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Pricing Insurance Risk With Steve Mildenhall and John Major

youtube: https://youtu.be/ZQHpMVH7d9s

episode page: https://www.buzzsprout.com/126848/11998732

Why did I do this show?

This is important work and needs to be celebrated and I honestly can’t imagine any other media property than the Not Unreasonable Podcast that could give it proper treatment. Steve and John have achieved something tremendous here in capturing the latest theory and practice of pricing insurance.

What did I learn?

Ho, boy, a great many things in my studying for this. During the show I got the chance to really solidify my understanding of the concept of allocating margin vs allocating capital. Like all brilliant ideas it’s absurdly simple once you get it. For bonus marks I’ll go with Steve explaining Freddy Debean’s remarkable result for how to break a TVAR tie.

What was my favorite part?

There has been some incredible work by incredible researchers that will be used by actuaries for generations to come and we deliberately tried to work in the names of as many of these giants as we could. Insurance, oddly, has too little of a sense of its own intellectual pantheon. It exists! We should better celebrate the intellectual giants that support our work.

Some papers referenced:

Freddy Delbean!

The paper is *Coherent Risk Measures*

As distinct from *Coherent Measures of Risk* which is his top cited paper (and also a good one of course!)




What I Learned In 2022 (and the books I read!)

Three things I learned in 2022:

  1. Florida is not weird, insurance is just really hard to get right. For one, it is a community of migrants who don’t totally trust each other yet and, two, it’s massively exposed to hurricanes. Natural disasters put a lot of pressure on the social fabric of any society and Florida’s social fabric is pretty thin! See my episodes with Gary Mormino and Dave DeMott on Florida. For 2023: A hypothesis here is that all disaster prone regions/societies will have dysfunctional insurance industries. Is that true? 
  1. Insurance is an expression of our value system. If you’re an insurer in Florida, for example, you have to be very careful to choose which subculture you want to insure as each will deploy a different set of values in their relationship with an insurer. I wrote an essay describing how it is the job of the insurance underwriter to use moral judgment to assess an insured’s values. See episodes with Howard Kunreuther, Joe Edelman and Jen Brady for discussions of values and insurance and this clip with Stan McChrystal nails it! 
  1. Your social theory only works if you can sell insurance with it. Joe Henrich taught me that we don’t pick our culture, we copy the culture of the prestigious. A lot of people have a problem with a big implication of this: it takes generations for a culture to change. If our treatment of risk is dictated by our culture and culture changes slowly, does that imply that we can’t do anything about newly identified risks? It does! My conversation with Joe Edelman explores some possibilities of another way and I’ve listened to a ton of interviews by Jim Rutt and Jordan Peterson studying this. It feels like something will be discovered here but not yet. Today, political compulsion is the only way to influence behavior reliably and no other theory of motivation is worth a damn. For 2023: What other theories can I test?

My top episodes for this in terms of downloads were: 

  1. Tyler Cowen on Talent
  2. Robin Hanson on Distant Futures and Aliens
  3. Howard Kunreuther on Behavioral Economics of Risk

Someone once asked me to list out the materials I use to prepare for my podcast. This year I studied about 40 books (some are re-reads, very few cover to cover), probably twice that many academic papers, probably 10x that many podcasts and interviews and a huge amount of time just thinking about what on earth I believe about all this stuff. Below are the books on my shelf and in my kindle this year (plus one library book I took back!).

  • Aspiration by Agnes Callard
  • Democracy and Decision by Brennan and Lomasky
  • Nudge by Thaler and Sunstein
  • Moral Economies of Corruption by Steven Pierce
  • Emerging Perspectives on Judgment and Decision Making
  • Thinking, Fast and Slow by Kahneman
  • Team of Teams by McChrystal
  • Leaders by McChrystal 
  • Risk a User’s Guide by McChrystal
  • My Share of the Task by McChrystal
  • Bureaucracy by James Wilson
  • Insurance and Behavioral Economics by Kunreuther
  • Mastering Catastrophic Risk By Kunreuther
  • The Complacent Class by Tyler Cowen
  • Stubborn Attachments by Tyler Cowen
  • Talent by Tyler Cowen
  • Creative Destruction by Tyler Cowen
  • What Price Fame by Tyler Cowen
  • Big Business by Tyler Cowen
  • The Art of Not Being Governed By James Scott
  • The Moral Economy of the Peasant by James Scott
  • The Sociology of Philosophies by Randall Collins
  • Why we Fight by Chris Blattman
  • Diminished Democracy by Skocpol
  • Human Agency and Language by Charles Taylor
  • The Righteous Mind by Jonathan Haidt
  • Self Efficacy by Bandura
  • Self Determination Theory by Ryan and Deci
  • Pricing Insurance Risk by Mildenhall and Major
  • Utilitarianism and Beyond by Amartya Sen
  • The Secret of Our Success by Joe Henrich
  • Seeing Like a State by James Scott
  • The Limits of Organization by Ken Arrow
  • Modern Warfare by Roger Trinquier
  • Risk Society by Ulrich Beck
  • The idea of a social society by Peter Winch
  • Why Democracies Need Science by Collins and Evans
  • Artifictional Intelligence by Harry Collins
  • The WEIRDest people in the world by Joe Henrich
  • The moral foundations of politics by Ian Shapiro
  • Rethinking Expertise by Collins and Evans
  • Land of Sunshine, State of Dreams by Gary Mormino
  • Dreams of a New Century by Gary Mormino
  • Age of Em by Robin Hanson
  • Elephant in the Brain by Robin Hanson

Addendum: I pulled my notes docs from a few of my interviews that listed out academic papers I took notes on. The two sources are the citations from the books above and me applying Cowen’s second law. Mostly these are from deep dives into literatures on Meaning and Motivation. I haven’t captured quite everything here because I don’t always take notes on all the papers. Google Scholar is a ridiculous treasure trove but not all literature is good!

  • Understanding a Primitive Society – Peter Winch
  • The Rapacious Hardscrapple Frontier – Robin Hanson
  • Testing the Automation Revolution Hypothesis – Keller Scholl, Robin Hanson
  • Post-conflict Recovery in Africa: The Micro Level – Blattman
  • Civil War – Blattman
  • Gang Rule – Blattman
  • Forscher, P. S., Lai, C. K., Axt, J. R., Ebersole, C. R., Herman, M., Devine, P. G., & Nosek, B. A. (2019). A meta-analysis of procedures to change implicit measures. Journal of Personality and Social Psychology,
  • Consensus-based guidance for conducting and reporting multi-analyst studies
  • Mapping the moral domain. -Nosek
  • Understanding and Using the Implicit Association Test: I. An Improved Scoring Algorithm – Nosek, Greenwald, Banaji
  • Michie, S., van Stralen, M.M. & West, R. The behaviour change wheel: A new method for characterising and designing behaviour change interventions
  • Capability and Well Being – Amartya Sen
  • Equality of What – Amartya Sen
  • Rights and Agency – Amartya Sen
  • Rational Fools – Amartya Sen
  • Putting together morality and well-being – Rachel Chang
  • What is Human Agency – Charles Taylor
  • Utilitarianism and Beyond – Amartya Sen and Bernard Williams
  • The Centered Self – David Velleman
  • Systematic review of meaning in life instruments – Monika Branstatter
  • Beyond the Search for Meaning: A Contemporary Science of the Experience of Meaning in Life – King, Heintzelman, Ward
  • Three Forms of Meaning and the Management of Complexity – Jordan Peterson
  • Meaning and Belonging in a Charismatic Congregation: An Investigation into Sources of Neo-Pentecostal Success – Douglas B. McGaw
  • Finding” meaning” in psychology: a lay theories approach to self-regulation, social perception, and social development – Molden, D. C., & Dweck, C. S.
  • Life is Pretty Meaningful – Heintzelman
  • The three meanings of meaning in life: Distinguishing coherence, purpose, and significance – Frank Martela & Michael F. Steger
  • Routines and Meaning in Life – Heintzelman & King
  • Encounters with objective coherence and the experience of meaning in life – Samantha J. Heintzelman, Jason Trent and Laura A. King
  • (The Feeling of) Meaning-as-Information – Heintzelman & King
  • Motivation to learn: an overview of contemporary theories – David A Cook & Anthony R Artino Jr
  • Motivating the academic mind: High-level construal of academic goals enhances goal meaningfulness, motivation, and self concordance -William E. Davis, Nicholas J. Kelley, Jinhyung Kim,  David Tang, Joshua A. Hicks
  • Motivation for accepting parent values – Ariel Knafo,  Avi Assor
  • Grit: Perseverance and Passion for Long-Term Goals – Duckworth, Angela L., et al
  • Grit, basic needs satisfaction, and subjective well-being -Jin, B., & Kim, J. 
  • Facilitating Internalization: The Self-Determination Theory Perspective – Edward L. Deci, Haleh Eghrari, Brian C. Patrick, Dean R. Leone
  • Regulatory fit: A meta-analytic synthesis – Tamar Avnet
  • Happy Soldiers are Highest Performers – PB Lester

Mark Friedlander on Florida’s Insurance Overhaul

youtube: https://youtu.be/8Bfkrbiazxw

episode page: https://www.buzzsprout.com/126848/11907447

Why did I do this show?

Florida has passed legislation and I wanted an excuse to dig through why it’s so important for insurance!

What did I learn?

That some reinsurers still aren’t happy!

What was my favorite part?

Speculating on what the eventual political consequences to insurance

Gary Mormino on the Social History of Forida

youtube: https://youtu.be/WT0iS-sDa54

episode page: https://www.buzzsprout.com/126848/11848870

Do you think Florida is weird? Most everyone does. Why? Gary is the man to answer this question. Gary is Professor Emeritus of the University of South Florida and has dedicated his career to studying the social history of Florida.

Here is Gary on wikipedia
Here is Gary on Amazon

Quote of the show: “Do crazy people immigrate to Florida or do perfectly normal people come here, and then be a little goofy and go crazy.”

What is the most unusual social characteristic of Florida? 0:00
What are some of the most distinctive features of Florida? 9:37
Florida’s “Florida Man” reputation. 15:49
California and Florida are neck and neck in population density growth in last 100 years. 24:51
Florida is running out of options for reinsuring barrier islands. 35:55
What it costs to live on the coast in Florida. 40:18
How is Florida a Ponzi State? 42:28
What’s the real alternative? 46:55
What are the similarities and differences between Florida and other states in terms of immigration? 53:49
How the Cuban vote has been a solid republican vote since 1961

Why did I do this show?

Gary is ridiculously underrated. Florida is a massive deal and its reputation for weirdness screams out for explanation. There is an insurance question here of course but come on, why don’t more people know Gary Mormino!

What did I learn?

As I expected Florida can probably be explained using a kind of factor analysis of its sociological parts. It is old, its immigrant politics are relatively dominated by communist refugees so skews right, it is “California on the cheap”. We can dig into each of these things and understand that they are all perfectly normal but their combination yields a fascinating place.

What was my favorite part?

This section is sometimes hard for me to write but I’ve got an embarrassment of riches in this episode. The winner HAS to be Gary describing the giant senior community that launches presidential campaigns where everyone drives golf carts instead of cars.

Dave DeMott’s Stories About Florida Insurance

episode: https://www.buzzsprout.com/126848/11840226-dave-demott-s-stories-about-florida-insurance

youtube: https://youtu.be/G7iGuLLZNwk

Dave DeMott is President-Elect of The Florida Surplus Lines Association, Chair of the Legislative committee and sits on the national Wholesale & Specialty Insurance Association committee.
Most importantly for today, Dave DeMott is a real, legit, on-the-ground insurance practitioner in Florida. He gets into the real details and war stories about insurance claims in Florida. 

Dave’s introduction to the Florida insurance market. 0:00
What is a lodestar fee multiplier? 5:23
The problem with AOB 12:29
What work is being done to curb predatory behavior by carriers? 19:03
Water damage and leaky roofs  23:15
What’s the distinct about Florida? 29:28
Lobbyists have their golden opportunity.

Why did I do this show?

I have been studying the Florida insurance market and Florida culture generally trying to figure out why Florida is weird. Dave DeMott is a real on-the-ground practitioner with real war stories and we got some in this episode!

What did I learn?

I learned what a one-way attorney’s fee was! If the attorney settles for $1 more in claim payment than the carrier offered, they get their entire fee paid for plus a multiplier. Holy cow!

What was my favorite part?

Here’s my favorite quote: “The very first time you hear about the loss, you get the you get the notice of loss to your claims team. There’s a notice of loss written by the insurance agent, there’s an assigned AOB, a public adjusters contract and a notice of intent to sue all together at once at first loss.” Insurers get sued at the very moment they learn of the claim!!

clips: https://www.linkedin.com/posts/david-wright-73661214_next-week-the-florida-legislature-sits-for-activity-7007081290201997313-yZYr

Joe Edelman on Designing Meaningful Things

youtube: https://youtu.be/Sjennrn5LNA

episode page: https://www.buzzsprout.com/126848/11585772

More on Joe Edelman

Why did I do this show?

I am looking for a way that we might be able to design a new insurance system. By “insurance system” I mean a way for us to make decisions about what kinds of risks we want to face and what we want to ignore. The amount of information we need to process to make these decisions is too much for an individual to handle so we make them socially. Social decision making is another way of saying “politics” and “regulation”. Does Joe open the door to a better way of regulation?

What did I learn?

In preparing for this and in doing this interview I learned how incredibly powerful it is to have your values identified and named and discussed. There really is something to this!

What was my favorite part?

Hearing about what the most common values are in people. I had thought that there was a lot of similarity and I think that’s right. “contributing” “showing up”. Interesting!

Mark Friedlander on Problems with Insurance in Florida

youtube: https://youtu.be/g63n9Kgq4CY

episode page:https://www.buzzsprout.com/126848/11582094

Why did I do this show?

I’m trying to learn about what the problem is with Florida insurance!

What did I learn?

From Mark I learned some details about fraud rings and how the problem really extends beyond property insurance.

What was my favorite part?

Learning about how property developers are dying to get back into Florida!

Joe Petrelli on Trouble with Insurance in Florida

episode link: https://www.buzzsprout.com/126848/11547382

youtube: https://youtu.be/Cd9JpHsjDr8

Why did I do this show?

Insurance companies operate based on trust. Probably the single most important gatekeepers of trust of insurance companies are rating agencies. Some will find that surprising! Rating agencies are a dominant force in insurance especially in supremely dysfunctional markets like homeowners insurance in Florida where Joe’s company, Demotech, is the dominant rating agency. Florida is a mess and then that mess got hit with the largest hurricane in its long history of hurricanes!

What did I learn?

That litigation reform is very, very hard!

What was my favorite part?

I learn again and again, entrepreneurs are pretty similar everywhere, even those in the weird business of rating agencies!


Brian Nosek on The Gap Between Values and Practice

podcast link: https://www.buzzsprout.com/126848/11461396

youtube link: https://youtu.be/NkKuF–5V60

Why did I do this show?

Brian has been at the center of two massive social shifts in the last 20 years, first the investigation of implicit bias and second the replication crisis in social sciences.

What did I learn?

Incredibly, I had underestimated Brian Nosek! His real contribution was to build technology that massively reduced the cost of conducting empirical studies, paving the way to increased power for studies and massively easier efforts at replication.

What was my favorite part?

“People aren’t happy to get an email from me” he says. Mostly if you are a researcher and get a cold email from Brian it means he’s about to put your research to the replication test. Better be real!


Why should insurance people watch this episode?


All Insurance Purchases are Compelled

This post is part of the social science of insurance series

Nobody Cares About Insurance, Neither Do You

It is common to confuse why insurance exists with why customers buy it. I’ve spent much of my career trying to convince people to spend real money on risk management and am frequently surprised at how little they care, even when they purchase!  This essay is about why that is, what actually motivates insurance purchases and what the implications are for sellers and manufacturers of insurance products. Agents, brokers, underwriters, entrepreneurs and investors, please stop trying to talk customers into buying insurance. They don’t want it. 

Where It All Goes Wrongi

When I sold insurance I noticed prospects almost always asked: “How can I make money on this?”

Reliably making money on insurance is a silly idea of course. Buying insurance isn’t a business opportunity, it’s a service you pay for that, in order to exist, is overwhelmingly likely to give you nothing back. 

Yet we instinctively seek to profit off insurance. I was asked this question while selling health insurance to consumers and while selling corporate insurance ‘treaties’ to multinational insurance companies. I was astonished that the most and least sophisticated buyers of insurance all started from the same place and followed similar paths. 

Nobody wants to pay for insurance when they get nothing back and by this measure, insurance never sounds like a great deal: “I pay you money today so you can pay me nothing later”? Why would anyone do this?

The reason is a bit messy to explain. You should buy it because you are underprepared for financial volatility.

Our lives start with lots of risk and no protection and we somehow decide what risks to focus on through avoidance, mitigation and insurance. You’ll notice, though, that you’re never done with risk no matter how much resource you throw at it. So while there is such a thing as spending too little on protection one can also overdo it. 

While visiting family in Ontario I heard a story of a person living illegally on an undeveloped island in the St Lawrence River who would rant at boater passersby about how civilization will imminently collapse (in this case because of COVID-19). This was a person obsessed with risk and willing to spend every available resource to avoid it1. Of course most of us err on the other side, of buying too little insurance and canceling it too readily. Why these errors?

Cognitive Bias and Insurance

Humans have some predictable blind spots when making decisions called cognitive biases. Even though I think the label is overused2, biases are easy to spot in people who buy insurance. I’ve observed systematic behavior that, if it were not corrected, is incompatible with a functioning insurance market.

Availability bias, for example, roughly means “I believe what I see”. This makes insurance for things we haven’t experienced look expensive. Once we do experience something bad, availability bias causes us to overcorrect. Smart insurers are happy to sell to newly risk conscious customers. But some customers will take that to the extreme and still not buy because they think they can eliminate their risk entirely by mitigation, think of our friend in the St Lawrence River.

Availability bias is also a fickle master: memories fade and our limited focus gets distracted by the next crisis or the one after3. Eventually we find other needs for the resources devoted to mitigation and let insurance coverage lapse.

On top of that, a slew of egocentric biases impede the purchase of coverages designed to protect folks other than the insured. This forms a surprisingly large share of the insurance industry. One example is life insurance, which doesn’t benefit the buyer one bit. Another is liability insurance, which protects others from damages caused by the buyer. When we cause harm to someone there are strong social norms for making it up to the victim. Harm a stranger, though, and who’s going to know? Why would we buy liability insurance to help these people? 

These are the psychological hurdles a large, complex insurance industry needs to overcome: 1) our deficiency in understanding probabilities, especially of bad events, confuses us into buying too little and the wrong kinds of insurance; 2) an overreaction to new information causes us to non-renew coverages when our focus wanders; and, 3) an aversion to fulfilling obligations to others, particularly distant strangers, which limits the size of groups we can integrate with socially and economically. 

How Culture Works (For Insurance)

Let’s go back to our crazy friend on the St Lawrence River. Does his mom know he’s out there? Our inner circle usually blunts our wackier impulses and weighs in heavily on really tough decisions, especially those involving risk. These decisions become social decisions, which are more rational than individual decisions4 because groups are able to 1) incorporate larger amounts of information in decisions and 2) cohere on a shared set of stable, often more self-interested, preferences. 

An interesting feature of social decisions is that they are hard to circumvent. Disobeying the consensus might get you thrown out of the group. We rely a lot on our groups, for a sense of belonging like having family dinner, and for more material benefits of financial support in times of hardship. That cultural evolution has tied these social benefits, literally the most important features of human life, to social conformity is a powerful signal for how important obeying social decisions is to survival. And social decisions don’t end with mom, the concept extends to larger scales. Anthropologist Joe Henrich argues in his book The Secret of Our Success that we are genetically evolved to learn by copying others in a process called cultural learning. We do not understand and do not need to understand why certain behaviors are wise or efficient; we merely have to adopt the behaviors modeled by high status, successful members of society. Culture, in other words, gives us the power to override our cognitive biased-addled minds. Cultural rules can take many forms, including legislation, but informal cultural norms regulate insurance as well. The most important characteristic of these norms is that we follow them, even if we hate them.

How We Actually Make Insurance Decisions

Henrich has documented a variety of cultural innovations in the last two millennia, like gods punishing contract breakers and bans on cousin marriage, that have gradually deposed the kin group as the primary mediator of trust in Western societies. This innovation was very successful. Cultures that can coordinate millions of members are at an incredible competitive advantage over those restricted to trusting the thousands of people in a kin group. 

The insurance manifestation of that competitive advantage is the aggregation of information from everyone’s experiences to gain knowledge about which risks are common and which are not. This allows us to better identify one-offs and also protect people against risks they may never have imagined. We don’t, however, get a definitive answer for what risks to prioritize, the best we can do is study the  emergent outcome of cultural evolutionary processes. 

These processes usually feel slow. Let’s say in the distant future Tijuana has more strictly mandated flood mitigation and insurance practices than San Diego. Then a giant flood strikes both. San Diego, embarrassed at losing more life and property, might change its tune quickly and copy Tijuana. Conversely, if no flood occurs for decades or centuries San Diego will probably have much nicer waterfront development and immigrants or tourists coming to enjoy it, fueling higher economic growth. Meanwhile politicians in Tijuana will likely be mulling the value of the ‘red tape’ holding them back. That’s cultural evolution. 

This process is actually no different than that of availability bias that I maligned earlier: updating probabilities based on experience. The difference is that cultures integrate vastly more information over longer time periods, sometimes exceeding human lifetimes. And in insurance, where compulsion to purchase is the norm, we see that the worse our individual decision making processes are, say in preparing for unlikely but consequential events or in trusting distant economic agents, the more powerful our group controls are.

So What Do We Do?

Taking the question back up of how to sell insurance, you can almost ignore the buyer. The real customer is the group of people that will force a purchase for the greater good. Here are some takeaways for different groups of people in the insurance value chain.

Insurance Salespeople (Agents, Brokers)

Key questions:

  1. What/Who is forcing this person to buy? What do these tyrants want?
  2. Whose behavior should the buyer be copying and why? 

The second question gives an opening to actually influencing the buyer through social validation, a less direct form of compulsion than a law or contractual mandate and correspondingly less effective. 

Underwriters and Product Designers

Key questions:

  1. What is the minimum requirement? 
  2. If customers buy more, why?

Keep in mind: bolt-ons and upsells that solve a unique client problem are usually high margin. If this is voluntary coverage, expect lapses! 

Ambitious Entrepreneurs and Investors

I have in mind those who wish to build entire new insurance systems and products. To them I say: focus on the beneficiary of insurance, not the insured. Then empower that beneficiary to compel insureds to purchase. 

The Bottom Line

The insurance system is based on a kind of relational violence, of bending people’s behavior towards the commonweal. Maybe you, like I, don’t really like that fact. But it’s the best way humanity has come up with to protect itself. 


1 Of course he was disregarding certain risks of personal injury and… hygiene.

2 Wikipedia lists maybe a hundred? https://en.wikipedia.org/wiki/List_of_cognitive_biases

3 Take this to the limit and you get “on demand insurance” where people buy insurance “while they need it”. This increases the threat of moral hazard, however, so only works for some products and markets. 

4  Social decisions often better conform to some definitions of rationality. See: Kugler, Tamar, Edgar E. Kausel, and Martin G. Kocher. “Are groups more rational than individuals? A review of interactive decision making in groups.” Wiley Interdisciplinary Reviews: Cognitive Science 3.4 (2012): 471-482.