Monthly Archives: September 2011

MarketScout survey points to higher rates

Via Business Insurance: Rates overall are flat, which is interpreted as a sign of a hard market. A leap of logic, maybe . . .

The Dallas-based electronic insurance exchange found that workers compensation rates rose 2% while commercial property rate rose 1%. Professional liability, directors and officers liability, fiduciary and crime pricing was flat. But general liability and umbrella/excess coverage continued to soften, falling 2%, while commercial automobile dropped 1%.



The Week in a Minute, Sept. 30, 2011

I spend less time on health insurance issues these days, but:

  • Both Obama and his political foes want the Supreme Court to rule on Obamacare’s constitutionality next year, so it probably will.
  • Employer-based health care costs rose 9% this year. The New York Times reports a family of four will pay $15,000 this year, according the the Kaiser Family Foundation report.

Elsewhere in Insurance Land:

  • Workers comp frequency rose 3% last year, the first increase since 1997. My take is here.
  • Nationwide Insurance buys Harleysville Insurance.
  • U.S. insurers are starting to report the extent of their Q3 cat losses. The tab so far: $1.3B before taxes, from reports by Allstate and Chubb. Separately, State Farm reports that it has paid more than $5B in cat losses in all of 2011.

Flood insurance: A never-ending story

Other day, I remarked that I don’t follow flood insurance closely enough. Today I was reminded why:

WASHINGTON—The National Flood Insurance Program got a short extension Thursday when the U.S. House of Representatives approved a stopgap funding measure to keep the federal government operating through next Tuesday.

The Senate voted earlier to extend the NFIP, which was slated to lapse Friday, through Nov. 18. The full House, however, cannot consider the longer Senate funding bill until next Tuesday.

(Thanks, Business Insurance!)

That’s a one-week extension. But that extension is only in place so that Congress-guys can create another extension, until November. The program has been like that, a fish gasping on the shore, for a few years now.


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Claim of the Week, catch-up edition

Haven’t done a claim of the week for a while, so here’s two:

  • “A Dallas, Texas, jury has awarded $9.2 million to a teen who was asked to leave a religious school after her sexual affair with a male teacher became public.” More here.
  • Insecticides that kill bedbugs are more dangerous than the bugs: “. . . dozens of Americans have fallen ill from the insecticides, and a North Carolina woman died after using 18 cans of chemical fogger to attack the tiny blood suckers.” More here.

Comp frequency rises 3% – first increase since ’97

Via Business Insurance, NCCI this week announced that workers comp claim frequency rose 3% last year, the first increase since 1997 and the biggest increase in more than two decades. The previous 19 years, frequency had fallen 56%. Here’s a chart from the full report (pdf):

Why the increase: With the Great Recession, frequency fell as workers feared too much for their jobs to report an injury. Last year, feeling more job security, they began reporting injury again.

Also worth noting that before adjustments, frequency appeared to rise 9% – that’s why the last column in the graph has two tones. Two adjustments are tied to the denominator – calendar year earned premium. The other affects the number of claims:

  • CYEP was dragged down by return premiums. As comp actuaries well know, premiums paid in advance estimate how many employees will be covered in the coming year. There’s an adjustment after the policy period to reflect actual exposure. In 2008 and 2009, employment fell well short of expectations. Insurers refunded a bunch of that premium in 2010. Pushing exposure down drove frequency higher artificially. Adjusting for this took 5 points off frequency.
  • Construction business took up a smaller share of premium last year than in previous years. Construction business has low frequency per thousand dollars of premium (severity is high). Less low frequency business in the mix will drive frequency higher.
  • Average hours worked per week increased. As hours worked rises, so do comp claims, without a commensurate increase in premium.

These last two adjustments were worth one percentage point.

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Supply and demand in p/c insurance

Always good when someone shores up the ranks of blogging actuaries, so welcome to Todd Bault! I guess he’s been posting awhile, but I seemed to have missed his earlier work.

Todd is well-known in the actuarial community for being one of the leading insurance industry analysts, and he’s posting as part of the lineup at Sector & Sovereign Research’s blog.

Todd’s advancing a controversial idea – that insurance capital is not the ‘supply’ in the industry’s supply/demand equations. Controversial because most people will tell you that the price of insurance varies inversely with the amount of capital in the industry.

When insurers have lots of capital, the thinking goes, they are eager to write lots of business. Hence the price of insurance goes down. When capital is scarce – think of the losses from the World Trade Center paired with a loss of capital from the bursting of the dot-com bubble – prices rise.

But Todd doesn’t subscribe to that theory, and his recent posts – here, here and here – suggest that exposure is actually what drives the insurance industry’s supply curve.

To summarize his thinking: Loss trends would drive accident year loss ratios ever higher, except for rate change (and catastrophes, which he accounts for). So if you back out loss trends, any year-to-year movement in loss ratios will reflect rate changes. Then he notes that premium growth = exposure growth * rate change.

Having estimated rate change and exposure change, he graphs one against the other:

To prove this is difficult. At the macro level, data is thin, so his analysis is driven by the kind of squinting you do when you look out the window of a plane at 30,000 feet – you can’t make out much in detail. But since you are operating at a high level, imperfect information will generally be good enough.

So his key assumption – that change in CPI serves as a good proxy for loss trend – will seem outrageous to most actuaries. Essentially he implies that claim frequency doesn’t change over time (though it has). But given his data limitations, it’s reasonable.

And he has what looks like a nice supply curve mapping data from 1980 to 2010:

As you can see, this graph has the “right” relationship: a downward-sloping line reflecting the negative correlation one would expect for supply & demand.  It’s not a 95% R-squared, but I wouldn’t expect it to be.  It just has the expected relationship, without any other unnecessary assumptions.

It would even slope downward if it were modeled the way most economists do – measuring price vs supply with price on the y-axis (instead of change in price vs. change in supply with price on the x-axis).

But I think the negative correlation is an inevitable result of the formula used to calculate exposure growth

premium growth = price change * exposure growth

The formula, I think, requires price and exposure to be negatively correlated. For example, if premium didn’t grow, premium growth would be a constant of 1.00. If price change was positive, exposure change would necessarily be negative, and vice versa.

Of course, premium growth isn’t zero. It follows GDP over the long term. Nominal annual GDP growth from 1980 to 2010 is about 5%, so absent any data, we’d expect an exhibit like the one above to be a negatively sloped line with a y intercept around 5%, which it is.

I don’t think this means the underlying analysis is wrong, just that the negative correlation isn’t as meaningful as portrayed.


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TweetWeek through Sept. 18, 2011


The Week in a Minute, Sept. 17, 2011

  • Allied World and Transatlatntic agreed to end merger talks, with AWAC getting a lovely parting gift of $48M. Validus and Berkshire Hathaway remain interested in Transatlantic. If one of those, or anyone else, merges with Trans within the next year, AWAC will get another $67M.
  • Towers Watson’s CLIPS survey points at a hard market.
  • More than a thousand asbestos victims in Libby, MT, will share a $43M settlement of a lawsuit against the state of Montana. The victims maintained the state knew of dangers from a nearby vermiculite mine and failed to act. The state will pay $28+M, National Indemnity is on the hook for $16+M, and the state guaranty fund kicks in $100K.
  • Bad August for Allstate: $735M in cat claims.
  • I don’t write enough about flood insurance. With the National Flood Insurance Program set to expire Sept. 30, Reuters did a nice job of clearly laying out the issues involved.
  • A federal report laid much of the responsibility for the Deepwater Horizon blowout on BP, but said there was lots of blame to go around. (Download report here.) BP and Transocean stock rose, as investors had thought they would bear more responsibility. BP could be on the hook for about $30B, according to this roundup of costs.
    Aside: At the CAS reserving seminar last week, I met an actuary who said he had modeled tail risk for oil rig failures. His preliminary findings were pooh-poohed by higher-ups, who said most years the losses from oil spills were zero, then scheduled a meeting a week later to basically berate him further. But the meeting got canceled because, in the meantime, the Deepwater Horizon blowout had occurred.

CAS Roundtables: A review

Attended my first CAS roundtable yesterday morning at the Casualty Loss Reserve Seminar.

The roundtable was called Strengths and Weaknesses in Stochastic Reserving – Capturing the Extremes and Reflecting Judgment. But I don’t want to focus on the topic – though I found the discussion interesting. I want to address the idea of the roundtable discussion. Started with the 2011 Spring Meeting, the discussions are new in CAS continuing education.

The roundtables are small groups (about 7 in mine) meeting during breakfast to discuss a topic.

The talks are informal. A facilitator – an expert in the topic – starts the discussion. Then everyone else is encouraged to, in the CAS’s words, “join the discussion, share their ideas, seek advice from their peers at the roundtable, and explore solutions to challenges faced with the issues presented.”

Enrollment at each of the eight sessions is capped at nine. You have to pre-register. But there’s no room of chairs pointed at an expert panel. No PowerPoint looms above. So it feels like a few people talking shop over breakfast. Sessions last about 45 minutes. You receive 0.6 continuing ed credits.

I like the format, and most people I spoke with did, too. It gives you an opportunity to talk with leaders in the field in a relaxed setting and voice common concerns.

And the informality keeps the topic fresh. Our discussion, for example, spent a lot of time on how to present a stochastic model’s results to senior management. We compared reserve models with the success cat modelers have had in presenting results and helping the C-suite manage its portfolio. But it’s pretty clear the discussion was not intended to go that way – it just happened because of the serendipitous makeup of our paricular group. I suspect the same topic, on a different day, with a different group would talk about something else.

I think the roundtables work well and hope the CAS continues to offer them. I think they would be really good for professional development – discussing Standards of Practice and real-life ethical dilemmas.

Disclosure: In addition to being a CAS member, I have written some press materials for the organization. But they did not suggest I write on this topic and, obviously, didn’t review this beforehand.


Vegas baby

I will be attending the Casualty Loss Reserving Seminar this week in Las Vegas. I’ll be presenting a case study on Friday morning. Probably light blogging, though I do plan to write about a roundtable discussion. That’s the CAS’s new program for informal breakfast-time mini-discussions on a topic. I’m interested in whether the more intimate settings (around 10 participants) makes discussion more or less fruitful.

On a personal note, I’ll also spend a couple of days visiting family in the area, including my niece’s one-month-old, Lily. Hence the headline.