Tort Reform

Posted on by David Wright

90% of insurance press falls into three categories:

1. Puff pieces about some industry grandee or cat product “innovation”

2. Chicken Little Tales about how some legislative catastrophe is just around the corner (climate change is big, as is whining about the lack of US tort reform)

3. SHOCKINGLY boring actuarial stuff.

#2 is the intellectual trap. You think you’re doing a good job because you think you’ve identified a neato risk nobody has priced in.

*smack*

Insurance folks are meant to be paid to assess risk. But risk isn’t something you see and touch, have drink with and that gets punched out by that drug dealer because it touched his girlfriend in the strike zone at a bar late that night in Vegas last year.

No, risk is a helpful intellectual framework in which to think about things that might happen. You might think that this is a profession for people who are good at figuring out what risks are out there.

You, my friend, could not be more wrong.

(Exaggeration for effect alert)

Insurance isn’t about assessing risk. Insurance is about getting on oversubscribed deals, writing more in cyclical upswings, having low expense ratios and conservative bond portfolios and not being played for a sucker by a broker. People who assess risk don’t write anything.

Not that you should have a team of died-in-the-wool morons running your portfolio, mind you, but you could probably get away with it if you had a microscopic expense ratio and laid ¾ of them off in a soft market.

But that’s barbaric. My point is that people that think too much about stuff don’t write any business – imagining ways something could go wrong is easy. I had a prof in U that said MBA programs are about teaching people a hundred million reasons to say no to ideas. Living with risk is the real skill.

So all this whining about Tort Reform by insurance companies is a red herring. The market price will adjust if claims blast off into the sky because of climbing tort expenses.

Otherwise, you’re still making money on it, so why waste your breath?

Arts & Science

Posted on by David Wright

So is insurance an art or a science?

Strange question, but it’s hardly above the towering ego of a CEO to nod in the direction of Einstein and Picasso when discussing insurance business strategy.

Let’s put it differently: what the correct balance is between capital and labour? Or, because we always start with 100% labour: can a computer program do this stuff profitably?

Wearingly, the answer is: sometimes.

People, relative to computers, are good at at identifying when another person is making an error or trying to mislead/screw you. Let’s be generous and call this insight artistic.
Computers are good at crunching through datasets in a scalable and standardized way. This would be the ‘science’ of insurance.

Now, there are instances when the artist is needed more than the scientist. How can this be? Well, insurance isn’t so monolithic as it may seem because different lines of businesses need different combinations of skills.

So, if the answer is ‘both’, then are the opportunities better for artistic lines or scientific lines of business?

Good question, let’s look into that shall we?

What is the Optimal Insurance Company Strategy?

Posted on by David Wright

Good question.

Insurance companies have three revenue streams:
1. Premiums
2. Investment Income/Gains
3. Other Revenue (usually fee income or something).

and three expense streams.
1. Claims and related expenses (adjustment, etc)
2. Underwriting expenses (salaries, etc)
3. Overhead and taxes

The question of insurance strategy is mostly about picking which of these factors you want to focus on optimizing. There’s an answer for each. Sometimes, a strategic solution will address more than one, even. Exciting, isn’t it?

BUT WAIT. There’s more.

The thing that really makes insurance really baffling is risk.

For example.

At Wal*Mart, and many conventional businesses, they have one lever, costs, and their success depends on just how damn hard they can push the thing. Costs go down, prices go down, sales go up, pricing power increases, costs go down… Lather, rinse, repeat. Their services, like insurance services, are a commodity.

An insurance company is weird, though. You fundamentally don’t know what your COGS are, sometimes until much later. So you can trick yourself into thinking you’ve made money when you haven’t. We’ll get to that later.

Most importantly, there’s a philosophical battle that needs to be fought before you really start analyzing strategy. And that is whether insurance underwriting an ART or a SCIENCE.

Blogging

Posted on by David Wright

So I haven’t written much recently. Got married, been busy. Usual stuff.

More importantly, I had it in my mind to use this medium for a project that is a bit bigger in scale than my previous entries. So big, in fact, that I haven’t done a thing. Too big, then, is the point. I’ll see if I can break it up.

The project is: what is the optimal insurance company strategy?