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- Posted by Admin on November 14, 2011
Once again it’s been a long time since I’ve written anything for this blog. For those of you who check, I apologize. There’s a lot going on, and this takes a back seat to my other responsibilities. However, I have an opening, and I’ll seize it.
I’ve written previously about various aspects of fraud and the recession relative to insurance, and I’m going to do so again. This time I’ll blend the two topics. Actually, while “recession” sounds catchier in the title, it more appropriately should refer to “downturn”. More specifically, as unemployment and underemployment have dragged on, that has affected the pocketbooks of millions of Americans. Has it also affected their survival instincts to the point of affecting honesty and integrity? Probably, to some degree.
Let’s be realistic. Besides the slow rebound in private sector employment, the housing market doesn’t look as if it will return to normal, or be allowed to return to normal, any time soon. As a result, it looks as if we will be living with underwater mortgages and reliance on some form of bailouts for the foreseeable future. This puts continued financial pressure on many among us. The relevance to this blog is that these people and their families still need insurance, but find it harder to pay for their coverage or see opportunity when incurring a claim. How is this affecting insurers?
Let me state at the outset that I don’t pretend to have the answers, and this is not a research paper. I’m writing this to posit ideas and generate thought. It stands to reason, however, that if what is termed “rate evasion” – intentional bending of the facts on applications designed specifically to lower anticipated premiums – generally runs close to 10% of written premiums for private passenger auto, it currently might be somewhat above that. I don’t know about you, but $16 billion or so for PPA doesn’t sound like pocket change, and that’s during “normal” times. I won’t speculate on how much the economy has inflated this ongoing amount, but as they say, a billion here and a billion there, and before you know it you’re talking about real money (unless it’s taxpayer money, but that’s another subject).
I’m not sure what the comparable numbers are for homeowners. Even though theoretically insurance-to-value should not be affected by declining market values, one suspects that it has suffered in recent years since very few insureds understand exactly what they are insuring, and agents tend to be sympathetic. Since proper ITV lies at the heart of any successful homeowners program, being the determinant of the premium collected for the risk, the homeowners line likely has suffered its own version of rate evasion with the economic downturn. That only adds to the pressure on premiums from the downturn.
Times are tough, and tough times clearly can affect losses possibly more than they can affect premiums. From inflated losses to outright fraudulent losses (recall the old claims maxim, ”things tend to get more flammable during a recession”), both underwriters and claims departments (as well as agents, if companies can figure out how) have to be on their toes, alert for red flags waving in these troubled winds. Coming off an extended soft market, premiums don’t have a lot of margin to absorb a change in claiming behavior, let alone overt premium avoidance. Since it is likely that individuals who fudge on their premium characteristics also are more likely to engage in some sort of claims padding, the economy’s influences on premiums and losses probably are not independent of each other.
So where am I going with this? One observation is the impact on results may encourage the hardening of the market, albeit not under the circumstances companies might prefer. More to the point, though, there is prime opportunity to be proactive here. Multivariate analysis has become well-established in the development of rating plans, but it has applications well beyond rating. Every company has been victimized to some extent, but how many have modeled the perpetrators of the adverse acts they have caught? This applies to both the premium and loss sides of the equation.
Those companies that have developed predictive models to identify in advance characteristics of individuals who are more likely than others to cheat, steal and lie are going to have quite a competitive advantage over those who have not. For the smaller companies out there without the necessary volume or resources to model their data, there also are specialists who can help with identifying such opportunities.
One other observation that may be a bit more subtle has to do with the advent of telematics in auto rating. As telematics become more widely used, usage-based auto rating will become more refined and widely accepted. However, we currently are in the early stages of the rollout of telematics-based programs. The early movers are receiving more than early data collection. Most of these programs are being rolled out with a guaranteed discount. Think about that for a moment.
Ultimately, a telematics program will generate premiums based on some combination of the mix of driving-related variables, but at the moment everyone gets a discount. Why is that? The programs are skimming the cream, the opposite of adverse selection. Early-mover companies know that poor risks are not going to sign up for programs that monitor their driving and report their driving habits. Only better drivers will sign up for such a program, so it doesn’t take much of a leap of faith to discount them up-front.
A side-benefit for these early movers may well be that these same preferred risks are less likely to engage in some of the practices previously discussed in this article. In fact, they cannot fudge on those aspects of their rating that are automatically reported. And if these insureds are more likely to be honest on the premium side of the equation, might they not also be more honest on the claims side? Admittedly, this is theoretical, but I would be willing to bet this thought is not lost on the early telematics movers.
There isn’t really an “in conclusion” or a “therefore” to close this article. It’s more about awareness – awareness lessens the adverse impact on an insurance company resulting from premium and claims manipulation by an economically strained public. I’m sure most of the thoughts in these words are not new to most readers, but it doesn’t hurt to keep them fresh. Artificially deflated premiums and/or artificially inflated losses can be and are made up in the rates companies charge – they always have been. However, if one company is better than another at identifying and eliminating (or charging for) the potential causes of these influences in advance, that can be a significant competitive advantage.
- Posted by Admin on June 30, 2011
It’s
been a while since I’ve posted a new blog, which in a way is a good thing since
it means I’ve been busy. However, I’m
beginning to feel a little guilty, so I’ll pause and write something new for
this post.
Actually,
I ran across something a month or so ago, but it really didn’t have anything to
do with any of the lines Quadrant touches.
I’ll just mention it here to get it out of my system. An article in Best’s Review highlighted a
workers’ comp writer that flourished while many of its competitors struggled
over the last couple of years, and guess what their niche was? Public service employees. What drives workers’ comp premiums? Payrolls!
The authors of the article either were very naïve politically or
mathematically (as in being unable to put one and one together to come up with
two). They unwittingly had written an
article that provided very timely commentary on the state of public vs. private
job markets that is playing out in real life all around us. This company’s success almost certainly had more
to do with its niche being the politically favored public sector than anything
they had done themselves. I don’t
begrudge them; I just found the article amusing in a depressing sort of way.
Anyway,
that’s out of my system, so on to the blog (the above comments, by the way, are
my own, and not those of Quadrant or of anyone else within Quadrant, as are all
comments in this blog). Over the last
few months there was quite a lot of publicity about the Insurance Research
Council’s January study, New York’s
No-Fault System: Preliminary Findings From Closed Auto Injury Claims
(sounds as if the actuaries have the upper hand over the marketers at the IRC,
at least in naming their studies). The
several articles referencing this study all basically have summarized the
findings, so that will not be my purpose.
Rather, as I have done in other blogs, I will comment on
cause-and-effect.
I
guess, however, that I can’t do a very good job of discussing cause-and-effect
relationships without first at least touching on the cause part of the
equation. That, in turn, requires me
briefly to discuss some of the study’s findings, or at least its focus. That focus is the huge disparity between
personal injury protection (PIP, New York’s no-fault coverage) costs between the
metropolitan New York area and the corresponding costs in the rest of NY
State.
While
inherent cost differentials are expected in such geographical comparisons, the
study shows that the difference in this case goes well beyond what is
expected. It does this by digging into
two aspects of claims inflation, “padding” (or buildup, as they call it), and
outright fraud. They discover that a
full 35% of PIP claims in metro New York involve either outright fraud, or at
least padding, as opposed to 8% in the rest of the state (and that this
percentage has been growing in NYC while staying flat to shrinking slightly
outstate).
Let’s
acknowledge that claims frequency is going to be higher to start with in the
Metro area. Let’s also assume that, all
things equal, general overhead costs would result in a higher Metro PIP
severity. This is the “natural” cause of
higher underlying costs that lead to higher premiums in that area – something
we intuitively expect. However, when we
start compounding these natural circumstances with additional man-made cost
inflators, things can get ugly.
We’ve
already been told that padding and fraud are much more rampant in the Metro
area, which will inflate severity. The
study goes on to mention that 44% of Metro claimants visited 4 or more
healthcare providers, vs. 14% in the rest of the state, and that these
providers were much more likely to include chiropractors, physical therapists
and acupuncturists than upstate. If
it’s anything like what we saw happen to Colorado PIP, you can probably throw
in aroma therapists and anyone else into the mix. Bottom line – more severity issues (big
time!). Just for good measure, Metro
claimants also were significantly more likely to have their healthcare
providers represented by attorneys.
Let’s be honest, how many of you readers feel the need to consult with
your attorney to optimize your medical care?
Once again, there goes the severity!
The
one quote I’ll include from the study is this:
“The preliminary findings from this study confirm that the New York City
area is a hotbed for auto insurance fraud and that the problem has grown worse
in recent years.” It goes on to point
out what I mention above – this isn’t a victimless development. It has a direct impact on costs. If it has a direct impact on costs, it
clearly has a resulting direct impact on the premiums companies need to charge
to cover those costs.
In
this case, the premium impact only affects our friends in New York. However, not just those in the Metro area are
affected. You might think that in a
perfect world the damage might at least be limited to where the fraud is most
rampant. In ratemaking, though, there’s
the pesky concept of credibility – no company has sufficient data volume to
limit territorial issues just to those territories most responsible for
them. Regulators tend to like to spread
out costs as well, in the name of affordability. The losses caused by the fraud and cheating
discussed above are part of the statewide pool of losses that determines how
high PIP rates in general need to be.
Because of limited credibility on the territorial level, those losses
end up getting spread out to all territories, some more than others. As a result, everyone in the state ends up
paying something for those inflated losses.
New
York PIP is not alone in its fraud issues.
Certain metro areas, and even some rural ones, are well-known for their
fraud and biased systems. I’ve
referenced the Judicial Hellholes identified by the American Tort Reform
Association, and how they add costs in their jurisdictions to benefit
prejudiced legal communities. Similarly,
certain cities are well-known for their staged accident rings, with drivers,
runners, lawyers, clinics, etc. all involved.
In short, accidents and/or fraud are a business for certain elements of
our society. The difference is that in
this case the business is not legal, but that makes it extremely lucrative for
those who pull it off successfully. They
get the big dollars, and the costs, as with any insurance, are spread among the
many.
The
good news is that there is a higher awareness of these costs and their impact
on society. Studies such as the IRC
study cited in this blog are aimed at increasing awareness among those who can
make a significant difference in stemming the bleeding. Those of us in the industry can point out
that the costs affect everyone through their insurance premiums. Public awareness is not good for the fraud
business – they thrive on ignorance.
- Posted by Admin on March 16, 2011
Well, it’s that time again, when the American Tort Reform Association (ATRA) updates their annual report on judicial hellholes. For those who have not yet been introduced to this concept, these are jurisdictions where trial lawyers laugh at the idea of fair trials for defendants, thanks to built-in biases overseen by sympathetic judges.
As ATRA points out, the vast majority of judges in the judicial system are fair. However, as so often is the case, it only takes a few with their own agenda to throw the system out of kilter. When the prevailing culture of a particular jurisdiction is receptive to such bias, fairness can be very hard to achieve. That’s essentially what makes a judicial hellhole.
I won’t dwell on the specific locations that deserve such ignominy this year, but it is worth mentioning them. In declining order (worst first), they are:
• Philadelphia • State of California, with special mention of Los Angeles and Humboldt County • State of West Virginia • South Florida • Cook County, Illinois • Clark County, Nevada
This year’s watch list is
• Former #1 hellhole Madison County, Illinois • Atlantic County, New Jersey • St. Landry Parish, Louisiana • District of Columbia • New York City and Albany, New York • St. Clair County, Illinois • McLean County, Illinois • Gulf Coast of Texas Of course, ATRA has a reason for publishing this report. After all, embedded in ATRA’s name are the words “tort reform”, which generally ring quite positively to an insurance industry that usually ends up paying the bulk of the questionable and/or excessive rewards, not to mention related overhead such as defense and investigation. As I mentioned in last year’s blog on this subject, we all end up paying the costs of excessive or frivolous litigation in the end, whether directly through higher insurance premiums or indirectly through higher costs of goods and services (to cover higher insurance premiums of others). Recall that insurers have a contractual duty to defend claims regardless of their merit. Insurer defense costs add to the overhead created in overly litigious jurisdictions, leveraging the more frequent occurrences and generally higher awards in these areas. Often a plaintiff attorney’s strategy is simply to make the cost of defending a claim higher than the cost of settling, even if the claim is of doubtful merit. It becomes a business decision for the insurer and defendant – a known settlement amount, unfair as it may be, vs. a protracted fight of unknown duration (time equals money) with a similarly unknown outcome (jury award in a plaintiff-friendly jurisdiction). As a result of these considerations, claims that are denied as unjustified in other states, counties or cities tend to be settled in these plaintiff-friendly areas. All of these combine to mean higher insurance premiums for all. What line of business does this tend to impact the most? Well, what line of business generates the most claims? Auto insurance! Have you ever wondered why otherwise innocuous states such as Louisiana and Nevada always appear among the most costly auto insurance states? You really have to look no further than their court systems. If anyone ever thought runaway courts were a victimless lottery, they should try footing the bill for insurance in these places where “justice” is defined by the size of contingency fees and quid pro quo “understandings” between trial lawyers and elected judges. Remember the infamous words of renowned convict and former trial lawyer Dickie Scruggs in his heyday as one of the most prominent and successful manipulators of this system, prior to his conviction for attempted bribery of a judge (he just couldn’t leave well enough alone!): “What I call the ‘magic jurisdiction,’ [is] where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges … and it’s almost impossible to get a fair trial if you’re a defendant in some of these places. … Any lawyer fresh out of law school can walk in there and win the case, so it doesn’t matter what the evidence or law is.” If some of my preceding words appear a bit inflammatory, you can see that they simply reference what one of the (formerly) biggest name in tort law said himself in an unguarded moment of braggadocio. This clearly wasn’t a revelation to him – it was strategy. None of the following: “judiciary elected with verdict money”, “trial lawyers have established relationships with the judges”, “almost impossible to get a fair trial if you’re a defendant”, or “it doesn’t matter what the evidence or law is”, has anything to do with justice or fairness. They have everything to do with gaming the system to one party’s advantage to the disadvantage of the other party – fixing the game so we know who the winners and losers are in advance. That isn’t justice, and it costs us all. Just as lottery winners are paid through the millions who purchase losing tickets, in judicial hellholes the winning plaintiffs gain their pound of flesh from the innocent citizens who go about their daily lives as does everyone else – just paying a premium for everything, including insurance, to cover the extra overhead that pays for the lawyers’ big houses, cars, TV ads, etc. The ATRA annual report on Judicial Hellholes can be reached at http://www.judicialhellholes.org/wp-content/uploads/2010/12/JH2010.pdf.
- Posted by Admin on December 21, 2010
Hopefully this post will add some meat to the potatoes of our last post. Part 1 of this 2-part post provided a brief discussion of the emotion, both pro and con, swirling around the use of credit in personal lines insurance rating. It then drew a distinction between the use of credit in insurance rating and how credit is used in the financial sphere. Basically, it set the stage for this follow-up post, which gets into the meat of how credit-based insurance scores have performed since the economic downturn. Before getting started, let’s briefly review the key concept from our last post. In building credit-based insurance models, modelers first review all credit attributes in order to identify those which show a positive correlation to insured losses. Only these attributes are used in the development of credit-based insurance models, while all other credit attributes are ignored. Whether or not the predictive models combine these positively correlated credit attributes with non-credit data, they produce credit-based insurance scores that are predictive of insured losses, not of credit worthiness. Credit-based insurance models are separate and distinct from credit models such as the FICO score. OK, so the question at hand is this: did these insurance scores tank along with the economy, thereby increasing premiums and providing a windfall for insurers at the expense of their insureds? The short answer is “no” (that’s the funny thing that happened on the way out of the recession, in case you didn’t figure it out). And the facts behind this answer are more logical than one might expect. There can be a fairly broad range of credit attributes that enter into the development of insurance scores, but we will focus on five that are widely used: inquiries (which represent a search for more credit), age of accounts, actual utilization of credit (outstanding credit balance as a percent of credit limit), late payment history, and bankruptcies/foreclosures. Let’s look at these credit attributes, keeping an eye on what we’ve read and heard about the recent recession. We’ll start with the last attribute. There is no doubt that bankruptcies and especially foreclosures rose to unprecedented levels in the recent downturn, certainly to higher levels than previous historical averages. From the beginning of 2007 to the end of 2009 (the time frame of all references in this article) total bankruptcies and foreclosures rose by roughly 7%. Clearly this attribute has penalized insurance scores, especially in those states with the most distressed housing markets, since we know the actual number varied widely around the 7% average in different geographic areas. Bankruptcies and foreclosures are the headline grabbers, and are commonly cited by those who fear that credit-based insurance scores unfairly penalize helpless victims. However, even acknowledging their impact, let’s take a logical look at what happened to the overall fiscal behavior of most individuals during these hard times: they became more conservative with their money. What’s a fundamental by-product of conservative fiscal behavior? People use less credit, and that’s a good thing from the standpoint of credit scores. (Note that I said “people” use less credit; it’s been in vogue for politicians to use more credit in an attempt to stimulate people to be less conservative with their money management. Then they wonder why they get the adverse economic results they do.) More specifically, reduced spending kept delinquencies flat and outstanding balances down by about 1% during the recession. In other words, more responsible economic behavior offset the greater difficulty people had in meeting their financial obligations. As a result of this behavior modification, these two attributes didn’t look any worse during the recession than they previously had. The more impactful items were average account age and especially inquiries. Since people were tightening their belts as they grew more defensive in their money management, spending was down. As a result individuals didn’t need any more credit, and there was slightly more than a 30% decline in the number of new credit applications. Reduced new credit applications were the biggest impact of the poor economy on personal economic behavior, and it was a very positive modification from the perspective of insurance modeling. A byproduct of the reduced number of credit inquiries was that individuals used in-force accounts rather than new ones for their credit purchases, increasing the average account age by about 16%. This further benefited insurance scores. In short, for the most part people saved more, spent less and paid down debt to the extent they could instead of borrowing more. Different models apply different weights to the various attributes they use, and models can use more or fewer attributes than the five mentioned above. They also may include non-credit related items such as accidents, violations, family profile, and numerous other variables. Therefore, not all models would have behaved the same. For the models referenced for this article, average scores actually rose between 2007 and 2009. Interestingly, when times were "good” before the recession, the same models showed either no change or actual deterioration in insurance scores. This is for the same reasons as the improvement, only with the logic reversed. When individuals liberally take advantage of the credit resources at their disposal, such activity tends to penalize insurance scores. If you think of credit-based insurance models as a reasonable proxy for responsible behavior, this all makes sense. There generally isn’t an increased cry about the unfairness of credit models because of their adverse impact during boom times, however. Through both good and bad economic times, the correlation between these credit-based models and insured losses has remained consistently strong. The models do what they are intended to do – higher risk drivers pay more, and lower risk drivers pay less. Most arguments against the use of credit-based insurance models do not dispute this, but are based on perceptions. A presumed unfairness attributable to tough economic times is one such perception. While it is undeniable that certain individuals did get penalized for recent economic events, the masses benefited because of their natural defensive reaction to those same events. Credit-based insurance models will remain controversial due to the emotion involved. However, insurers use them for one reason only – they lead to more equitable pricing of insurance products, refining the alignment between premiums and losses. Whether that alignment is contrary to the overall public benefit is not an insurance question, but a political one. Putting it in that arena may not add confidence to the results, but it certainly will make the controversy more entertaining (to those who don’t have a stake in the game). Insurers use credit-based insurance models for one reason only – they lead to more equitable pricing of insurance products, refining the alignment between premiums and losses. If we want to be honest, the question of whether that alignment is contrary to the overall public benefit is not an insurance question, but a political one. Because this issue really is political rather than insurance-related, credit-based insurance models will remain controversial due to the emotion inherently involved in any political issue. That’s the real arena credit-based insurance rating belongs in. Putting it in that arena may not add confidence to the results, but at least the public would know what game really is being played.
- Posted by Admin on October 12, 2010
Please don’t take the title of this article as reflecting any disrespect for the recession which officially ended in June, 2009, but out of which so many still are trying to escape. I especially mean no disrespect for those who have suffered as a result. In fact, I personally learned first-hand what it’s like to have to find a new job under duress during the height of the recession, and I understand the anxieties that can result.
The intent of the title is to highlight how perception and reality can diverge, especially when that perception is based primarily on emotion (or worse, political correctness). The specific topic to which I’m referring is credit-based insurance scores. Few can deny that there is quite a mixture of emotion, indignation, confusion, hyperventilation and political bluster on the one side, and frustration, exasperation, futility and statistical posturing on the other. Rationality can be lost in such an environment.
Those who steadfastly oppose the use of credit-based insurance scoring justify their concerns primarily on fairness issues. Many of them make the underlying assumption that such scores are a surrogate for income or for attributes that can correlate to income, race being the characteristic of most significant concern. Use of any surrogate for a rating variable that has been deemed unfairly discriminatory is by implication unfairly discriminatory itself. To the extent this is the opponents’ real concern, it is a reasonable one.
In order to address this concern we really need to look at the concept and purpose of credit-based insurance scores and compare these to the concept and purpose of the credit scores to which everyone has become accustomed. Primary among such credit scores is the FICO score created by the Fair Isaac Corporation (now known simply as FICO).
I won’t claim to be an expert or a historian, but I think it’s reasonably understood what the FICO score is and how/why it was developed. FICO took the attributes encompassed in the credit records compiled by the major credit bureaus (currently Equifax, Experian and TransUnion), and through a process generically known as predictive modeling were able to develop a numerical “score” that predicted an individual’s credit-worthiness. Because of the predictive nature of this number, it became the standard used by financial institutions of all kinds in determining how capable a borrower was of meeting the terms of his/her loan. Different FICO score levels were assigned different interest rates and loan terms that reflected the relative risk of making a loan to the individual who generated that score.
Drawing an insurance analogy everyone can understand, this is a form of risk classification similar to that of auto insureds. Since the FICO score is influenced by borrower behavior, it is most similar in concept to driver accidents and violations. Insurance companies don’t surcharge accidents and violations to recoup any losses they incurred from those occurrences. Rather, these surcharges reflect the predictive nature of the occurrences. An individual with an accident statistically is more likely to have another accident than someone without one. Someone with more than one accident is especially more likely to have another, since accidents are reflective of awareness and behavior. Since accidents are the primary direct cause of insured auto losses, accident surcharges reflect a higher loss propensity in the premiums charged insureds who have had one or more accidents.
Violation surcharges are similar in concept, but in this case they are indicative of driving behavior more likely than average to lead to accidents and therefore to insured losses. Therefore, the concept behind the FICO score is understandable in insurance terms, but what is less understood, at least outside the insurance industry, is the fact that insurers do not use FICO or credit scores for rating purposes. Why? Because the FICO score has nothing to do with predicting insurance losses. It is a measure of credit worthiness.
But don’t insurers use credit for determining premiums? The answer is a qualified “yes”. When discussing the development of the FICO score above, I referenced the fact that the raw data for the development of this score consists of “attributes” contained in credit records. In the development of credit-based insurance scores, these attributes are analyzed to determine which ones correlate positively with insurance losses. Only these attributes are used in the development of insurance models, while all other attributes are ignored.
As a result, developers of credit-based insurance scores make use of predictive modeling techniques as does FICO, but using only inputs which correlate with insurance losses. These may be attributes strictly obtained from credit records, or may be credit-related attributes combined with other insurance rating variables that have nothing to do with credit. In either event, the resulting modeling produces a “score” that is predictive of insured losses, not of credit worthiness.
This background may be second nature to some readers, but may be a revelation to others. Whatever the case, it sets the stage for a topic I wanted to write about earlier, but wasn’t satisfied with the objectivity of my source. Since that time I’ve seen material that overcomes this earlier concern. The topic – how did insurance scores perform during the recession, a time when critics feared they would artificially, and unfairly, penalize individuals for macro conditions beyond their control and unrelated to risk.
Stay tuned for Part II of this article to see “the rest of the story”.
- Posted by Admin on May 17, 2010
A recent Wall Street Journal article asked this rather blunt
question in its title: “Do Girls Speed
More than Boys?” The article pointed out
something that every auto insurer in the country knows: the difference in premium charges between
youthful boys and girls has narrowed over the last 5 years. That’s a roundabout way of saying that girls
have cost insurers more in recent years relative to boys than they used to –
i.e., they have more and/or costlier accidents than they used to.
The article cites stats provided by a countrywide survey
conducted by TRU Research for the Allstate Foundation in May 2009, based on
1,063 online interviews with teens. The
survey was a follow-up to one conducted in 2005 by the Allstate
Foundation. Since the survey was
self-reported, it also could say something about the relative honesty of boys
and girls when it comes to their driving behavior. Nonetheless, I think we all know the
difference between their driving experience isn’t what it used to be.
Certain of the stats were surprising, to the point of
raising the issue of forthrightness. 48%
of the girl respondents said they are likely to drive more than 10 mph over the
speed limit vs. 36% of the boys. The
percentage of girls describing their driving as “aggressive” was 16%, up from
9% in 2005. During the same period the
percentage of self-described boy drivers dropped from 20% to 13%, below the
percentage of aggressive girls. Right!
Others of the stats definitely were not surprising. 51% of the girls said they are likely to use
a cell phone to talk, text or email while driving, vs. 38% of boys. In a reflection of their adult counterparts
when queried about Congress (“I hate Congress, but MY Representative/Senator
isn’t the problem”), kids of both genders see the problems as being somewhere
other than in the mirror. 65% say they
are confident in their own driving skills, but 77% admit to having felt unsafe
with a different teen’s driving.
The latter stat likely has something to do with a point raised
in the 2005 report that was studied at some length around that time. The study involved brain development, and
found that the portion of the brain that correlates cause-and-effect
relationships between events and their consequences does not fully develop
until the mid-20s (except in politicians, where I’m sure a similar study would
find this portion of the brain to be completely missing – sorry, that was too
obvious to pass up). Therefore, kids
tend to see the thrill in risky behavior behind the wheel without considering
the dangers associated with that behavior.
As a passenger they are more likely to feel the danger since they are
not the ones in control.
Getting back to the subject of the article, I can’t resist
relaying an incident I experienced a few years ago while running out for
lunch. I was in the left lane in one of
our city’s major streets, alongside a teenage girl talking and having a good
time with her friends in the car. As we
approached a red light at another major thoroughfare, while I was applying my
brakes I couldn’t help but notice her still talking and having a good time with
her friends as she rapidly closed the distance between her and the last car at
the red light. Finally, either she
looked up or one of her friends suggested she do so, slammed on the brakes,
narrowly missing the stopped car, and backed up to put a little distance
between the two cars. As she resumed
talking and having a good time with her friends (now slightly in front of me),
I noticed that the back-up lights still were illuminated. Sure enough, when the light turned green and
she hit the gas, back she went before another screech brought her to a halt
just in front of the car behind her, which apparently (and fortunately) had
noticed the back-up lights and kept its distance. Finally, now back in drive, she continued
talking and having a good time with her friends as she proceeded in the correct
direction.
“Oblivious” was the word that immediately came to mind. However, a more thoughtful response probably
would have observed that many kids are social animals, likely more so among
girls. In this case, and no doubt in
many more like it, the driver’s social inclinations dominated her
still-developing sense of responsibility.
In an admittedly non-scientific “study”, I certainly have observed this
type of oblivious behavior behind the wheel in girls more so than in boys, who
(from personal experience) are more likely to be goofing off as opposed to
being unaware of what they are doing. My
unscientific observation has been unscientifically confirmed by similar
unscientific studies of my acquaintances (the nice thing about non-scientific
studies is they don’t have to be politically correct).
Seriously, the article points out some observations about
the results of the study relative to the direction society as a whole has
taken. More specifically, women are more
and more competitive in the role they now fill than in the past. Whether talking about careers, academics,
athletics, or whatever, former barriers and role distinctions have eroded,
along with the more passive nature associated with former views. In other words, narrowing gender differences
in driving behavior are simply mirroring what is going on everywhere else. That view has been put forth by psychologists
and other professionals who work with teenage girls, no doubt in a more
scientific format than my study. Young
female driving behavior and an increase in general assertiveness go
hand-in-glove.
The WSJ article cites trends from the U.S. Department of Transportation
showing that death rates for teenagers from traffic accidents have dropped by
54% from 1975 until 2008. That, of
course, parallels traffic fatalities in general. However, the rate of decline for girls during
this period was less than that of boys by a wide margin – 38% vs. 59%. From that it doesn’t take a lot of analysis
to deduce that the traffic death rate for girls and boys has narrowed
considerably over the last 35 years.
We see things changing constantly in this business, and
insurance rates have to change constantly to reflect current
circumstances. After all, insurers
protect people and things against unanticipated events, and all three (people,
things and events) are in a constant state of flux. Societal changes such as what we see
reflected in youthful female rates are a constant in our business.
So is she sweet or Junior?
All of the above, plus many more options – she just ain’t who she used
to be. Who says insurance is boring?
- Posted by Admin on March 23, 2010
For a while I’ve been reading and scanning trade periodicals for a good topic for my next article, with no real success. I thought I had a great topic that would generate a lot of interest, but upon rereading the source material determined it to be too biased – I’ll hold that topic in reserve, because I anticipate it will resurface with more objective studies underlying subsequent articles. This is difficult for me, because as my wife will tell anyone, I’ve never been accused of being without an opinion, and I’m chomping at the bit to comment on that particular subject (the study supported my underlying belief). However, I realize in this role I have an obligation to vet my sources adequately so as not to be accused of being a mouthpiece for any particular constituency.
In the absence of a good personal-lines topic, and having mentioned my wife in the previous paragraph, let me diverge from the usual subject matter of this blog to get a bit personal. I am writing this from my father’s apartment in an assisted living facility in Jacksonville, FL, where our family is converging for his 95th birthday. As I write this, he is sitting across from me working the second of his two daily crossword puzzles, one reason I suppose his mind is as alert as it is (Florida Times-Union and Wall Street Journal puzzles daily, with a neighbor giving him the NY Times weekend crossword weekly – not lightweight stuff).
My wife isn’t here with me because 3 weeks ago she had part of her left lung removed following the discovery that she, who has never touched a cigarette, has developed lung cancer. Fortunately, we found it early, yet it had already begun to metastasize, so she will have to undergo chemotherapy and radiation treatment. She is a strong woman, and insisted I be with my father for this family gathering, and has other members of our family gathering at our place to care for her while I’m here.
On this website since November you have seen a link in tribute to John Macauley, who passed away on November 10. John was the father of Quadrant’s founder, Mike Macauley, who unabashedly refers to his late father as his hero, and often refers to him in discussions as a source of wisdom in his growing up. I could say the same.
Why do I mention this in a column that is targeted to those in the insurance business? Because as I am torn between
a) being with my wife as she recovers from her surgery, and as she stares at her upcoming battle with killing off any remaining cancer that remains in her body without knowing or caring what effect that battle will have on her; and
b) being with my father, brothers and sons to celebrate his 95 years of life and the fact that he’s still sharp as a tack and hasn’t lost his sense of humor,
I realize the amount of time over my career I’ve relegated my family to the back bench to achieve personal or company objectives. Have I been a good employee? Yes. Has some sacrifice been necessary? Absolutely – life is all about striking appropriate balances. Is some sacrifice necessary in most businesses and careers? Definitely, especially for those who care and who are responsible. Do we often enough step back and sort out our priorities to make sure we aren’t making too much sacrifice of those who mean the most to us? Doubtful.
Please excuse my reflection, but I’ve been in environments where extensive sacrifice was expected, and I’ve been in situations where I brought it upon myself. In the heat of the battle it’s unlikely that you can just drop what you are doing and walk away, nor should you in most circumstances. However, you also shouldn’t lose sight of what is important in your life. After all, when all is said and done, what is the ultimate reason you are working in the first place?
- Posted by Admin on February 11, 2010
In January an insurance consulting group out of San Francisco and owned by ISO named Quality Planning released a report about private passenger auto premium leakage. I will not attempt to make this article a book report about their findings, but rather will comment about some of the more salient aspects of those findings.
The report is based on actual audits performed by Quality Planning in 2008 covering in excess of 4 million auto policies from carriers ranging from substandard to preferred. Industry estimates were extrapolated from the findings of those audits. Error margins or degrees of confidence were not discussed in the report, so I will simply state that up front, along with the fact that any numbers referenced in this article are quoted directly from the report with that caveat.
The first major disclosure of the report is that their total estimate for premium leakage for the entire PPA industry in 2008 was $15.9 billion. This compares to a total premium for the year of $164.25 billion (i.e., would increase the industry total by 9.7%), and would rank as a strong #3 writer if it represented the stand-alone premium of a single insurance group.
As I said, I don’t intend for this to be a book report, so I will just touch on the more interesting findings. The recommended solutions are pretty much common sense, and are what Quality Planning is selling, so I will skip over those. At the end of this article, though, I will provide a link for those who wish to see the full report. Here are some observations:
- In recent years profit for many companies as a % of premium has been depressed. However, even at a 90% combined ratio, if leakage of 1% of premium can be identified and fixed, that equates to a 10% lift in underwriting profit. For most companies, the lift would be significantly greater.
- Under the heading of risk management, the report discloses a 200% loss ratio for undisclosed 16-year-old male drivers in their study.
- A fairly obvious observation of the study is that unreported rating information correlates with higher loss ratios. No surprise there. But carrying that concept to its conclusion, that means the honest subsidize the dishonest (again obviously). While the majority of agents and insureds may be honest, a minority gaming the system can throw premiums and losses out of equilibrium, which in turn affects the rates for all. This is because, what is not so obvious, it only takes a few to mess it up for the many.
- Rating errors that lead to leakage are not random. Many are intended to lower premiums of otherwise high-rated insureds, introducing a bias into company statistics, whether actuarial, underwriting, claims, or whatever. Management can be misled as a result. Here’s where running your book through a tool such as Quadrant’s Quote Converter can have a side benefit in identifying the emergence of unexpected rating cells, besides helping with your competitive analysis.
- Companies are not blameless in the leakage department. Besides the obvious upfront lack of diligence that can contribute to leakage, today’s ever more complex rating schemes, and the constant rating changes associated with them, mean that insureds are often rerated at renewal, creating more opportunities for error, missed details, or convenient mental lapses.
- It certainly does not help things that certain individuals take advantage of legitimate internet sites suggesting how to lower one’s premium, and put their advice to illegitimate use. A well informed fraudster is an effective fraudster. I didn’t spend much time looking, but I didn’t find any sites telling you how to cheat, although I found at least one questionable chat room (but it was aimed at gaming life insurance rates for a smoker, unrelated to this specific discussion, but symptomatic nonetheless).
- Dynamic lifestyles combine with dynamic rating schemes to result in many more opportunities for good old fashioned rating errors (i.e., unbiased) than ever before, in addition to the intentional stuff. An example – is employment used in rating? Most workers probably don’t know who Ozzie and Harriet are any more, let alone live like them. But workers move around now – how current is the employment-related rating information on insureds for whom that is a variable? What system is in place to keep the information current?
- I won’t get into the specific sub-categories here, but looking only at broad categories, of the above $15.9 billion of leakage:
- $6.5 billion (4.0% of premium) were attributable to vehicle-based rating errors;
- $8.9 billion (5.5% of premium) were attributable to driver-based rating errors;
- $0.5 billion (0.3% of premium) were attributable to other rating errors.
- The above percentages are averages. Actual results by carrier vary greatly around these averages based on the programs they have in place to address rating integrity.
- Changes between the 2007 and 2008 studies appear consistent with changes in the economy.
- Loss of personal contact with policyholders via the internet and attempts by companies to automate as much as possible likely have combined with more complex rating plans to add to the growth in leakage.
- Effective programs to address leakage can certainly give a lift to a company’s bottom line (maybe a material one), and may even help them establish better communication with their policyholders (which may not be a positive to a select few).
Realistically, no company is immune to leakage. As with everything else, there is a cost and a benefit to addressing each individual company’s situation. Management knows what processes are in place to ensure rating integrity, but they should be aware that what worked yesterday may not be adequate tomorrow, or maybe today. This is one more area to examine for those few extra decimals (or even percentage points) to help the bottom line in a difficult economic climate. It requires taking the first step to make it happen, though, and any company that thinks it has everything covered is probably subsidizing some of its higher-cost insureds.
Here is the link to the full study:
http://www.qualityplanning.com/QPC_Resources_Public/reports/2010.01.18.Rating.Error.Report.2008.pdf
- Posted by Admin on December 22, 2009
Liability insurance is a major element of both private passenger auto and homeowners insurance. Therefore, it is relevant to devote a blog article to the annual report of “judicial hellholes” published by the American Tort Reform Association. After all, while there is a tendency to laugh at the ridiculous claims that are filed, and even at those that occasionally are won (spilled McDonald’s coffee, anyone?), the fact is that the dollars involved to defend and to all-too-often settle and/or pay these claims are very real and are no laughing matter. We all end up paying for them in the end, whether directly through higher insurance premiums or indirectly through higher costs of goods and services (to cover their higher insurance premiums).
The ATRA opens their annual Judicial Hellhole reports with actual quotes from judges or attorneys to highlight the bias in select jurisdictions. These are not made up – they are actual quotes, generally from those prominent either in creating or benefiting from the climate in those jurisdictions. Here is a sampling taken directly from the 2006-2009 Judicial Hellhole reports:
“What I call the ‘magic jurisdiction,’ [is] where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges that are elected; they’re State Court judges; they’re popul[ists]. They’ve got large populations of voters who are in on the deal, they’re getting their [piece] in many cases. And so, it’s a political force in their jurisdiction, and it’s almost impossible to get a fair trial if you’re a defendant in some of these places. The plaintiff lawyer walks in there and writes the number on the blackboard, and the first juror meets the last one coming out the door with that amount of money. . . . These cases are not won in the courtroom. They’re won on the back roads long before the case goes to trial. Any lawyer fresh out of law school can walk in there and win the case, so it doesn’t matter what the evidence or law is.”
— Richard “Dickie” Scruggs, legendary Mississippi trial lawyer who built an empire of influence suing tobacco companies, HMOs and asbestos-related companies, but who has since been disbarred and sentenced to federal prison after pleading guilty to conspiracy in an attempt to bribe a judge.
“As long as I am allowed to redistribute wealth from out-of-state companies to in-state plaintiffs, I shall continue to do so.”
— Hon. Richard Neely, who served as a West Virginia Supreme Court of Appeals Justice, including several terms as Chief Justice, for over 22 years until 1995, is now in private practice at a firm primarily handling personal injury cases.
“West Virginia was a ‘field of dreams’ for plaintiffs’ lawyers. We built it and they came.”
—West Virginia Judge Arthur Recht
“You may not like it . . . but we’ll find a judge. And then we’ll find a jury” that will find restaurants liable for their customers’ overeating.
— John Banzhaf, George Washington University Law School professor and personal injury lawyer
“That venue probably adds about 75% to the value of the case…. [W]hen you’re in Starr County, traditionally you need to just show that the guy was working, and he was hurt. And that’s the hurdle….”
— Tony Buzbee, West Texas trial lawyer, on filing lawsuits in Starr County, a jurisdiction in Texas’s Rio Grande Valley
Admittedly, the last two quotes specifically pertain to commercial coverages, but the bias and attitude they convey are equal-opportunity. The first is from an actual law school professor from whom at least some of the next generation of trial attorneys are taking notes. The second has definitely impacted personal lines similarly, but maybe not to such an extreme extent – ask any insurer who has written in the Rio Grande Valley how comfortable they are with the legal climate there.
An insurer’s contractual defense of a claim translates to large expense dollars regardless of the merits of the case. Clearly, the more frequent occurrences in these jurisdictions, along with their generally higher awards or propensity to settle and the expense costs associated with such claims combine to add costs to “the system”. This means higher insurance premiums for all.
Quotes such as those above tend to suggest this is not a “justice for all” equity-based system, but rather a rigged game designed to enrich those who play in that arena. The ATRA has had some success in highlighting this fact to residents of some past Judicial Hellholes, who have defeated through election those most responsible for the judicial environments in those areas. As the ATRA notes, judges create these situations, so their removal is necessary to fix them. Not surprisingly, costs and insurance rates have subsequently dropped when this has occurred.
My point in bringing this up in this blog is simply to highlight awareness. Quadrant’s clients are involved in the personal lines insurance market – these situations affect their business. We can program any rates that have to be charged, but that doesn’t mean we have to be oblivious to the issues in the various jurisdictions that affect those rates. We need to maintain an awareness of the laws and regulations of the various states, similarly to the companies that write there, but an awareness of the environment also helps. This helps us anticipate upcoming changes that you, our clients, may be getting ready to make in your rates or rating structures.
For those of you who are curious, the 2009-2010 list of Judicial Hellholes, in order of severity (i.e., dishonor) is as follows:
1. South Florida (specifically Miami-Dade County)
2. West Virginia (entire state)
3. Cook County, Illinois
4. Atlantic County, NJ
5. New Mexico Appellate Courts
6. New York City
There is also an annual watch list of jurisdictions that show promise of deteriorating into Judicial Hellholes if remedial action is not taken. The New Mexico Appellate Courts were promoted (demoted?) from this list this year, for example. This year’s watch list is as follows:
1. California (entire state)
2. Alabama (entire state)
3. Madison County, IL (former #1 Judicial Hellhole)
4. Jefferson County, MS
5. Gulf Coast and Rio Grande Valley, TX
Other areas are mentioned for different reasons, either for consideration for the watch list, for suspicious individual verdicts, or for positive developments. For those interested, the report, along with those for the last few years, can be found at ATRA :: Judicial Hellholes 2009.
- Posted by Admin on November 19, 2009
I concluded my last blog by observing that
unforeseen and often emotional issues can blow up and potentially cause major
loss events not anticipated or priced into the rates by homeowners insurers. As if to make my point, an article in a
recent trade magazine quoted a malpractice defense attorney as saying that
swine flu just may be one of those unforeseen, emotional events. If it is, I suspect it got a boost from a
willing media, but first, little background.
The Centers for Disease Control estimate that
we have on average around 36,000 flu-related deaths per year in this
country. That figure was based on a
study from the 1990-91 through the 1998-99 flu seasons, during which time the
number of seasonal flu-related deaths varied from around 17,000 to around
52,000. An updated study conducted this
year with data from 1993-94 through the 2002-03 flu seasons didn’t change the
numbers significantly – the average was 36,171 annual flu-related deaths. The point of this is that flu has been only
slightly behind auto accidents in terms of the number of deaths for which it is
annually responsible on average – before
swine flu entered the scene.
Swine flu is unique in that it is a virus
against which humans have not developed a natural immunity defense. Thus it has spread relatively unimpeded, and
pandemics are declared on how they spread – not on the severity of the
disease. I recall a discussion last
spring where a prominent official not beholden to political correctness advised
an alternative term be used other than pandemic. His point was that as soon as the government
used that term and it was picked up by the media, a general panic would ensue
that would not be supported by the severity of the actual disease.
That’s pretty much what’s happened. Like any other flu, people have become very
ill from the swine flu, and people have died.
Nothing in this article is intended to diminish the anguish associated
with this. CDC numbers show that hospitalization
rates for regular flu are pretty much the same as those for swine flu,
though. Local reports show anecdotally
that people are going to the hospital with self-declared swine flu, but who
prove to have either the regular flu or even the common cold. If this event had been handled with less
hysteria by the media – less emphasis on the dramatic headline-grabbing but not
necessarily key facts, and more on the key issues that may be less sexy from a
news standpoint, I suspect the public wouldn’t be quite so fearful or quick to
believe they are suffering from the disease.
This brings me to back to the original topic
of this article – the impact on homeowners insurance. I took the above detour to highlight that
what is going on this flu season is pretty much business as usual with one
twist – awareness drummed into us by a hyperactive media, and given a boost by
a government wanting us to believe there was a monumental problem they alone
could solve.
What is the unintended consequence of all
this? With awareness comes blame! Things that have been going on forever and
accepted as a part of life suddenly are being called foreseeable events that
could have been prevented. That’s a
lawyer’s turf! Thus, as was discussed in
the article I referenced in my opening paragraph, suits could arise for such
things as hosting a cocktail party when your kid is sick, or for failing to
inoculate your kid, who proceeds to get sick and pass the illness to another child.
To prove his point, the author cited an actual
case in New York where the family of a school principal has brought a $40
million suit against the city of New York, claiming the Board of Education
failed to alert the principal that he had been in contact with children who had
tested positive for the virus (I will refrain from any obvious editorial
comment about someone whose chosen profession puts him in contact with
thousands of children every day!), failing to provide a safe working
environment, and several other quite obvious charges. Surprisingly, failing to advise him that
breathing could be hazardous to his health was not among them, although this
may have fallen under “health condition information,” which was included in the
charges.
Regardless of the merits of a lawsuit, though,
it costs an insurance company real dollars to defend its insured against any suit. With the public whipped up to such a fever
(no pun intended), I suspect the author is correct that it is only a matter of
time until such suits hit homeowners insurers, if it hasn’t happened
already. Are the circumstances any
different than they were last year, or any other year? No, just the awareness and the fear
factor. That’s enough for the legal
community to figure this has now moved into its playground. When that happens, they generally are more
than ready to play.
By the way, I came down with something the day before writing this, and it developed into an infection of some sort. However, it hasn’t occurred to me to sue anyone. I called my doctor, got an antibiotic for the infection, and am monitoring how I feel. Isn’t this how we used to do things in this country – take personal responsibility? For those of you who are concerned, though, I have been assured that I cannot infect the electrons that flow from my computer to the website where this article will be posted, and thus I am maintaining for my homeowners insurer that anyone who reads this and proceeds to get ill must have been infected elsewhere.
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