Tag Archives: thought leadership

COVID-19 Highlights Gaps, Opportunities

Months into the global COVID-19 crisis, it is evident that the insurance industry failed to step up to the plate with actions that could have helped the community cope with the new situation. In a time where both individuals and businesses need support — more than ever — one would have hoped to see a more coordinated response or a strategic act from such a powerful industry. Instead, the pandemic and the response to it have highlighted significant gaps in industry offerings that are yet to be resolved. 

As soon as the pandemic started, a lot of the major legacy insurance companies simply stopped selling policies for certain kinds of coverage, and some of them still aren’t selling them. In an attempt to manage the expectation of their customers, they put up disclaimers on their websites about not covering COVID-19-related losses. We have gotten used to seeing these disclaimers during natural catastrophes to deter fraud, but the outcome for consumers is still grim, at a time when they need protection and support. 

Even now, there is still a large amount of uncertainty and posturing between the insurance industry and regulators about who should have been covered by existing policies that may or may not have explicitly excluded pandemic-related losses. As a result, many customers who were affected by COVID-19 and already held insurance policies — like travel insurance, which explicitly has blanket exclusions for pandemics — remained unclear as to whether they will be paid. 

In the past decade, we have seen huge growth in the number of gig economy contract workers, but they generally aren’t treated as employees, meaning that they do not have sufficient benefits or insurance for loss of income. It has become evident in this period that almost 40% of the U.S. workforce don’t have the support they need.

Herein lies a valuable opportunity: to adapt and provide better fundamental support to businesses and their workers, which in many cases have proved to be essential during these difficult times.

See also: Strategic Planning in the COVID-19 Era

The good news is that there is a huge opportunity for insurers to harness technology to create products and means of getting these products into the hands of people who need them, which will put insurers in a better position to support communities when the unexpected happens again. 

First and foremost, we need new products: customized, robust and agile solutions that provide actual protection during times of need. The cookie-cutter products that traditional insurers have been offering have not proved to be beneficial. Simply bundling-in pandemic coverage to every single insurance policy is not the answer, as it would raise policy prices for a lot of consumers. This is where product innovation can really make a difference. For example, general availability for “loss of income protection” for gig economy workers would have taken some of the burden off the government, while also helping the community stay resilient. Adaptable and responsive insurance coverage options for these people or the small business community could ensure they maintain the appropriate level of insurance as their income or businesses fluctuate. The exclusions for a pandemic in insurance policies are fairly broad, so there’s clearly a need for explicit pandemic coverages — either as embedded coverages, or sold separately. And of course, parametric products of some type should be developed and made available to kick in when different types of events happen. 

As the economy starts to reopen, some businesses can only operate at a 30% capacity. Will they be able to claim for their losses under existing insurance policies? Will they have access to coverage for a liability resulting from an infection that happens inside a small business? For small and medium-sized businesses (SMBs), all of these situations could mean going bankrupt. Innovative products don’t have to be all-encompassing as far as losses are concerned. Relatively affordable insurance products that provide a basic level of financial support to businesses to navigate difficulties — even if it’s just to enable them to keep the lights on for a while — have a demand in the market right now. 

Second, we need to change the way in which insurance products get distributed. As an industry, we need to help people get the right coverage when they need it. Generally speaking, one of the drivers of underinsurance in the community is the fact that insurance is complicated to understand and purchase. In most scenarios, people have to go out and search for protection, and most just opt out of that task. Others don’t understand what they are buying, don’t get the appropriate coverage or are simply underinsured. Giving consumers the opportunity to get covered, if they want to, is important. Making protection available and offering it in the right circumstances, as a product or add-on at the point of purchase, is a big opportunity for the industry.

The role of technology is to use data that exists from platforms like payrolls systems or e-commerce websites to better understand the level of risk and offer customers the right level of insurance at the right time. Reducing friction on the front end ensures that the level of insurance is adequate and will drive down the volume of underinsurance in communities, which provides a lot more resilience in the event that a pandemic happens again. 

See also: 4 Post-COVID-19 Trends for Insurers

It will be a long time before the insurance industry has a feel for the scope and the scale of the losses that have and will be incurred by businesses, individuals and insurers as a result of COVID-19. The pandemic will have a big impact on coverage and pricing, and it still remains to be seen if the industry will get together to support the community by making insurance available to those who are affected. 

We should all join hands and step up to ensure our communities are protected. We need to use the power of technology to really innovate with new insurance products and distribution methods that guarantee people are properly protected and safe when things go wrong.

Wildfire Season Off to Perilous Start

It is only the beginning of the 2020 wildfire season, and already there have been 20,351 U.S. wildfires between Jan. 1 and June 12. Compare this with 16,630 fires during the same period in 2019, according to the National Interagency Fire Center (NIFC).

As many as 90% of wildfires in the U.S. are caused by people, according to the Department of the Interior. Some are caused by unattended campfires, burning of debris, downed power lines, negligent discarding of cigarettes and arson.

In many cases, wind causes fires to spread over greater distances, creating exponential expansion. Fire spreads from hillsides to various points in the valleys, creating spot fires with no relationship to the main wildfire body. Examples of late season fires being compounded by extreme winds include several Southern California fires in 2019.

When One Disaster Follows Another

Across the U.S. and Canada, the scale of forest fires has increased to the degree that the fires themselves are now contributing to the rise in greenhouse gas emissions. Some fires are even creating their own weather systems, making winds more erratic and conditions too dangerous for firefighters to protect people and properties. These fires are often called megafires, and they are becoming more common. Some bushfires in Australia created powerful pyrocumulus clouds that led to smoke-infused thunderstorms. The lightning from these storms threatened new fires, which sometimes developed into fire tornadoes.

Warmer temperatures do more than just dry out the land. They also heat up the atmosphere, where clouds hold on to more moisture for longer periods, causing severe drought and fire. This is often followed by crushing rains that can’t be absorbed by severely dry lands. When floods and mudslides destroy property where fires blazed nearby, a cycle of what scientists call “compound extremes” – one climate disaster intensifying the next – makes recovery more difficult.

See also: Wildfire Season: ‘The New Abnormal’?

Evacuations and Blackouts Made 2019 Unique

While 2019 was not as active as 2018 in the U.S., disruption was still significant, leading to the evacuation of over 200,000 people and the declaration of a state of emergency in California. 

One of the most notable aspects of the 2019 California wildfire season was the introduction of scheduled intentional power outages by utility companies when fire conditions were forecast. This was meant to minimize or eliminate ignition risk from downed powerlines. These preemptive power shutoffs occurred in approximately 30 counties in California for approximately 23 days total, by Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric. The shutoffs initially affected around 800,000 customers, or about 2 million people. Stanford University’s Michael Wara, an expert on electricity policy in California, estimated the total costs of the blackouts were somewhere between $1.8 billion and $2.6 billion.

The shutdowns drew widespread criticism from residents as well as government officials. Many businesses and residents complained of either being misinformed or not informed when shutdowns would occur. California developed programs to protect utility companies and consumers in the advent of future wildfire events. The state legislature passed a bill that created a $21 billion state-run insurance pool to act as a cushion for utility companies against future wildfire claims.

Wildfire Modeling 

Wildfires are a rapidly growing challenge – and businesses need better tools to manage this risk. Predicting wildfire-related risk requires understanding more than just fire history, frequency and severity. Using solutions that are scientifically supported and peer-reviewed can provide powerful insights into wildfire mitigation, monitoring, reporting and response.

At Allianz, wildfire modeling is approached from a loss- prevention perspective:

  • Fire frequency, history and severity: Quantifies how often and how severe wildfires are expected to be, based on the history of a specific location
  • Ember loss and smoke damage: Scores the risk of a fire breaking containment via drifting embers and the projected path of those embers
  • Structure-to-structure ignition: Considers the proximity of houses and structures in each zone and the projected risk of fire jumping from structure to structure
  • Urban conflagration: Uses fire shed analysis incorporating the risk of a wildfire’s transition into urban areas, including structure-to-structure loss, ember scoring and accumulated risk
  • Correlated risk zones: Uses interactive maps to correlate and understand risk of single-fire events in specific areas

Reinsurance and risk modeling experts have begun using terms such as “megafires” and “the new abnormal” as they have identified several contributing trends of interest:

  • Increase in property development in and adjacent to wildland urban interface (WUI) areas 
  • Increase in fuel loads on the ground, including dead standing trees due to drought and insect infestation, along with a decrease in fuel moisture content as a result of prolonged arid conditions 
  • Increase in weather volatility from year to year, including several years of drought interspersed with a few very wet winters, as well as longer dry seasons extending later in the year when intense seasonal wind patterns are most likely to spread fires 
  • Changes in fire behavior, with rapid expansion becoming more explosive in terms of quickness and distance, due to a confluence of extreme conditions, including high temperatures, low humidity, strong winds, high fuel loads (vegetation and structures) and steep, hilly terrain; fires have consumed up to 70,000 acres a day and traveled over 15 miles in a few hours, with embers blown across multilane highways into developed areas within city limits  
  • Multiple fires have erupted at the same time and often in close proximity, stretching the availability of fire-fighting resources and their capability for aerial drops of retardants due to massive smoke plumes that reduce visibility

See also: Some Hope in the Face of the Wildfire Threat

COVID-19 Challenges

The 2020 fire season presents new challenges related to COVID-19. The pandemic has raised the stakes at the worst possible time, forest managers say, and is forcing firefighters, officials and communities to rethink how they combat blazes. One such consideration is firefighters moving from blaze to blaze in camping groups while not on the front lines. This previous practice is now considered a dangerous incubator for COVID-19. Also, the combination of smoke inhalation and the novel coronavirus complications greatly expand respiratory risks for first responders.

The continued spread of the coronavirus, as well as the economic paralysis that has accompanied health restrictions, has affected every aspect of wildland firefighting. With fires beginning earlier in the spring and persisting later into the fall, communities may have to contend with the dual risk of COVID-19 and wildfire for several months.

Helping Insurers Get a Handle on Wildfire

“California is the lab for managing exposure to wildfire risk,” according to Lynn McChristian, a professor of risk management at Florida State University. If carriers and reinsurers can make it there, they can make it anywhere.

The past several years have seen a steep increase in the severity of wildfires, with the 2017 and 2018 seasons causing $24 billion in insured losses in California alone. Rates are climbing there, and coverage is dropping—there is clearly insufficient wildfire coverage to meet market demand, especially in high-risk, wildland-urbane interface (WUI) communities. 

These historic losses, combined with insufficient solutions for managing wildfire risk, mean insurers are trying to get a handle on their wildfire portfolio accumulations and gather perspective on relative risk. Simply put, the old way of doing things has been proven not to work—and insurers are demanding better. 

The flaw with historical wildfire risk management: Fires don’t burn in a circle

The California wildfires illuminated that many companies do not have clear best practices around managing wildfire risk, primarily because it has often been considered part of wider policy terms.

One solution is to limit accumulations between highly correlated areas of wildfire risk. Historically, insurers have looked at their concentrations of wildfire risk at the county level, along with using ring accumulations as a tool to assess risk. But fires don’t burn in a circle, and they don’t know postal code boundaries. Now, RedZone, a wildfire modeling company, has used millions of wildfire simulations to identify burn patterns across the landscape to create areas called “correlated risk zones.”

See also: Parametric Solution for Wildfire Risk

These zones are essentially regions that look completely separate but, statistically, burn together. They provide a logical and credible alternative by which to manage portfolio risk accumulations, alongside traditional loss modeling techniques. A more consistent approach to managing capacity can also improve risk-based pricing.

Solving a portfolio-scale problem requires changing the way we think

“Models have focused on risk at specific locations, but this is a portfolio-scale problem,” RedZone CEO and founder Clark Woodward says. 

The above screenshots show RedZone’s models for use in portfolio-level analysis. On the left is RedZone’s burn probability layer. When combined with the image on the right, which is RedZone’s hazard control zones, you can develop a firmer understanding of portfolio composition when it comes to accumulations and likeliness to burn. 

Accumulation analysis involves defining zones of correlated risk—where properties are likely to be damaged by the same event in the same year—and estimating the probable maximum loss (PML) within each zone. By evaluating accumulated wildfire risk, insurers can assess where additional properties may be insured with minimal increase in exposure to extreme losses. 

Reinsurance broker Willis Re has also brought to market a new methodology for wildfire underwriting and customer-specific portfolios. By helping carriers understand not only individual risk selection but geographic areas that are driving up their PMLs, Willis Re can, in turn, help them diversify their portfolios and drive down reinsurance costs.

Practical innovation that can be deployed now  

It’s taken a beat—and a harsh reality check—but better wildfire risk management strategies are now coming to fruition. Providers like RedZone, Willis Re and Insurity are working collaboratively to create solutions, like the correlated areas of risk discussed here, that provide better, more logical ways of managing wildfire accumulations.

This technology can be quickly deployed and implemented alongside traditional risk management strategies. This allows insurers to avoid disruption while employing a consistent approach to managing capacity across both underwriting and portfolio management and, ultimately, better serve and protect insureds against wildfire risk.

A Way Forward on Flood Insurance?

In the mess that is flood insurance in the U.S., a bright spot emerged late last month when First Street Foundation released a major report on the issue, along with a model that will go a long way toward making assessment of flood risk more accurate and transparent.

The report serves first and foremost as a wake-up call. It says, for instance, that 70% more homes are within a “100-year” flood zone than are designated as such by the the Federal Emergency Management Agency (FEMA). That means 6 million households face flood risks they don’t anticipate, yet aren’t eligible for the National Flood Insurance Program. In Chicago, 13% of properties are at risk, according to First Street Foundation’s report, while FEMA puts that figure at less than 1%. The report says Washington, D.C., and Utah have five times the risk that FEMA sees, while Wyoming, Montana and Idaho have four times the risk.

Those sorts of figures are quite the clarion call, but First Street Foundation goes even further by providing the beginnings of a solution: data. Its model evaluates the risk for 142 million properties in the continental U.S., based on an exhaustive array of different inputs that not only are as accurate as possible for today but that project how risks will develop because of climate change. The model lets you search any address for free.

The model from First Street Foundation, a nonprofit research and technology group, should provide short-term benefits while laying the groundwork for smarter long-term policy decisions.

In the short run, potential buyers will understand their odds better and can either pass on a higher-risk property or can mitigate the risks by buying insurance or retrofitting the building. Banks will see the risks more clearly when writing mortgages — and some 30-year mortgages written today will still be in force in 2050, by which point the report projects at least 11% more properties will be at substantial risk of flooding. Insurers will price more accurately. Government — the 800-pound gorilla on flood policy — will have a better handle on what public works to undertake to protect vulnerable areas and what areas to steer clear of because the flood dangers are just too high.

(My entirely unrepresentative check on homes where I’ve lived over the decades struck me as spot on: All were ranked at the lowest level of risk, except for a condo I owned in Hoboken, N.J., that included the ground floor and that, in fact, flooded twice in the decade I owned it.)

In the long run, better information should allow flood risk to be allocated in a mostly rational manner, with homeowners and insurers mostly splitting the liability, but with government in the background to help with out-of-the-blue catastrophes.

We’ve all heard the stories about homes on the coast that get wiped out by storms, then rebuilt, only to be wiped out again, sometimes more than once. Having more accurate data should lead, in time, to underwriting decisions and government policy that reduce or even eliminate such craziness.

First Street Financial describes its report and model as a necessary but insufficient first step. That sounds right. The report is insufficient on its own because lots of other companies and groups will have to finetune the group’s data and, in general, deepen our understanding of flood risk. At ITL, we’ve long appreciated the work done by reThought and Hazard Hub, among others, but many firms will have to step up. And regulators, not known for turning on a dime, will need to become comfortable with using data that exists for each individual property, rather than thinking in broad, imprecise terms like flood plains.

But the report is a necessary, and very welcome, first step.

Stay safe.


P.S. Here is an intriguing piece from a sister publication, Risk & Insurance, on how insurance could help address systemic problems in police departments. The idea would be to require that police officers carry professional liability insurance. Police departments would cover the average cost of the insurance, but each officer deemed a high risk by actuaries (based on number and type of civilian complaints against them, for instance) would have to cover the additional premium payments. The hope would be to price bad officers out of work before they could do something that would wind up on the news.

I’m not at all sure the idea would work. Institutional forces such as police unions would resist like crazy, and there is surely enough uncertainty about how to weight risk factors that they’d be able to piece together an argument. But I found the idea innovative, so I figured I’d share the article. Maybe there’s a way to build on the idea.

P.P.S. Here are the six articles I’d like to highlight from the past week:

4 Post-COVID-19 Trends for Insurers

It’s not all gloom and doom. A crisis usually functions as a great breeding ground for innovation.

The Case for Paying COVID BII Claims

Is it reasonable to assume coverage for a COVID-19-related BII claim in the absence of a virus exclusion? The answer has to be, yes.

How Risk Managers Must Adapt to COVID

To modernize at the scale and speed required, ​”low-code” application development tools should be incorporated within the enterprise.

COVID: How Carriers Can Recover

Does RFP stand for “Request for Proposal” or “Really Frustrating Process?” Carriers can and must do better.

Strategic Planning in the COVID-19 Era

As insurers develop plans for 2021, the question is, where to start? Traditional processes may need to be supplemented with scenario planning.

ERM Shows Its Worth in Pandemic

Companies with sound ERM practices were better-positioned to deal with the pandemic than those with less sound or no ERM.

ERM Shows Its Worth in Pandemic

Although some say COVID-19 is a black swan event, it really is not. Pandemics have occurred in the recent as well as the remote past. A clearly articulated description of pandemic risk can be found in the World Economic Forum’s, The Global Risks Report 2019. “The spread of infectious disease” was among the top 10 risks listed, based on impact. There are estimates of the cost of a pandemic in one of the special chapters in the report, though these may look small compared with what COVID-19 might actually cost.

In the The Global Risk Report for 2020, “infectious diseases” is again among the top 10 risks. That report describes the readiness of countries to deal with epidemic or pandemic and cites a Nuclear Threat Initiative study that concluded that “no country is fully prepared to handle an epidemic or pandemic.”

The World Economic Forum’s (WEF) annual meeting in Davos, Switzerland is attended by government, business, scientific and other leaders from a plethora of countries. The ideas and data developed by its staff and contributors are widely distributed and well communicated. 

The WEF is not the only organization or individual to warn about pandemics. Bill Gates gave an excellent TED talk about pandemics in 2015 that has now gone viral on the internet. Heath organizations, think tanks focused on health and other types of organizations have put out the warning, as well. 

In the face of these warnings, it is puzzling as to why has there been the lack of preparation witnessed in some sectors. On the other hand, many major corporations reacted speedily and effectively to the challenges presented by the pandemic, even if they had not had it among their list of top risks. The reason they were able to do so rests, in large measure, on these companies’ adoption and implementation of enterprise risk management (ERM). 

ERM’s Premise

ERM is a process that addresses both operational and strategic risk across all facets of an organization by identifying, prioritizing, mitigating and monitoring risk to ensure that the mission and strategy of the organization can be assured. Below are the numerous ways ERM has proven its worth in ameliorating the potential adverse effects of the pandemic, whether the risk was fully recognized or not.

See also: How Risk Managers Must Adapt to COVID

How ERM Has Mitigated Pandemic Risk Among Practicing Companies 

A robust ERM implementation includes having both a business continuity and a disaster recovery plan. These plans enable companies to 1) assemble key decision makers immediately to approve responsive actions, 2) communicate to employees quickly and 3) move to “work at home” conditions without too many glitches. Many companies have indeed moved to a “digital only” environment with employees working at home. When this was not possible, companies rapidly put guidelines in place to create social distancing and other modes of worker protection.

ERM places a heavy emphasis on information technology security. Thus, as companies migrated to more work at home, employees already had cyber training. IT staff have implemented strong controls on aspects such as accessing systems and cloud security. Further, cyber insurance products have been purchased. 

ERM also includes having a solid handle on supply chain risks, meaning that supply chains are well-documented and diversified and that supply alternatives lined up. A number of ERM practitioners moderate the parameters of their just-in-time production and ordering to allow for a certain amount of inventory to be available in the event of a catastrophe. However, even a company following ERM best practices can experience supply difficulties and losses when a pandemic is truly global and lingering, but less so than others.

In addition, ERM-managed companies tend to have very solid financial underpinnings in terms of capital levels, credit lines, investment portfolio diversification, etc. The “however” in this case is that many small businesses are unable to have as substantial a financial foundation as larger ones, and even large companies with solid financials cannot sustain a severe drop in revenues for consecutive months. Nevertheless, to the extent that practicing ERM resulted in stronger financials, companies were better-positioned to withstand the financial impact of the pandemic.

Further, ERM fosters keen focus on reputation risk. Companies with dynamic ERM practices understand the need to aggressively protect corporate reputation. As such, many of such companies widely communicated what they were doing to protect all stakeholders from the effects of the pandemic, modified their advertising to take a more sober and caring tone and introduced a new level of caution in all they did.

See also: COVID: How Carriers Can Recover

An Example for Others

Governments and healthcare institutions could have benefited from ERM or more robust ERM. The list of mitigations that could have been in place is legion. For example, stockpiles of personal protective equipment and respirators could have greater, the number of ICU beds could have been higher, protocol for where to treat patients who contract the virus could have been drafted in advance and treaties among co-operating countries that address warnings and the closing of borders in the event of an outbreak could have been drawn in advance. 

It is hard to argue that companies with sound ERM practices were better-positioned to deal with the pandemic than those with less sound or no ERM. The benefit in dollars and cents may not be able to be determined accurately, but the benefit is real.