I’ve put together some analysis for work that never got used, so I figured I’d throw it up here.
First, there’s a strange conundrum that confuses even the most enlightened financial observers. Here’s a quote from David Merkel’s blog: Continue reading Catastrophes and Reinsurance Stocks
Insurance companies and bond portfolio managers have a lot in common in respect of their financial risk profiles: fixed payments in exchange for an uncertain probability of loss of principal. Insurers call this loss a claim, while cross-default provisions in loan agreements make losses apocalyptic. Continue reading Love Boring?
Here is Celent writing about data and coordination, which I think boils down to the idea that IT is gradually becoming a core skill of other business functinos.
I think that’s right. I also think that IT progress can be categorized. Continue reading Coordinating Data
I feel like a bit of a pretentious ass-clown for blogging so little about the business I work in. As much as I often go on about loving my job, you’d think I’d have something more to offer than cheap theororizing. Continue reading A Hard Market
Mandatory Workers’ Compensation insurance in the US was part of the legislative avalanche during the Progressive Era. It started in New York, probably following the Tringle Shirtwaist fire, but other states quickly started following suit.
Well, the Supreme Court didn’t like this much. In a 1917 judgment the court ruled that Workers’ Comp didn’t apply to maritime workers because the seas weren’t technically part of the States’ jurisdictions.
Sound logical enough? Sure, but get a load of this:
The remedy of the New York Workmen’s Compensation Act is inconsistent with the policy of Congress to encourage investment in ships, manifested by the Acts of 1851 and 1884 (Rev.Stats., §§ 4283-4285; c. 121, 23 Stat. 57), which declare a limitation upon the liability of their owners
It’s going to hurt investments in ships! Incredible.
And it gets better.
So a few years later, presumably when progressives got some hand in Washington, the feds went ahead and enacted a federal Workers’ Comp statute that covered waterways, creating the US Longshore and Harbor Workers’ Compensation industry.
And today US L&H Comp premiums are today more than 1.5x normal Workers’ Comp premiums.
The reason? Claims are way more expensive in the federal legal environment.
From the Longshore Blog:
Oops!
I recently listened to an interview with Hal Varian, wherein he advocated a common view: the importance of statistical analysis is increasing and it isn’t likely to stop soon. Organizations and individuals should therefore concentrate on improving analytical capabilities to stay ahead of (on?) the curve.
I’m on board only with a very specific version of this view. Since routine tasks can be automated, the only part of a statistical analysis that is really ‘hard’ is the pre-analytical part: sourcing, verifying and scrubbing the data. Once you have a crisp and polished database, the conclusions often leap off the screen.
Hal has an interesting way of describing competitive advantage:
[Having a] scarce factor of production that is highly complementary to something that is ubiquitous and cheap.
It’s extracting something that we can recognize as data from the mess of everyday life that is the real skill.
Over to Europe, where the courts just destroyed a reliable dataset for auto insurers, who now can’t rate policies based on the gender of the driver.
Now, gender is an awesome data point: it’s easy to record, hard to fake and damn good at predicting outcomes.
The problem with it is, of course, that correlation and causation aren’t the same thing. Male-ness may be correlated with a bad driving record, but it isn’t causing it. Besides, within reason, once a guy, always a guy. Where’s the incentive for de-risking dudeness?
As I read it, the courts are implying that insurers should only rate on causation variables, because then you’re rewarding or punishing for actual changes in risk.
I can see logic in that.
The post-PC world is not heralded by the iPad, regardless of what Steve Jobs says. You need a PC to use the thing!
When I hear ‘Post-PC World’, I think people are really talking about a few trends:
I think that this insurance technology blog, gets the trend right, but screws up the attribution. For instance, this sentence doesn’t make sense:
There will be no patience for slow software, no perseverance for software that isn’t easy to use and an expectation that they can interact with the insurer in a way that works for them.
Rubbish. People have always hated crappy software. What’s changed is that there is much more supply of excellent software.
Like most economics, this is not about demand. It’s about supply.
To me, the main effect that computing trends are going to have on the insurance industry is to reduce costs and so reduce premiums. But the slow grind of process improvements are only newsworthy over large timescales.
People want game changers!
I am reminded of SRW’s response to Cowen’s TGS:
I think that Cowen is lamenting a scarcity of breathtaking [technological] resets… Electricity helped make bread cheaper. But I don’t think cheap bread impresses Cowen as much as the fact that, post-electricity, humans colonized the night and Presidents colonized living rooms.
Indeed.
Finally, some real innovation!
A new online system from the Chubb Group of Insurance Companies… allows drug and medical device developers to quickly secure required insurance documentation for clinical trials around the globe.
“If a clinical trial is delayed because a certificate of insurance is not available, inaccurate or incomplete, it also shortens the timeframe during which a life sciences company enjoys patent exclusivity,” added Goudsmit
Now THAT’s something of value to the world. Like, literally measurable economic benefit.
Even if some of us are skeptical of IP.
Well done, Chubb!
Much has been said about this.
I’d say the most notable take-away from this disaster is the awesome achievement of the preparedness of the Japanese for this kind of thing. I read somewhere that earthquakes you can FEEL happen almost every day down there.
If any country can take a right hook from Planet Earth, it’s Japan.
Professionally, I do very little Japanese business, so I don’t have an awesome intuitive feel for the market reaction here. The quake was a monster, possibly as high as third all time, depending how how the measurement revisions go.
And that’s the most important point, I suppose. Quakes are notoriously hard to get a handle on quickly. The property damage can take literally years to uncover (think cracked foundations and leaky pipes).
Throw in a wonky nuclear plant and extant flooding from the tsunami and it’s a big fat question mark.
But these people don’t buy too much EQ insurance (it’s pricey and they feel pretty prepared), so I’m pessimistic about the damage to the marketplace. April 1st is a big renewal date, particularly for the Japanese covers.
It won’t take too much internal finangling for the ex-US folks to wrestle some capital away from the dead-in-the-water US casualty market.
If you ask an old-timer about the biggest changes in the insurance industry during his career (as I did recently), you get some variation on the answer I got: MBAs and lawyers and actuaries.
I see two sides to this complaint, actually.
First, the industry has taken the underwriting role and split it out into specialized functions.
Second, these various specialists pretend that they’re doing something different than their ancient predecessors and have introduced a steaming pile of jargon.
I’d say the first is actually good (sorry, Bob!), but the second is terrible.
Ok, specialization first. When you educate people, they specialize: lawyers do the legals, actuaries do the maths and MBAs do the MGT.
The trick is that these people think they’re doing something new when they’re not. It’s really hard to prove this empirically, but I’d argue that specialization improves the overhead part of the expense ledger and not the claims cost part. That is, they’re not doing any better of a job, but they’re doing it more cheaply.
But boy, you’d be hard pressed to figure that out if you listened to these people talk.
I’ll focus on actuaries since that’s the part I know best. They come up with the most impressive models: truncating this beta function, integrating that pricing curve. All to try and figure out whether the market price makes sense. And still their work boils down to 1) an inflation assumption; and, 2) a vague assumption about the relationship between reported and outstanding claims.
Now, I don’t believe for a second that an underwriter in the 50s knew any more or less about whether a piece of business would make them money than an underwriter does today, or will in a hundred thousand years.
More importantly, though, the ability for people to actually wade through the misleading math is an order of magnitude rarer than the ability to understand the driving assumptions.
They erect this fortress of jargon to keep people out and make themselves feel better about spending a decade or more in post-secondary education before they really get on with their careers.*
I’ve recently come across an interview with Freeman Dyson, famous mathematician, author, physicist, etc. No PhD here and it hardly stopped him. I found it amusing that in his day, the PhD was considered a ‘German thing’ and not as important as it is now.
Behold credentialism: a force for people to, in the words of a good friend of mine, “add value to themselves”.
*Actually these people are, individually, friendly, smart and hard working folks with not a drop of self-aggrandizing intent.
Not Unreasonable 