At The Coal Face of Insurance Analytics

Ladies and Gentlemen, welcome to the coal face of insurance analytics.

Today’s guest is Jim Weiss, the director of analytic solutions for ISO. ISO houses perhaps the richest insurance data repository on the planet and among Jim’s responsibilities is building models that don’t use it! I joke.. Actually, Jim is exploring new frontiers of modeling for insurance purposes. This episode works very well in conjunction with the Cathy O’Neil episode which of course I recommend you listen to right away!

Right out of the gates Jim discusses his view on whether big data in insurance is overrated or underrated:

Jim Weiss: I think if you were gonna write a history of big data in insurance ending today, I would probably have to say that maybe big data in insurance is a little bit overrated. If you look at our industry in recent years, I think it’s kind of a graveyward of big data and analytics type projects that went overbudget overdeadline. I think there were a lot of factors contributing to that, but they can largely be characterized as maybe we’re not doing these projects very well but moreover we’re not picking these projects very well.

Jim on proxies:

Jim Weiss: I feel it’s very difficult to identify something to predict risk behavior that isn’t a proxy unless you’re doing individual risk rating. Unless you’re using something like prior claims to predict future claims, what variable isn’t proxy-ing for something? [From there we talk about my own history as a teenage driver (not great)!]

Jim on how good we are at what we do:

Jim Weiss: Myself and a colleague did a study of some rate level reviews that had been conducted in our industry over the past several years to see how many of them reversed themselves over one or two years.

David Wright: change signs.

Jim Weiss: Not even change signs, substantially reverse themselves. So you have a plus five rate percent rate indication. You notify your agents, you put it in your systems, you sent out hte policy holder notices. you tell the regulators you do eerything you ahve to do. you spenda ll that money, time and effort. then one or two years later. boom, negative five. Completely reversed…

Luckily in the study we did, the majority of the time at the time the rate level indications didn’t reverse themselves within one or two years. It did happen a little bit more often than perhaps I would think.

DW: why do you think that would have happened.

JW: because, Yogi Berra has an expression that making predictions is hard, especially about he future. Ther are so manythings you don’t know at the time you make the analysis.

Finally, in my favorite part of a conversation full of big insightful moments, we discuss whether and how to use complex modeling (and what on earth is modeling for?!):

Jim Weiss: I think, to some degree, applying the smell test to the types of variables you’re looking at, ‘is there some basis in reality’, can be a healthy thing, but I don’t htink it should be preclusive of exploring more complex approaches where prudent. But I’m not sure pricing is necessarily the prudent place for it. It may be but there are a lot of use cases for big data and analytics and sophisticated techniques in our industry which far transcend pricing.

and later..

Jim Weiss: the mix of complicated problem and complicated solution is a particularly problematic one… if you don’t really understand why exactly the approach you’re taking does solve that problem then how do you know it’s not a coincidence.

David Wright: I’m wondering what the objective is of modeling. So one characterization of the objective of modeling is to get an answer you can use. So I get a rate, or I get a loss estimate. I wonder if the real objective is to develop an understanding of the problem. Which is a human consumable… So the output isn’t the answer the output is the story.

This conversation was jam packed with fantastic stuff and the time we spent together flew by. Thanks to Jim for his time and the opportunity to learn! Subscribe in iTunes, stitcher, or by rss feed.


Turning Reinsurers Around With Joe Taranto

Joe Taranto is one of the most successful reinsurance executives in the last 40 years. He has turned around and taken public two reinsurers who even today are very prominent and successful companies: Transatlantic Reinsurance Company and Everest Re, the latter of which he spent 20 years leading as CEO and 10xing the firm over that period.
Joe started his career at AIG, a firm that has produced some of the most important leaders in the insurance business, Joe among them. We learn what is was like working there, Joe’s turnaround experienes, his strategy and philosophy of management and leadership.

Listen to whole thing!
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Robin Hanson Will Blow Your Mind


The latest guest on the Not Unreasonable Podcast is Robin Hanson (read his blog!)

Robin is one of the most original thinkers of our time. I’ll borrow a description from Bryan Caplan, who I think described him best:

When the typical economist tells me about his latest research, my standard reaction is “Eh, maybe.” Then I forget about it. When Robin Hanson tells me about his latest research, my standard reaction is “No way! Impossible!” Then I think about it for years.

Some time ago, Robin thought he had uncovered some ways to make the world a better place. He expected people to either agree or disagree. Instead he got indifference. How could that be? Does nobody care?

This led Robin to becoming an economist and, eventually, an answer: we aren’t motivated the way we say we are or think we should be. We do care, we just care more about other stuff. Stuff we don’t talk about. Those hidden motives are the subject of Robin’s new book (authored with Kevin Simler), The Elephant in the Brain.

From our conversation, some favorite excepts of mine:

Robin Hanson: Human behavior is consistently well adapted to its ancient environment. We are intelligent and clever about why we’re doing things. But then we have these conscious thoughts. We think we have a plan and follow that plan. But we mostly make conscious rationalizations for things we do. Most of the elephant in the brain is at this conscious level. The level of the reasons we tell ourselves we are doing this. And those reasons are just wrong compared to the reasons we actually have.

We are actually good at following the actual reasons we have, but the disconnect is when we try to explain it.

From earlier:

Robin Hanson: Once farming became possible, it was only possible because of human cultural plasticity. If we had just kept the same sort of norms and behaviors we had as foragers we would still be acting a lot like animals.

With our cultural plasticity we could create new norms. There was a new set of behavior that was the right behavior and a new set of things that were the wrong sort of norm violating behavior. It took a while but the farming world was able to come up with a whole new set of norms and values and enforce those and that allowed us to live and work in a very different world. Intead of wandering around we stayed in one place. Instead of egalitarianly sharing we had property and inequality. Instead of intermittent violence and mostly peace we had war and a lot of it. And we had so many things that were different than what foragers did.

And later:

Robin Hanson: Lately wealth has been dramatically increasing per person and that’s the other big trend over the last few centuries and that’s been causing most of the cultural trends you see. So humans are primed to act differently when they’re rich than when they’re poor. That’s an explantion for why we have increased leisure, art, travel, decreased violence, increased democracy, decreased fertility, decreased religion.

David Wright: Is it the case that foragers, then, are in some ways wealthy?

Robin Hanson: Anthropologists called them the original affluent society. They’re affluent in some ways but not others. They don’t have a lot of material wealth but they have a lot of friendship, play, dance, music. They’re living in a world where when they do something that feels right it roughly works.

…We’re being rich like that in our leisure time but at work we’re hyper farmers.

Do listen to the whole thing!

In Love with Chaos with Michel de Lecq Marguerie


This episode features Michel de Lecq Marguerie. Michel, a most English sounding fellow with a most french sounding name, is one of the most creative deal makers I’ve ever met.

On paper his creativity shouldn’t surprise us: Michel is an accomplished musician, having won a scholarship to the Royal Academy of Music as a teenager. He was an unfocused student, however: “the rest of my education was pretty miserable.. I just wasn’t really engaged with it… I think I had a certain arrogance about music that I was involved in and assumed I was simply going to pursue a career in music like my father and like his father before him.”

Eventually realizing it wasn’t for him, Michel became singularly focused on supporting himself and managed to hustle his way into a job at Lloyd’s. Michel points out that hustle isn’t something that comes naturally to musicians and artists, and in music even he is a different guy: “On the music side funnily enough I would say I’m more on the passive side and actually I enjoy that”.

Michel in business was anything but passive, moving from London to Toronto to join the fledgling broker Beach & Associates. He found the feeling of an empty desk and the need to create something from nothing exhilarating. Eventually I asked “do you like pressure?” and this kicked off my favorite part of the conversation (around minute 52):

I do actually, I do. I think I like a bit of chaos as well… Since I left Beach, I think I’ve created more Chaos for myself. Which I.. I think I love it.

Michel’s love of high pressure situations made him a natural entrepreneur and he credits that path to unlocking his own super power (my words) of creative deal making.

In the interview we also cover what it means to be creative in reinsurance, how Michel’s interview while racing around London in a porche went and what it felt like picking up the pieces (literally) of his office after the IRA bombing of Bishopsgate.

Let none of these adventures mislead you. Michel is one of the most effective reinsurance brokers alive. Credit that to his unique perspective on problems and pressure extreme enough to forge incredible skill.

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Intangibility, Economics 2.0 and What Makes A Modern Firm with Arnold Kling


We talk a lot about technological change but organizations are evolving, too, partly (maybe mostly) due to technology but this line of thinking also stands on its own. No less a celebrated thinker than Peter Drucker reserved a special place for organizational evolution in the innovation universe.

Recently there has been some progress on measuring changes to organizations, most prominently from a new book called *Capitalism without Capital* by Jonathan Haskell and Stian Westlake, which argues that what they call intangible assets are growing in importance.

Intangible assets are ideas, knowledge, aesthetic content, software, brands, networks and relationships. These sit collectively in the heads of employees of an organization and in some ways sit between theirs heads in that organizations are webs of relationships and collaboration. The framework the authors establish is that intangible assets have four qualities: they scale easily, their costs are sunk (you can’t sell them!), they are synergistic, in that the combination of these assets supercharge their effect and they create positive spillovers outside of the firm itself. Intangible assets are most effectively exploited by large organizations.

Other research supports this by pointing out firm margins are increasing but startup rates have declined! This paints a complicated picture and I wanted to find someone to help me think it through.

My guest today, Arnold Kling, has been an early commenter on these trends, publishing essays in the 90s and early 00s discussing declining variable costs (link) and the intangible economy (link to book). He has an incredibly unique perspective in that he has a mainstream economics education (completing his PhD dissertation at MIT under Nobel Laureate Robert Solow) but also started, grew and sold an Internet business in the 90s (see his story here).

There were three themes to the conversation that I thought were excellent.

  1. Management! Perhaps THE thing that distinguishes the modern firm from the (soon to be) extinct is the ability to manage software development. It is hard and a distinct business process that needs to be mastered. The best companies of today take the ability to do great software and apply it to many different businesses. One model of Silicon Valley is that it is a repository of software engineering and management expertise to be dumped on every industry on earth.
  2. Firms are changing and the reading Capitalism Without Capital is a good way to learn about how. But Arnold argues that some of this has always been there and we are just measuring things better (though still not perfectly).
  3. I didn’t even realize it until this conversation but I’ve been drawn to Arnold’s work because it makes sense to me in a way most economics doesn’t outside of a few core concepts. Economics tends to glide over what makes businesses work. Arnold, as a former entrepreneur himself, makes no such mistake.

Read Arnold Kling!

Addendum: Arnold comments and found our conversation interesting enough that he published an essay on Medium about it. An excerpt:

Twenty years ago, management in book retailing meant deciding where to place stores in shopping centers, deciding which books to stock, and creating displays that attracted customers. But now, Amazon has instead made the management of software teams crucial for its book retail business. What we mean today by “management in book retail” is different from what it used to mean.

Economic textbooks describe business leaders as if their job were to aggregate machines and homogeneous workers to produce output. Sixty years ago, this might have been a fair approximation. At that time, many large firms had been started and were being run by men without much formal education, relying instead on experience and grit.

But today, business strategy is more complex. Getting the most out of highly-skilled employees is more challenging. Making the best use of computer technology requires a careful analysis of how new developments affect the business environment.

How Ted Blanch Left His Dent in the Universe (or at least in Minnesota)

This episode features Ted Blanch. Ted to me is one of the greatest leaders the reinsurance industry has ever seen and one of the most underrated leaders of any industry in any era. Ted ran the firm EW Blanch, taking over at about 50 employees and growing it into a billion dollar company by the mid-90s. That alone puts Ted among the most successful businessmen in the world but EW Blanch was also a pioneer in catastrophe modeling and has as its legacy a reinsurance industry in Minneapolis. How many can say they reshaped the economic geography of the United States? How he did it, his philosophy of management and Ted’s downright humility shine through in our conversation.

Two things I learned in this conversation that I’ll carry with me for a long time are how catastrophe modeling as an investment for the firm (and they were a pioneer) followed the classic startup path: it was a stupid idea.. until it wasn’t. I’ll let Ted tell the story:

If we had laid a bigger egg, it would have to have been dropped by an albatross.

And then a wonderful thing happened. And the wonderful thing that happened was Hurricane Andrew. Where all of the people who had their own systems for measuring their cat exposures found out just how wrong they were. Did they have a desire to be right? I don’t know. But I’ll tell you one thing, the guy sitting in the corner office didn’t want to have to go to the board or the shareholders and say we’re not doing anything about this. So everybody started using modeling.

On the organizational front, two things stood out. First that he hired young and trained folks obsessively. Here Ted explains the development program:

TB: We had professional educators who were doing it. We never had them teach, we only had them organize it and help develop the curriculum. The teachers were always the people who worked at the firm.
DW: What did it look like for a new student coming into the program…
TB: Basically it was divided into two parts: one was classroom work and the other was we gave them jobs to do so they were always working…
The classroom work was basically half days to whole days and it went on for, I don’t know, my recollection is we were doing about 9 weeks of classroom work which was divided into sections in a syllabus to cover a bunch of different things. And then we would test them and they liked being tested…

Second, he shared in the equity of EW Blanch with his producers. Ted one last time:

TB: My belief was that I would be better off having a smaller share of a much larger pie than I would having a big percentage but not being able to attract and work with people who really felt good about what they were doing.

DW: did you always know that would work?

TB: No, no I didn’t know it would work it just seemed like the right thing to do.”

There’s so much more in our conversation, including what Ted thinks of Minneapolis, a discussion on whether or not he fired his father and what he’s learning about now after almost 60 years in the business.

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Sales, CEOship and Unknown Unknowns with Bart Hedges

Next on the Not Unreasonable Podcast is Bart Hedges. I’ve been doing business with Bart for years and I’ve always liked his style. Bart is an actuary, former teenaged entrepreneur and the son of a car salesman. He recently stepped down as the CEO of Greenlight Re, an affiliate of David Einhorn’s Greenlight capital and an innovator in the reinsurance business. On top of it all, Bart’s ‘good guy quotient’ is off the charts.

One book we discussed on the show is The Mental ABC’s of pitching, which I actually came across in a David Brooks column. Here is the passage that got me to buy the book and the key lesson from it that I carry with me to this day:

A pitcher is defined, he writes, “by the way the ball leaves his hand.” Everything else is extraneous.

In Dorfman’s description of pitching, batters barely exist. They are vague, generic abstractions that hover out there in the land beyond the pitcher’s control. A pitcher shouldn’t judge himself by how the batters hit his pitches, but instead by whether he threw the pitch he wanted to throw.

Dorfman once approached Greg Maddux after a game and asked him how it went. Maddux said simply: “Fifty out of 73.” He’d thrown 73 pitches and executed 50. Nothing else was relevant.

Focus is one of the most powerful forces in the universe. Cultivate it!

Do listen to my interview with Bart. And if you want to receive an email when I publish a podcast, please sign up here!

The Not Unreasonable Podcast Episode 3- Don Mango

The first Not-pilot episode of the Not Unreasonable Podcast is up! thinking-chimp_card

Don Mango is one of the most important thinkers in insurance. He has published numerous papers and helped, in my mind, the rest of us figure out what on earth to do with all the computational advances of the last 20 years.

In this episode we talk about that as well as how publishing research changed his life; what is relative strength is among published authors; the peculiarity of the intellectual community of actuaries; how capital should be modeled (you can all eat the pie!); the future of technology in insurance and more!

I’m happy to say Don’s also an excellent guy and very gracious interviewee.

In the conversation we discuss a few papers I enjoyed:
Mango’s first publication

Capital as a shared asset (eat the whole pie!):

On his paper on random number generation: “This is really valuable and I couldn’t imagine an actuary in a more traditional role would have had access to”

risk load and default rate of surplus, which got him attention from the more traditional capital markets:

His pragmatic papers:
how the normal copula is flawed.

How to present DFA results to the board of directors (including stories of his errors!)”

The Kreps reserve range presentation (I think… two choices here):

Writing on actuaries as engineers (and the future!):