Tag Archives: national weather service

Quick Takes From Insuretech Connect

Last week, I was excited to attend the first Insuretech Connect conference, which brought together entrepreneurs, VCs and industry insiders to focus on the innovative (and some say disruptive) developments within the industry. I wanted to get a closer view of the emerging technology and begin to hear a clearer message about how these developments are connected with the core issues facing the industry, such as: the industry in total very rarely delivers cost of capital returns; the products are complex, and structured in ways that make them not easily consumable by customers; there is aversion to new risks by the carriers given lack of credible loss information used for pricing; a third of P&C premium is absorbed in cost of sales and delivery, an unsustainable figure; etc.

With the event behind us, here are my top takeaways:

1. There are fantastic stories beginning to emerge about the engagement of millennials (notoriously uninterested in insurance products) that over time could be hugely instructive for the broader industry.

Both Trov and Lemonade are genuinely different, with an experience that is more akin to a social media exchange with your friends as opposed to the arduous image (and sometimes reality) of most insurance buying, servicing and claims interactions. Both appear to have genuinely rethought the product being delivered.

In the case of Lemonade, the company has removed the implicit contention between insured and customer with an affinity-oriented dimension: Excess premiums not used to pay claims go to a charity of the customer’s choice. These factors alone (I will cover more below) fundamentally reposition the insurance provider in the mind of the consumer.

Trov is delivering an on-demand, single-item, micro-duration coverage – a genuinely innovative product concept. The takeaway here is that true innovation in customer experience is unlikely if there isn’t innovation in the product. Trov also provides its user with an app that has real value to the consumer independent of the insurance cover — effectively the app is a a super-easy-to-use personal asset register.

The “value in use” delivered in this app is a launch point for an entirely different type of engagement. Metromile is doing the same thing with its free smart driving app, which helps you with  where you parked your car, with diagnostics and maintenance and with trip planning. The Metromile app has tremendous value to its users independent of the usage-based insurance the app provides.

So the real question for the industry is whether Lemonade and Trov are just great ingenuity to deliver renters and single-item coverage to a segment that is meaningfully under-penetrated and uninterested in insurance, or whether these fundamental innovations will be harnessed and applied by others not just elsewhere in personal lines but in commercial and specialty lines, as well.

2. Unsurprisingly, the conference was dominated with many who are endeavoring to attack the distribution part of the value chain by changing customer experience and the cost to deliver those experiences. Many of the entrepreneurs are borrowing pages from the countless other categories that have gone through dramatic changes in distribution (financial services, travel, etc.).

It is early days, but I look forward to companies such as Embroker, which is legitimately trying to re-create the entire customer-broker experience (focused on the more complex middle-market commercial risks), with technology as a critical enabler.

One far narrower example is Terrene Labs, which is a really interesting play on big data that potentially flips the application-for-insurance process for commercial insurance on its head. Effectively, the company is developing the technology that combs the public domain to create a near-completed (and far-higher-quality) insurance application based on only a handful of questions. I highlight this venture led by the ex-CIO of Great American as he is seeking to improve the customer experience in small commercial while simultaneously slashing the front-end agency cost of entering the application data to carrier’s on-line systems.

I suspect that the much-anticipated launch of Attune, the initiative backed by Hamilton-Two Sigma-AIG, will feature this sort of change in experience. I anticipate the developments next year on distribution are going to be far more robust and measurable.

3. While there is an intensifying discussion about the Internet of Things (IoT) and the exponentially increasing data that can be accessed to evaluate risk — including sensor technology that can convert risk taking into a continuously monitored, pay-as-you-go model (even in liability classes) — most of this is futurist stuff. The exceptions are usage-based insurance (UBI) in auto, some modest developments in smart home and increasingly smart machinery monitoring you find in a variety of commercial applications.

Yet one company really stood out in its ambitions. The company, Understory, has been installing micro weather stations (wireless, solar-powered, etc.) to get a far more finite view of rain, hail, wind, etc. than the National Weather Service can provide. During a panel discussion, the CEO noted that the company can put 60 of these micro weather stations in a city for the cost of a single large radar system (around $200,000).

It is difficult to cite the specific loss to the industry of straight-line wind and hail (it runs in the tens of billions of dollars in the U.S. alone each year), and hail loss is notoriously difficult given the sometimes long tail to discover it and, in certain cases, the high fraud rate and difficulty to empirically verify whether a hail storm that occurred during a specific period of insurance coverage caused the damage.

But the sort of innovation occurring at Understory was one of the few focused on a core aspect where the risk takers can improve performance and meaningfully reduce loss costs. This is not to say that the many excellent developments around machine learning and predictive analytics applied to underwriting and claims is not similarly attacking these sorts of costs, it is just that Understory is unusual in that it is a tangible quantum improvement in data that can drive improvement in loss costs.

Look out for the next wave of “Understories” and to more tangible results from the variety of vendors pushing the machine learning/big data angle for both claims and underwriting,

4. I finish with my “not so impressed” takeaway. The most obvious aspect missing at the conference was a good economic understanding of the insurance industry by many of the entrepreneurs selling their wares. In some cases, including panelists, they were flatly wrong in their assertion and some showed little regard for the facts.

Even Daniel Schreiber, the CEO of Lemonade (whom I found to be thoroughly entertaining, insightful and articulate about many things, including behavioral economics), responded to a query from the interviewer/moderator in a way that indicates that some independent research suggests that the pricing of Lemonade’s product is a fraction of competitors. Schreiber suggested that the 25% cost for distribution (I interpreted this as total commission) and 40% total operating costs for the industry, compared with the “20% management fee Lemonade charges its customers,” is a key contributor to the difference in costs.

Underlying Schreiber’s comments was an obvious point that the cost of today’s insurance product to the customer is far too high and that innovation has to drive down costs for the insurer and prices for the consumer. At least Schreiber took on the issue in a thoughtful way.

Unfortunately, though, the 25% and 40% numbers are simply wrong. I go back to the factual economics of our industry. The INDUSTRY IN TOTAL DOES NOT EARN COSTS OF CAPITAL, so the industry in total is not getting paid for the risk it is taking. In 2015, 31% of premium (not 40%) went to sales and service. In personal lines, the numbers are far lower. As a reference point, Progressive’s total expense ratio is just under 20%, and Travelers homeowners expense ratio hovers around 28% (with a large part in commissions, given their retail distribution model ).

I am not suggesting that the industry is not ripe for some disruption, but that those are seeking to disrupt (or even enable) it need to understand the macroeconomics and then follow the money (kind of what Understory is doing).

Back to Lemonade. I can imagine that the company has built its infrastructure in such a way that the investors will get an appropriate return from the 20% management fee. I can further imagine that the model may self-select a better class of renters than the wider population and that maybe the fundamental proposition reduces fraud-driven loss costs, so a far lower price could be justified. Yet only a few of those at the conference started with a good foundation of industry and value chain economics, an understanding of the unique regulatory and product attributes that will remain for the foreseeable future, and where and how underwriting and loss performance can be improved.

As these issues come into focus, I suspect that the innovations will begin to fulfill the expectations that are building in the insurtech space.

Hurricane Joaquin: Why the Model Matters

It has been fascinating watching the progression of the forecasted path for Hurricane Joaquin — what a perfect example this is of the importance of a modern data and analytics platform!

The big news is that the hurricane is not expected to make landfall on the East Coast of the U.S., but the new forecast depends as much on analytics and big data as it does on actual changes in the storm’s path. The spotlight is now on the European Center for Medium-Range Weather Forecasts (the European model) vs. the Global Forecast System (GFS) run by the National Weather Service. The New York Times has a great article discussing the reasons for the changing forecast and, crucially, the differences between the two models.

This is an excellent lesson for insurers to see the power of modern data and analytics in action and what happens to models when they are not using the advanced capabilities available today. Fortunately, investment in analytics continues to rise, as detailed in SMA’s recent report, Maturing Technologies in Insurance. Almost three in four insurers are increasing their investment in analytics over the next three years. 48% of P&C insurers, in fact, are planning to increase their analytics investments by more than 10% annually during that time.

In recent conversation with key CAT modelers, we have learned that they are working to use their weather data and insights at a more granular level than ever before in coming releases. The advance of these CAT model tools creates opportunities for insurers in search of better predictive capabilities on weather events. An upgrade to the GFS model has been planned by the end of the year, taking advantage of soon-to-be-available computing capacity. Once it is up and running, it will be interesting to see how the upgraded GFS model compares with the current European model, especially when applied to future CAT events.

Insurers can take the continuing story of Hurricane Joaquin as a wake-up call — not only is analytics a critical area for investment, but the quality of the information and the computing capacity available have a major impact on how useful predictive modeling can be.

Lessons Learned From Hurricane Sandy

Hurricane Sandy is said to have been the most damaging hurricane recorded in U. S. history. There appears, however, to be some dispute as to whether Hurricane Katrina holds that dubious honor. The loss estimates and concerns are changing daily. The cost of the storm, estimated by private firms including PricewaterhouseCoopers and the PFM group, points to the fact that Hurricane Sandy destroyed or damaged more units of housing, affected more businesses and caused more customers to lose power. Here is the breakdown provided on November 26, 2012: http://www.governor.ny.gov/press/11262012-damageassessment.

  Sandy in New York ALONE Katrina & Rita in Louisiana
Housing units damaged or destroyed 305,000 214,700
Power Outages (peak) 2,190,000 800,000
Businesses Impacted 265,300 18,700
  • Number of deaths is more than 110 from Hurricane Sandy http://articles.latimes.com/2012/nov/03/nation/la-na-nn-hurricane-sandy-deaths-climb-20121103
  • The official death toll from Katrina was 1,723. http://robertlindsay.wordpress.com/2009/05/30/final-katrina-death-toll-at-4081/
  • 7.5 million power outages throughout Hurricane Sandy's two day assault on land
  • Moody's Analytics estimates the loss in the vicinity of the storm to be $50 billion, of which $30 billion will be directly from damage to property and the remaining $20 billion from economic activity, not all of which is going to come from an insurance policy.
  • 60% of the losses in economic activity, or about $12 billion, will come from the New York City metropolitan area.
  • Because of the storm's intensity and the breadth and scope of the damage, President Obama declared New York and New Jersey federal disaster zones without waiting for any damage estimates.
  • As of 12/3/2012, the Federal government has already issued $180 million in federal contracts related to Sandy.
  • The President has declared several areas as disaster areas, which means that federal funds will now be available to storm victims. (This is not limited to those without flood insurance.) This federal disaster assistance usually takes the form of low-interest loans to help home and business owners rebuild, which you can learn more about on the Disaster Loan page.

The statistics are staggering as are the losses (both covered and not covered) that are emerging from the storm. We will attempt to discuss some of the unique and troublesome issues that are arising from the storm.

Article Discussion Points:

  • Definition of “Storm” and its impact on insurance
  • Flood or NOT Flood?-that is the question (or the hope)
  • Personal Auto salvage concerns
  • The Lawyers are out to get you

Definition Of “Storm” And Its Impact On Insurance

A storm reaches tropical storm status by reaching sustained winds of 39 miles per hour. The National Hurricane Center creates annual lists of names from the database of names maintained and updated by the World Meteorological Organization. If a storm causes significant damage and /or loss of life, the name is retired from the list permanently. Thus, there will be no Katrina II or Sandy II.

1. What Does The Definition Of “Storm” Have To Do With Insurance? There May NOT Be Coverage On The DIC.
Thousands of businesses were affected by Sandy. Many times those larger clients have flood and wind coverage, but written on a large property or DIC (Difference in Conditions) policy.

In those policies there may be restrictions, sub-limits or different deductibles that apply to “Named Storms.” Those policies will define what that is, and should include flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain into this category once the storm has been declared by the National Weather Service to be a hurricane, typhoon, tropical cycle, tropical storm or tropical depression, thus bringing into focus the entire life cycle that a storm may go through.

We have found a number of articles written by law firms that are already taking on the issue of “named storm,” claiming that even though the National Weather Service had named the storm, it was not at hurricane strength when it reached landfall. A comprehensive definition of “named storms” would be helpful to clarify coverage. The fact that the meteorologists are discussing the attributes of this storm to be more like a winter storm rather than a tropical storm may end up on the chopping block of justice in a civil court or two and test the insurance policy coverages.

2. What Is Unique About Hurricane Sandy?

  • Sandy has defied normal storm behavior by moving east to west; it acted both like a hurricane and a cyclone simultaneously.
  • The result of this last odd wind pattern was the root cause of the flood tides and the inundation of the New York subway system.
  • The storm qualified as a hurricane at the time of landfall and its wave “destruction potential” reached a 5.8 on the National Oceanic and Atmospheric Administration's 0 to 6 scale.

3. One Storm or Two Storms:
Bad memories of the World Trade Center came immediately to mind when I read about this potential concern relating to Hurricane Sandy in the Daily Report. You might remember there was a significant concern that a second storm, following the initial impact of Sandy, was going to hit which would have further devastated the area.

Richard Mackowsky, a member of the Cozen O'Connor's global insurance group, said “new damage from a second storm could result in a separate occurrence, potentially requiring a separate set of deductibles.”

“If there is damage caused by a second storm but related to the first storm, issues arise as to whether there were one or two occurrences. A second storm could impact causation as to what is really driving the loss. If the only reason the second storm caused damage was because of damage from Sandy, the question then becomes whether that is a covered cause of loss,” Mackowsky said. “A second storm could trigger a separate limit of liability if it's a big enough situation,” he said.

But even one storm can create causation questions. Was the damage from wind or flooding? Not a simple question to answer, litigation stemming from previous storms has shown.

Excerpted from the Daily Report

Saved by the bell on this one — the second storm never hit, but the insurance pundits were armed and ready.

Flood … Not Flood? — That Is The Question

This appears, at first glance, to be Insurance 101 — most of this damage was either directly or indirectly caused by the condition of flooding. That is sure what it looked like to me and that is not a very popular observation. Why? Because most people did not have flood insurance and if they did, the flood insurance policy has limited amounts of insurance and significant restrictions such as no business income coverage.

1. Dilemma Of The Federal Flood Insurance Program — It's A Problem:
Even if it is covered on the flood insurance policy, there is real concern about the overall program. See this article from Reuters for more information.

2. Flood Or Not Flood
Whether talking about homeowner's insurance (including renters and condominium owners) or commercial property insurance, those forms most often include an exclusion for flood. So, here is where it gets a little tricky:

  1. Did the property owner sustain damage from storm surge?
  2. Was the loss due to rising flood waters?
  3. Was the loss due to too much rain that entered into the building because the wind removed the roof, blew out the windows or knocked a part of the building down?

“It is an ongoing saga,” says insurance lawyer Frank Darras, who has worked extensively on litigation scenarios following Katrina. “If you are a homeowner, you are going to argue that you have damage caused by wind and wind-driven rain. If you are the carrier, you are going to say the damage was caused by flood, tidal surge or a hurricane, which requires hurricane coverage.”

Excerpted from The Street

In a unique twist, New York has a specific website that contains a regularly updated scorecard on insurance company performance. Here's the link. For example, State Farm has had 48,109 claims; 6,363 closed with payment; 5,229 closed without payment.

3. Problems With The Flood Insurance Solution
FEMA says that less than 15% of homeowners nationally carry flood coverage. Federally backed lenders have been lax in enforcing the obligation to purchase flood insurance (that may change due to higher penalties being imposed upon the banks as of July, 2012).

The National Flood Insurance Program anticipates claims between $6 and $12 billion but has borrowing power at $2.9 billion. Reauthorization from Congress would be required, and Homeland Security is expected to request appropriation soon. Those current and new policyholders of National Flood Insurance Program coverage will be getting a scheduled rate increase that predates Sandy.

Even if the person or business purchased flood coverage, there are still problems and concerns.

  1. The limits of insurance available through the National Flood Insurance Program are small.
  2. Replacement cost coverage applies only to a dwelling and not to commercial structures.
  3. There may be wind damage to the building that the flood insurer will not pay but is covered in the homeowner's policy.
  4. The insured will get to pay two deductibles for those two separate policies.
  5. What kind of coverage is there if the first layer of property coverage is the NFIP coverage and the insured purchases excess layers of flood coverage above that policy?

    1. Will it drop down to pick up the replacement cost difference? No.
    2. Will it drop down to pick up business income, extra expense coverage? It should. Check the policy language.

4. The Future Of Flood Insurance
The future of the entire program is bleak enough. Add to that the impact of Hurricane Sandy on the future purchase of flood insurance. Homeowners in storm-damaged coastal areas who had flood insurance, and many more who did not, still now may be required to carry flood insurance and will face premium increases for flood from an estimated 20 to 25 percent per year beginning January. This is due in part to legislation enacted in July to shore up the debt ridden National Flood Insurance Program and is exacerbated by Hurricane Sandy.

“Because private insurers rarely provide flood insurance, the program has been run by the federal government, which kept rates artificially low under pressure from the real estate industry and other groups. Flood insurance in higher-risk areas typically costs $1,100 to $3,000 a year, for coverage capped at $250,000; the contents of a home could be insured up to $100,000 for an additional $500 or so a year,” said Steve Harty, president of National Flood Services, a large claims-processing company.

Excerpted from The New York Times)

Lenders, in addition, will be affected by Hurricane Sandy if they fail to enforce the requirement for their lenders to carry flood insurance. They will face even higher penalties then they have in the past.

5. Ordinance Or Law

  1. Many of those properties damaged by Hurricane Sandy had been built a number of years ago. So here are the questions:

    1. Does the Homeowner's Policy, Commercial Property Policy or Difference in Conditions include contingent ordinance or law coverage, demolition coverage and increased cost of construction coverage?
    2. What about the loss of use for the homeowner as well as the business interruption coverage?
  2. The National Flood Insurance Program policy is out as there is no coverage for the indirect loss.
  3. Many Difference in Conditions policies do not include ordinance or law automatically and many more do not include ordinance or law — increased period of restoration to cover the additional down time due to code or law enforcement.

6. Power Loss
Earlier we quoted the statistic of there being approximately 7.5 million power outages throughout Hurricane Sandy's two day assault on land. Many of these outages lasted days and weeks. There are several issues relating to insurance in terms of the power outages:

  1. Requirement Of An Off Premises Endorsement: In order for businesses to have coverage for either direct or indirect losses relating to power outage, the insurance would first have “off premises” or “utility coverage” on the policy. Typically, losses stemming from off premises situations are excluded on property insurance policies.
  2. Causation Of The Power Outage: If there was coverage on the property policies for the off premise loss, the situation that occurred off premises would have to be covered. For example, if the off premises loss were caused by a windstorm, that cause of loss is typically covered on a Commercial Property Policy or personal form. If the loss were caused by flooding, then that cause of loss is excluded and the off premises endorsement would not apply.
  3. Off Premises Deductible: Off premises coverage oftentimes has a “time” deductible or waiting period of 72 hours unless endorsed. This waiting period would have eliminated coverage for many of the properties that had their power back in three days or less.
  4. Direct vs. Indirect Loss: An Off Premises Endorsement would have to cover both direct damage and indirect to pick up a loss for Business Income.
  5. Other Perils such as Equipment Breakdown (EB): The cause of off premises loss may be due to a power surge that results from the storming. If the Equipment Breakdown policy has off premises coverage and business income coverage, then recovery can be sought under that policy.
  6. Some Off Premises Policies Have Distance Limitations: It must be ascertained if there is any distance indication on the policy to which the off premises is being attached. For example, some policies have a 500-foot distance radius which means the source of the off premises loss must be within 500 feet of the insured's premise.
  7. Spoilage: It may be that the loss the insured sustained while the power was out was spoilage, such as loss to refrigerated items and the business income that stems from that loss. This could be covered on either an Equipment Breakdown Form depending on whether there was a “breakdown” or on a Commercial Property Spoilage Form. Some Homeowners have limited coverage built in for refrigeration loss but not for the peril of flood.

7. Business Income
Now we are talking about one of the bigger claims that will result from Hurricane Sandy and much of it will not be covered. Here are some of the pressure points of this coverage:

  1. Cause of Loss — back to that one. Flood is excluded on the Commercial Property form so there will be no response for business income.
  2. The Flood insurance policy does not cover business income.
  3. If the cause of loss is determined to be “windstorm” and the insured has Business Income insurance, then the policy should respond from the causation point of view assuming they had direct damage.
  4. The insured will have to prove that their income loss is directly attributable to Hurricane Sandy.
  5. The policy has a waiting period for coverage typically 72 hours unless endorsed.
  6. The policy would have to be endorsed with Off Premise coverage for the Business Income stemming from loss of power to apply.
  7. There is no building ordinance for the business income — it would have to be endorsed.
  8. Civil Authority: Many of the businesses did not sustain direct damage but were closed by civil authority.

    1. There is limited coverage on the Business Insurance form
    2. There may be distance limitations
  9. Ingress/Egress: A bigger problem is the ingress/egress issue which basically means “because of the condition, itself, access to an area is affected or unavailable.” For example, if a road is flooded out so that there is no access to a grocery store, the grocery store will be able to demonstrate they are losing customers. However, if the store was not directly affected by the physical loss, there will be no trigger on their business income form. Civil Authority did not close down the area — it was closed due to natural events in this case.

Traditional Business Income Policies require that there be direct damage to the premises by a peril insured against for there to be any business income insurance response. However, there is talk, in the aftermath of Hurricane Sandy, of what is referred to as Non-Damage Business Interruption or Non Physical Business Interruption Insurance. It is referred to as NDBI. While articles are referring to these coverages, as if they are readily available, I believe they are truly exceptional in availability and accessibility. Sometimes these forms are part of a “supply line coverage” for very large businesses that often have an international component. There is also the TDI or CDI coverage — Trade Disruption which could come into play — however, that coverage has a very limited market. Bottom line, the average business that sustained damage as a result of Hurricane Sandy had neither one of these types of coverage. Liberty International apparently has a program.

8. Automobile Losses From Hurricane Sandy
Autos are the easiest part of this equation: whether wind, flood or a combination, all are covered under the “Other Than Collision” coverage. The salvaging of these autos is where it gets interesting. Canadian officials are now bewailing the fact that thousands of autos — some estimates are as high as 250,000 — are likely making their way to Canada. Those storm-damaged vehicle are classified in Canada as “non-repairable” and are illegal to sell. But, in the aftermath of Katrina, Canadian citizens were buying these vehicles in the thousands, and they expect the same thing to happen again. What I wonder is, who is selling those vehicles? The original owner? The salvage company the insurer uses?

The Lawyers Are Out To Get You

Errors And Omissions Litigation
Well, as if all the foregoing isn't depressing enough, we cannot end this article without a little nudge to the insurance agent and broker.

If you are relying upon “conversations” with your client along the lines of “Do you want flood insurance? No. OK, then,” you are going to be sadly mistaken that your client is not going to enjoin you in litigation over your standard of care. Your client is going to claim an increased standard of care, yes including New York residents, and that you had a duty to advise and quote coverage for them or at the very least, tell them in writing of the limitations of coverage in the policies they purchased and that they relied upon you for your expertise. Many agents simply renew, year after year, their direct bill homeowner's and small business clients without any documentation of coverage offers. Even those handling larger accounts somehow rely upon the client's memory and good will not to sue you. So, again, for the millionth time already, please, please document your file, in writing, to the insured, with a rejection signature every year or, for larger accounts, an authorization to bind affirmation from the insured.

As we were all glued to the TV, watching reporters being blown around reporting the devastation, my insurance brain immediately went to “flood exclusions.” I saw the wind ravaging the houses, the uprooted trees blocking the roads, but also saw the rising waters in the streets, along the shores, in the housing areas.

The question will come down to that simple reality — was the damage due to flooding or not? The attorneys are out in force, fighting for first page on the Google search engine so you get to them first. It reminds me of an old Gun Smoke movie — ready, aim, fire. Barrels are being loaded against the insurance companies.

There is no easy way to end this article, although I am sure all of you who reached the very end are hopeful that I will. The storm was one of the biggest ever, and the insurance story will not end soon. There is so much more we could say but best end this with a heads up to watch and see how these claims unravel; and, for those of you who did not insure any of these damaged properties, I say a toast of champagne is in order.