So these companies had no rating.. like a small Mutual company.. because you know what’s amazing because I think of that these days as being kind of the bread and butter for let’s say an AM Best, a Regional Mutual insurance company that’s all they’ve got and they’ve been around for a long time but they’re very small I mean were those guys also excluded from this or is this mostly newer organizations?

JP: No, it was, ah, the smaller independent companies all of them were not rated and actually after we’ve been approved by Fannie and Freddie I actually had a conversation with Arthur J Schneider the president chairman CEO and largest shareholder… the conversation I had with the Arthur J Schneider II was they never wanted to rate the smaller companies.

DW: because you’d think that’s where the rating agency would offer the most value, right, because the smaller companies are the ones perhaps are a little less certain..

  • Underserved, low end market? Check.
  • Looks like a ‘toy’ product that no serious player should consider? Check.
  • Slowly creeping upmarket against all odds? Yep.

That’s disruption kids. And he did it at least two more times with Florida Homeowners and Title insurers. Astonishing. Joe should be an insurance innovation celebrity.

Another amazing point is Demotech’s track record, a much under-publicized fact.

JP: So for A” [DW: called double prime] we said for A”, a hundred percent of the companies we rate A double Prime will survive at least 18 months after we withdraw that rating. At least 99% of the A primes, at least 97% of the A’s at least 95% of the S’s and at least 90% of the Ms after if we withdraw the rating and it goes from rated to unrated you got at least 18 months and those are the survival percents. In terms of what we do to show people that we have confidence in a rating, we have self-published our record from 1989 to date annually updating it.

And this last year year end 2016 and getting a 2017 update, we retained two distinguish professors both of whom had worked with the National Association of insurance Commissioners. Robert Klein was their Economist for years and he’d been at the Michigan Insurance Bureau, he’s a Georgia State University, Dr. Robert Klein and Dr. Michael Barth is I think assistant Dean at the at the Citadel, he’s another PhD, he’s also CPCU. He was at the NAIC and developed was actively involved in the development of the risk based capital framework.

So we got two distinguish Insurance profession we gave them every one of our ratings from 1989 to date and said check our math and they did it and they publish the report in February of 2018 and they basically said we hit our marks every year from 1989 to date.

Here is a link to the latest version of the report. And another to some graphs. Demotech is one of the most fascinating and underrated stories in insurance innovation and in the insurance market in general. Thanks to Joe for his time!

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, for the price of a CAS webinar you get unlimited access to content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

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Todd Hart on Managing Hedge Funds, Reinsurers and Insurers

Todd Hart (mp3youtube) has had the following jobs: political campaigner, investment banker, hedge fund trader, hedge fund portfolio manager, private equity investor, reinsurance company CEO, insurance company CEO and stay at home dad. I’ve seen Todd in action in all kinds of capacities from the lofty heights of deal finance to the gnarliest systems issues in personal lines insurance and I’ve always admired his level-headed attitude in what otherwise might be very difficult situations.

You can be smart and hard working, and Todd is both those things, but to me he is more of a model for *how* to be smart and hard working. In the interview I want you to listen for evidence in the more universal qualities that set Todd apart: curiosity, optimism and a fundamental decency especially towards people that work for him and with him.

One of the things I really wanted to ask Todd was whether management is different in hedge funds, reinsurers or insurers. It is not:

TH: It’s not just capital. You think about your resources. You’re doing resource allocation period. Whether it’s time, it’s people. Attention. Money. A lot of what you’re doing as a manager of anything is you’re allocating. What do you think the most probably outcome and most beneficial use of those resources.

So yeah I guess there is a universality across those things. If you’re running a fund, your biggest resource you have, besides time, which is always your biggest resource. Capital is a huge one. But it’s no different than if you’re running a reinsurance broker, how are you going to spend your time and whatever precious resources you have and not spend and increase your margins.

DW:  How about Risk Management capital allocation and those kinds of functions, those kinds of domains of expertise. Any thoughts on contrasting those between the capital markets and the insurance/reinsurance world?

TH: It’s all basically the same principles. Measure. Keep it simple and measure. I’m sure there are folks who are doing very sophisticated jobs you know when we were putting together our own tools it’s really simple stuff, what are your PMLs what are your limits.

DW: What’s the worst that can happen.

TH: What’s the worst that can happen. I think one of the big differences between the insurance and reinsurance world is the sum of limits you write relative to your capital. You do not want to be publishing that.

DW: a definition of Leverage.

TH: but then if you turn that around equate it to you know you own the Equity slug in a CDO it’s not dramatically different just a question of what capital do you have ahead of you. So we had a lot of conversations around you know what is your limit and that’s why reinsurance works pretty well for a fund because they want to know what the absolute downside is. I do too, and everybody should. For an insurance that’s really the amount of capital you have provided but the leverage is pretty dramatic. It’s actually quite dramatic at a reinsurer as well but in insurance it’s just off the charts.

Todd on systems:

DW: is there a example to come to mind where you know like I made this mistake and then this was the outcome and now I would make a decision later. I don’t know how specific you want to get.

TH: I think as an executive you know we made mistakes around not being firm enough on staying in that customization and configuration zone.

DW: What’s the temptation to leave it. Why do you not? Because everybody probably realizes that on some level right?

TH:What seems to be the interaction that I saw and I would push back on if I saw it again is that ‘we’ve always done a business flow this way we’ve always done it this way and I want the system to mirror our business flow right’. In some circumstances I saw, with a modification of business flow which would have made no material difference you don’t have to redo everything. Part of that is that a system implementation is as much a cultural issue as anything else.

When I walked in to the company we’re in the process of transitioning one system to another and I thought it was not going well and a lot of.. I think I was probably more sensitive to making sure the business Parts the business users were happy and then the technology people were making them happy and so when we went to the second question around technology and I think that lingered through where is I probably should have pushed back a lot harder on the business folks say look, the technology can’t do that and it would be too expensive to create that way.

It’s all about a balancing act. A lot of lessons to learn but you don’t learn these things until you actually make mistakes.

DW: this reminds me of high school football. So my coach.. he was alright, our team was not that good. One of the things he said, which was good, was he said to design the playbook around the team you have as opposed to take the team and force them onto some plays they can’t execute. You have limited talent.

I think what’s interesting about this is that sometimes truths are universal and sometimes they’re not. In this case they’re not because in this case of a system that you actually do want try to redesign the team around it. Swapping a play out in a football playbook is cheap. Changing a system is not. And maybe if there’s a weakness in insurance executives or any executives is that they don’t understand the cost of system changes and so they underestimate them.

TH: Yeah, I think that’s universal.

Folks, there is so much more. I haven’t even given you any quotes on management! Todd is probably the best manager of people I’ve ever witnessed in addition to being one of the best negotiators and strategic thinkers in insurance. And in the show we hear about his strategic thinking and management style but also why American Airlines called him to see if he was ok, what it was like failing in a hedge fund, what a good business opportunity looks like.

You will learn from Todd Hart!

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If you’re an actuary you, like me, probably dread the professionalism continuing education requirement. I think the best time to satisfy this in podcast time. While on your commute, while walking your dog, mowing the lawn. Head over to notunprofessional.com where, for the price of a CAS webinar you can get content dedicated to continuing education for actuaries. Especially professionalism CE.

Why Systems Are So Hard to Build

My guest this week is Bill Jenkins (youtube, mp3). Bill is a technology specialist in the insurance industry. I like to joke that the customer satisfaction rate for insurer systems is 0. But does that need to be the case? I’ve finally had the chance to ask these questions of an out and out expert. Bill has headed up internal technology projects at insurers, he’s run the technology at brokers. He’s been a consultant. A Board member. An industry standards advocate. If there is a puzzle in insurance technology, Bill has probably thought about it and here he is today to help us all better understand why we struggle with technology in insurance.

First, the classic question. Why so many systems? This one always puzzled me. It’s not just about acquisitions. It’s because it’s actually easier that way! Such a satisfying answer (for me) since it aligns with the idea of hidden and underappreciated costs as being the main reason why some problems persist in the world.

BJ: some carriers have multiple and duplicate systems so I worked for a large/ medium sized carrier and we had a eight billing systems.

DW: why, acquisitions?

BJ: Partly Acquisitions partly because it’s one system than address one problem with the other system did so they decided that they needed that this additional functionality that the old system didn’t provide. We just want another one. We had three Bop systems. I was listening to a talk that the chief technical officer at the Hartford was giving and he said every year that goes through the examination and review to determine if they should replace all their legacy systems they had over 330 system. I said to replace all these are they that they projected out would be in 50 years or so and the cost would been astronomical. So all they did was just add systems.

Bill on how project management can achieve great things:

BJ: we also use the project management discipline that we called black hat white hat. Black hat was a hired gun. A project manager who comes in and his or her and only charge was to make sure that the specifications for the system were done and was going to be followed for the requirements of the system and that the time frame that was said would be adhered to. The white hat was an internal project manager who basically made sure the right people were on a project to do the work and also did all the reporting to the Senior Management and navigated the political Waters.

BJ: We built the entire system in 9 months.

DW: Wow, so these things can be done.

BJ: let me tell you the antithesis. Next time around we went with an internal project manager, kept the same skunkworks: 22 months…

DW: So what’s the difference?

BJ: Project Management

DW: So what makes a good project manager?

BJ: well first of all the problem with an internal project manager, and I argue this all the time even when I sit on boards and people are having project problems, a project manager for internal may know all the project management disciplines but they pretty much don’t have the personal characteristics to do the work. You have to be a pitbull.

DW: Put the black hat on

BJ: Put the black hat on.. and you go native too quickly so therefore your scope creep becomes scope leap and you’re fitting more and more into the project and doomed to failure.

And we cover so much more, including how legacy systems are defined by what data they capture and how the information technology industry is perhaps 150 years behind other infrastructure industries. We have a long way to go but things can (will!) be dramatically better!

By the way Bill recommends a book In Search of Excellence, which will hit my reading list soon.

Thanks to Bill for his time. And thanks for listening!

Are you an actuary? Someone you know? Check out the Not Unprofessional Project, content dedicated to Continuing Education Credits for Actuaries, especially Professionalism credits. CE On Your Commute!

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Product Development from Kenya with Barbara Chabbaga

Hi Everyone,

I lived in Hong Kong for a semester in college. The thing that struck me most about that experience actually how familiar life was there. Succeeding in life takes the same qualities everywhere: honesty, hard work, relationships, fun. For whatever reason, learning these lessons in really foreign environments lends another layer of meaning. Or maybe just makes them more memorable.

That universality shines through in today’s interview with Barbara Chabbaga (youtube, mp3), who lives and works in the insurance business in Kenya. How about this for a lesson we can use anywhere in the world: Get the @#$@ out of the building:

How we do it now at AB consultants we call it a bottom up approach. We would never sit in a boardroom and say this is a really good idea.. the kind of product we’d design. I look back at my previous life of working in the corporate world is very tempting you know to sit in a marketing meeting or a product design meeting and say I really really think that if we did this kind of products would work.

What we do now.. we’d probably commission a study, so if it’s with farmers not bring them to our office, go to the field, go to the tier states or go to the informal settlements here in Nairobi. And to be very honest, David, I actually did that for the first time after I left CIC.

But of course not is all the same in Kenya:

…it was a shooting attack, right, shooting, grenades and just shooting anybody in their sight it didn’t matter whether you’re a child. They shot a children’s convention, a cooking class for children, and they shot the children it was horrible and so I was stuck in this little filing room and I was very lucky because it was very hidden. And there were about 30 of us and we hid there for about 8 hours.

…It went on and on and on and you hear the grenade. And you hear the grenade is rolling on the floor because when you roll a pen on top of a table it makes a similar sound and I never knew that until after that ordeal. And a pen rolling on a table, it terrifies me.  And I sat there in this dark room and I think I’ll probably die today and that we knew that for sure they’re going to find us, that’s what we thought, you know, they’ll find us. and I prayed.. please spare my life and I’ll live my life to its fullest.

After I made a couple decisions and one of them was I was going to leave my job at CIC.

There is so much more to the conversation, including the changes she made to her life after surviving that attack, where the Swahili word for insurance comes from, how many actuaries there are in Kenya (guess!) and how the most successful banker in Kenya made his fortune.

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Insurance is Not Sold with John Shettle

Recently I’ve gotten to know today’s guest, John Shettle (youtube,mp3), and all along I’ve been trying to figure out how to just hook up the cables and suck as much information out of him as I could. But how do you ask someone: hey can I just pepper you with the most challenging questions I can think of in insurance for an hour or so.. you know, for fun?

I’ll tell you how.. you start a podcast and pretend “it’s all for the audience”.

John Shettle is awesome. He’s currently an operating partner at Stonepoint Capital and grew up at a family-run MGA, running brokerage and underwriting divisions before taking that company public. The breadth and depth of John’s experience is extraordinary. As another highly successful insurance executive put it to me recently, you can never have enough time with John. I’m honored to have the chance to bottle a bit of him up for us all.

Here is the story of him firing a cherished employee for selling insurance on price:

JS: when I was running an Insurance Brokerage, it had a very very what I thought of was a low retention rate and it was an area that certainly needed to improve on… and so when I reorganized the sales function one of the things that I really emphasized was we’re not going to sell on price and when the client comes in and asks for, ah, says you shopping and he wants to get a quote we don’t respond by getting him the quote we begin to go into a process of Engagement and I also said that to the Salesforce that: “we’re all kind of salary plus commission based, if I catch any one of you just selling price and getting quotes you’re going to be instantly fired.”

And to that extent one day a young gentleman named Eric who I love to death like a son I would keep my office right in the in the area of the office where we had all of our sales reps and I would put myself in the loop when I have time to take sales calls and I overheard him on the phone: “sure mr smith, let me go and get you three or four quotes and I’ll call you back in about an hour” and it broke my heart and I fired him on spot in front of the whole sales organization.

David Wright: No kidding. What should he have said?…

John then gives one of the most lucid lectures I’ve ever heard on how to sell. He’s a master. It’s phenomenal.

But that’s not all! John also explains quite clearly how insurers get it wrong, too:

all the myriad examples of when companies got it wrong… it really comes down always to the combination of 3 things.

One is the underwriter didn’t understand the risk.

Secondly, the underwriter mispriced the risk.. sometimes that happens on purpose.

And third is what I would call sloppy underwriting so when you know you should get certain information and you don’t get it. Where the broker says yeah I know but look it’s the same as last year nobody else is asking for a renewal app why are you asking for it, right, if you want all this stuff I’m just going to go take it somewhere else. What I’ve found is that underwriting disasters happen when two of those three things happen.

And of course there is so much more, including that description of how to sell, a deep dive into the difference between specialty and standard lines and John’s first sales experience (because it’s always good to hear how even the legends start out as doe-eyed newbies like the rest of us).

JS: I remember being scared to death

DW: yeah

JS: 25 years old.. to a retail customer a policy for $110 and it was like a nothing policy and I just remember

DW: were you kind of surprised that he bought it?

JS: yeah and I remember walking on air the rest of the day. And just the adrenaline rush of selling something and having it accepted by somebody you never met was actually pretty cool

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Our Spirit Guide

My guest today is Rick Lindsey (mp3, youtube), who has attracted some attention in the insurance market because his company, Prime Insurance Company, is willing to take on the toughest risks in the toughest lines of business, particularly commercial automobile insurance which is going through a wrenching dislocation right now. Very, very few insurers are making money there. Prime is making a fortune.

Why? How? Then I heard that Rick is from Utah, pilots is own helicopter all over the country and I instantly knew I needed to get to know this remarkable contrarian. I was not disappointed. Rick has built an amazing organization with an amazing culture.

Rick Lindsey: Every other business you’re not asking someone else to tell you what the product is worth… what we do is use common sense. First thing I ask you let’s see what you have.. show me the claims.

Every year we ask them: how did we do on your claims. Because that’s all I care about. I want my insured to tell me you guys were great. You talked to us about the claims, you kept us informed about them and we agreed with the result. With what you did.

What I hear from everybody else is..

what happened on your loss run?

I don’t know.

Well did you know they paid it?

No, I didn’t even know they paid it.. first thing I know it’s on my loss run.

Well why’d they pay it?

I don’t know. I wish they wouldn’t have. they shouldn’t have paid it.

As a company we need to have a relationship with our insured… they feel scared and uncomfortable and their insurance company doesn’t communicate with them. You should be contacting them the minute you have a claim.

I am not going to punish you for reporting claims. I will cancel you for not reporting a claim because then I can’t do my job.

And of course we learn that Rick isn’t just interested in distressed business. That’s just the easiest entry point for his to build a relationship with a client:

If I charge somebody who can’t get insurance anywhere else an extreme price and think I’m going to keep getting that if they perform for me? I’m an idiot.

Perhaps the most fundamental human quality is trust and the thing that great underwriters are great at is figuring out who is worthy of that trust and nurturing it. Rick Lindsey is to me the embodiment of the humanity in insurance. His insurance isn’t about technology and data transfer and machine learning. Rick understands a few really big ideas better than the rest of us and has the force of personality to show us the way. I’m calling him our spirit guide. Listen to hear why…

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Gabe Glynn on Iowa, Manufacturing and Sending People Home from Work

Today’s guest is Gabe Glynn (youtubemp3), co-founder and CEO of MakuSafe and host of the Advanced Manufacturing Podcast. Gabe’s company is a technology startup designing wearable sensors to dramatically improve workplace safety in manufacturing. Here is Gabe on the mission of MakuSafe:

Gabe Glynn: one of the heartbreaking statistics we came across was more than a thousand people a day die in work accidents on this planet so that means since I started this company more than half a million people have not gone home to their families at the end of the day and we believe that with data like this we’re going to be able to send more people home from work and that’s our driving factor.

Gabe is an excellent example of someone with a product that is awesome for insurance but really has very little to do with insurance itself.

David Wright: I like to think about Innovation and insurance as there actually is no such a thing as Innovation in insurance, there is only Innovation in risk management. People in the insurance industry I think get distracted little bit by what they do every day which is insurance and they forget that the social value of what we’re doing is is insulating people from risk and the only way to really affect insurance is to affect the risk

Gabe Glynn: yeah to your point when we started this journey it wasn’t about insurance for us it was about how do we how do we make sure that the environment these people are working in is it is a safe and productive as it can possibly be.

We cover a lot of ground in our conversation, including the culture of manufacturing, why unemployment is so low in Iowa and, of course, how to spot shoplifter.

Here is Gabe’s podcast homepage and MakuSafe’s homepage. Big thanks to Gabe for his time and use of his podcast equipment for our recording! Thanks for listening.

Subscribe to the Not Unreasonable Podcast in iTunesstitcher, or by rss feed. Sign up for the mailing list at notunreasonable.com/signup. See older show notes at notunreasonable.com/podcast.

Bryan Caplan on the Case Against Education

This show’s guest is Bryan Caplan (youtubemp3), Professor of Economics at George Mason University whose latest book is *The Case Against Education: Why the Education System is a Waste of Time and Money*. In this book Bryan makes the point that if we judged education based on how much, as adults, we use what we learned in school, we’d have to admit it’s a shocking waste of time and resources:

David Wright: I remember the first time it occurred to me. I was in third grade gazing out the window and I figured this whole racket was basically just free babysitting for my parents, ah, was I right?

Bryan Caplan: For young kids it’s definitely that, but there’s definitely a lot more going on. Schools definitely teach skills, most obviously literacy and numeracy. But then a big thing that’s going on is that you’re jumping through hoops trying to impress future employers.

Now employers don’t know what you’re actually doing in third grade but since the whole system is so cumulative and sequential.. basically in third grade you’re getting ready for forth grade and fourth grade for fifth grade and so on. And then Junior High and middle school you’re getting ready for high school and high school then is preparing you for college. So very often what you’re learning you’re going to use in a subsequent class. It is used for gatekeeping. But then it’s finally, when you get a job, that’s when the stuff you learn you can safely forget.

Instead, education is about signalling qualities you need to succeed in the workplace. That means more education doesn’t really benefit society!

Bryan Caplan: So the problem is this: when you go and get a better degree this selfishly raises your earnings because you look better but it does not enrich society in the same way. If everyone were to go and get a college degree this would not mean that everyone is good in the same way. This would mean you now need additional degrees in order to convince employers of your awesomeness and we can see very clear empirical evidence of this that over time there’s been massive credential inflation this means if for one and the same job you now need a lot more education to be considered worthy of employment.But if the whole society gets more credentials this doesn’t make the whole society better instead this means that employers will say what’s so great about a high school diploma, almost everyone’s got one now so now you’ve got to get more… as a result there’s this rat race…

So what kind of a world does Bryan want? One with a lot less education spending:

Bryan Caplan: I call it educational austerity. If very wide access to education has caused fruitless credential inflation then reducing access will cause fruitful credential deflation and basically go back to a world where you can get a good job out of high school right so this is the main thing that I push. I talked about a lot of different ways you can cut spending there’s so many different possibilities. I’ve got a blog post on 47 ways to cut spending right so I’m agnostic but there’s just not much research on what’s the optimal way to cut education spending. It’s just not a big topic as you might guess.

And of course we talk about actuaries…

David Wright: Why don’t more people go into vocational jobs?… By training I’m an actuary and that is in some ways I vocational job because I (only) have a bachelor’s degree but it’s it seems to me quite an interesting sector because there’s no other there’s no other profession I think that would be a comparable to actuary where you don’t have to get a graduate degree and so that school system doesn’t hold the keys to the Actuarial profession.

… so I think vocations are great and I think that they’re underrated go by our society why do you think that might be?

Bryan Caplan: Basically there is a pile of government money in favor of the status quo and the status quo is a modest modification of the system from Oxford and Cambridge, right, so basically modern colleges have the fingerprints of early [inaudible] was basically there to train the elite for Law and Medicine and the Ministry…

and one of the main things that education signals is sheer conformity.

I have to admit I remain uncomfortable with the length to which Bryan follows the logic but this book is much more convincing than you’d expect.

We much more than the above, including Bryan’s very interesting idea of the Ideological Turing Test, that just because education is signalling doesn’t mean it doesn’t work and the impact of educational signalling on the civil rights movement!