Risk Management for Fun and Profit

Doing business as a risk manager with an insurance underwriter's brain.

[riskmgmtforfunandprofit]

Risk Mgmt in the home and garden

My girlfriend and I have recently bought a house. In our city the law requires us to have an energy assessment done, to identify ways we can save money/energy by improving the home in different ways. Apparently this can include anything from replacing the windows and sealing air-leaking cracks, to replacing HVAC or installing a heat pump system. We are also, of course, arranging to have quite a bit more work done on the house, but this energy assessment has to be done within a few days of closing.

As I've been shopping for quotes for this service, I've found the prices run anywhere from $250 to $400, not including the fee to file the assessment report with the city. What surprises me is that the contractors who the City lists as qualified to do this work mostly don't have a contract or a terms and conditions form at all.

However, there is one contractor whose website does have an extensive, impressively-written Terms and Conditions document. To keep things deceptively simple, you only sign a one-page "inspection agreement" at the time of their visit. But, the agreement attempts to incorporate by reference their terms and conditions from the website.

Most of the terms and conditions are innocuous or typical of commercial contracts. However, the indemnification clause (the heart of risk transfer in any contract) made my eyes pop open:

You agree to defend, indemnify and hold [Contractor], its subsidiaries, and affiliates, and their respective officers, agents, partners and employees, harmless from and against, any loss, damage, liability, claim, or demand, including reasonable attorneys’ fees and expenses, made by any third party due to or arising out of your contributed content, use of the [Contractor] Services, and/or arising from a breach of this Agreement ... Notwithstanding the foregoing, [Contractor] reserves the right, at your expense, to assume the exclusive defense and control of any matter for which you are required to indemnify [Contractor], and you agree to cooperate, at your expense, with [Contractor]'s defense of such claims. [Contractor] will use reasonable efforts to notify you of any such claim...

What happens if the contractor's ladder tips over and falls on the neighbor's parked car? What if a contractor employee is injured inside the house? What if the contractor gets into a car accident on the way to or from our house? This indemnification clause means that the contractor, or their insurers, could pursue us for all costs associated with those mishaps. And if we don't have cash, they could take the house itself.

[riskmgmtforfunandprofit]

Pope Francis Wears Miter With Faceshield To Comply With New Vatican Safety Measures

VATICAN CITY—Receiving protection against chemical, environmental, and immoral hazards in the workplace, Pope Francis reportedly began wearing a miter fitted with a hard polycarbonate faceshield this week to comply with the Vatican’s new health and safety standards.

Always wear appropriate PPE at the jobsite!

[riskmgmtforfunandprofit]

A definition of insurance

From The Devil’s Dictionary by Ambrose Bierce:

INSURANCE, n. An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.

INSURANCE AGENT: My dear sir, that is a fine house— pray let me insure it. HOUSE OWNER: With pleasure. Please make the annual premium so low that by the time when, according to the tables of your actuary, it will probably be destroyed by fire I will have paid you considerably less than the face of the policy. INSURANCE AGENT: O dear, no— we could not afford to do that. We must fix the premium so that you will have paid more. HOUSE OWNER: How, then, can I afford that? INSURANCE AGENT: Why, your house may burn down at any time. There was Smith's house, for example, which— HOUSE OWNER: Spare me— there were Brown's house, on the contrary, and Jones's house, and Robinson's house, which— INSURANCE AGENT: Spare me! HOUSE OWNER: Let us understand each other. You want me to pay you money on the supposition that something will occur previously to the time set by yourself for its occurrence. In other words, you expect me to bet that my house will not last so long as you say that it will probably last. INSURANCE AGENT: But if your house burns without insurance it will be a total loss. HOUSE OWNER: Beg your pardon— by your own actuary's tables I shall probably have saved, when it burns, all the premiums I would otherwise have paid to you— amounting to more than the face of the policy they would have bought. But suppose it to burn, uninsured, before the time upon which your figures are based. If I could not afford that, how could you if it were insured? INSURANCE AGENT: O, we should make ourselves whole from our luckier ventures with other clients. Virtually, they pay your loss. HOUSE OWNER: And virtually, then, don't I help to pay their losses? Are not their houses as likely as mine to burn before they have paid you as much as you must pay them? The case stands this way: you expect to take more money from your clients than you pay to them, do you not? INSURANCE AGENT: Certainly; if we did not— HOUSE OWNER: I would not trust you with my money. Very well then. If it is certain, with reference to the whole body of your clients, that they lose money on you it is probable, with reference to any one of them, that he will. It is these individual probabilities that make the aggregate certainty. INSURANCE AGENT: I will not deny it— but look at the figures in this pamph— HOUSE OWNER: Heaven forbid! INSURANCE AGENT: You spoke of saving the premiums which you would otherwise pay to me. Will you not be more likely to squander them? We offer you an incentive to thrift. HOUSE OWNER: The willingness of A to take care of B's money is not peculiar to insurance, but as a charitable institution you command esteem. Deign to accept its expression from a Deserving Object

[riskmgmtforfunandprofit]

Hope they had cargo insurance

I wonder if a plaintiff’s attorney could prove unseaworthiness due to insufficient lashing? 

http://sploid.gizmodo.com/watch-thousands-of-tons-of-cargo-spill-into-the-sea-dur-1785606242

The steamship line will doubtless point to their Bill of Lading clauses, as described in that old poem...

It is much to be regretted

That your goods are slightly wetted 

But our lack of liability is plain,

For our latest Bill of Lading

Which is proof against evading 

Bears exceptions for seawater, rust and rain.

Also sweat, contamination,

Fire and all depreciation 

That we've ever seen or heard of on a ship.

... 

We're protected from all these and many more,

And it's very plain to see

That our liability 

As regards your claim is absolutely nil,

So try your underwriter, 

He's a friendly sort of blighter,

And is pretty sure to grin and foot the bill.

[riskmgmtforfunandprofit]

Habits of success: focusing on the customer experience in business insurance

Everyone in the insurance industry knows that this is a relationship business. What does that really mean?

Think about the difference between Virgin America and just about any other airline. If you’re an experienced air traveller and you’ve flown Virgin, you’ve probably already thought of three different ways in which the experience was notably better than most of the competition. Or, consider the difference between calling an Uber or Lyft on your phone, and hailing a traditional cab on the street; that improvement in the overall ride experience is why these rideshare apps have become so popular. The art of “customer experience” is transforming how many industries in America work today. Insurance for middle-market business, though, has a long way to go.

One challenge is that many buyers mistrust sellers of insurance - it's often an afterthought for a business owner: one of the first places to look when it's time to cut expenses, and generally thought of as regrettable overhead that we might not need if we didn't have such a "litigious culture".

I used to work for a couple of insurance companies, and I can tell you: some people on the carrier side are just as selfish as those buyers are. "I must have more business from you”, as the underwriter says in that video that went viral about five years ago - underwriters are hungry beasts. Insurance companies in general don't think as much as they should about what Insureds really want; they think incrementally, in terms of adding to what they do already. I can’t think of another industry where the vendors make their customers jump through so many hoops.

Among more sophisticated buyers, there is understanding that insurance is valuable contingent capital, and a necessary part of a well-developed risk management program. There are also sophisticated sellers, who really want to be useful to their clients, who want to help them solve problems and build their businesses. Among the sophisticated buyers and sellers, there is an understanding that nobody really wants this to be a one-off transaction, or even an annually-repeating transaction. It should be a long-term partnership.

Over the years, I've had the chance to work closely with some outstanding people in the insurance industry. Here are the four traits they have demonstrated to me, which differentiated them as closely connected to their clients, deeply engaged in a productive partnership. Every successful person I’ve ever met in this business has these traits - that includes brokers (who sell to the insureds) and underwriters (who sell to brokers). What these traits have in common is a focus on the customer's experience: understanding the business from their perspective, and meeting the client where they are (not where you want them to be).

Responsiveness

This is "table stakes" to survive in the business. Nobody wants to feel that their email or phone call has gone into a black hole, even more so if they’re dealing with a large corporation. It's not that every email must be responded to immediately, and I don't even necessarily think that every call must always be returned the same day. But over the long run, you have to keep your client's confidence that you are there, that you will show up for them. The gold standard is the illusion that they are your only client; they don't actually expect that to be the case, but it's nice to be treated as if it were true. The name of the game is to work with your customer to set service expectations together, and then meet them.

Continuity

Anecdotes abound of famous politicians who could remember the names of individuals in their constituencies. This is continuity: when you maintain awareness of your client's needs and operations. When the client talks to you, you should already be up-to-speed with what's going on in their world - they've probably already told you previously. Wouldn't it be frustrating to have to explain your whole medical history all over again, every time you saw your doctor? When the risk manager calls her insurance broker, she should trust that the broker doesn't need to be reminded about that new expansion to a new state; the underwriter shouldn't have to be reminded of which are the broker's specialties.

Anticipation

This arises out of the virtue of continuity. Think about the relationship between a butler and their employer, like on the TV series Jeeves and Wooster: Jeeves gets hired in the first episode because he has a hangover cure waiting for Wooster before Wooster even wakes up. It often happens that you have a good idea of what someone is going to say before they say it, doesn’t it? Sometimes it feels like you have ESP.  Whether it’s your parents’ attitude towards what you want to wear for school, or what a professor thinks about your choice of research topic, or what your boss will ask you to include in a report. Anticipation of a client’s needs is one of the hallmarks of a service provider who really understands them. For a broker marketing an account, this means developing a narrative submission to underwriters that really explains the nature of the risks, that allows the underwriter to get a true feel for the drivers of the account, rather than just rattling off basic statistics or doing the minimum to fill in a form. You don’t want important information to get lost in translation between what the underwriter is asking for, and what you are telling them. For an underwriter, this means you should make it as easy as possible for your brokers to deal with you. Things like requiring your own company application to be fully filled out and signed prior to binding (a very common complaint from brokers) are a pain point that encourages the broker to take their business elsewhere.

Followthrough

Brokers want their underwriters, and risk managers want their brokers, to be able to get things done. People are usually careful not to make promises they can't keep; but we must keep the promises we do make. It's vital to make sure that you create only reasonable expectations in your customer's mind, and manage them as needed. As a buyer, I should be able to trust that it will get done, and that my partner is capable of handling it without me having to chase them for it. Has the underwriter promised to turn around that quote in a week? Has the broker asked for a new endorsement? Then it should get done without the client needing to ask for it again. Has the broker promised to deliver newly-issued policies to the insured? Or get new quotes from another carrier on an existing line of business? The broker should be able to make it happen without the risk manager needing to follow up with them.

Some people talk about having a "one touch" system: picking up an item and not letting go of it until it's resolved. The reality is that sometimes, these processes are too complex for that "one touch" rule - authorization or capacity is beyond the reach of the person handling the item. But in that case, you move it forward as much as you can, delivered in a package that makes it easy for the next person to do what they need to do; and you take ownership of the matter: you keep the item on your radar until it is resolved, and you communicate to your client to keep them updated without them having to prompt you. In other words: you should make sure your client knows that you are thinking about what have to do for them, even more than they are thinking about it.

What do you think is the most important characteristic of a service provider in a business partnership? Drop me a line and let me know. I think these rules apply broadly, even outside the insurance world; anyone who seeks an ongoing partnership with a customer can use these concepts, such as software companies, doctors, attorneys, and realtors.

Adapted from my original post on LinkedIn: https://lnkd.in/b7mS75i

[riskmgmtforfunandprofit]

people who advocate tort reform often say, "isn't there such a thing as an accident anymore? why are we always suing each other?" the fact is, actions have consequences, and people need to take responsibility for them. in this case, someone brought a box of live ammunition for use in a stage show. you can't just tell the victim to throw up his hands and say "oh well, I guess there's no point in lawyering up". he has every right to go after the parties involved in putting the show on - the parties who put him at risk without controlling that risk. from there, the principle of "vicarious liability" which establishes an employer's responsibility for an employee's acts is well-established.

[riskmgmtforfunandprofit]

Loss Triangles

I went to a nice party that my insurance broker hosted at IRMI last week in Nashville. Because I am a party animal, the subject of loss triangles came up. And I promised someone that I would send them an email to explain what they are. Now I share it with you, for your edification or my mortification.

So the question is, how do you, the insurance company, come up with an estimate of your book’s tail? This is for long-tail business like GL or Auto or WC.

Obviously, from year to year, you are constantly modifying your appetite and underwriting guidelines. The marketplace is also changing, as the prevailing rates rise and fall depending on state filings, competition, and secular changes such as the requirement to wear seat belts, the requirement for motorcyclists and bike riders to wear helmets, the rise of OSHA, etc. But in the short run, probably a good guess for how this year’s results will eventually shake out is “something close to last year’s and the year before’s.”

Obviously, as of today, your results for 2012 have less maturity than the results for 2011 and 2010. So the loss triangles enable you to look at your recent years at-a-glance, and try to ballpark where your recent years are going to come in.

Let’s look at an imaginary set of loss triangles for Insurer XYZ. The years below refer to calendar years.

Each cell refers to the book’s loss ratio for that year. The loss ratio obviously changes as the book ages – as of “0 months”, that is Dec. 31 of each year, there’s still a lot of development still to come. That’s the “incurred but not reported” losses which are the nightmare of every actuary. As time goes by, up until the statute of limitations/repose, claims keep on coming in for that year. Also, loss reserves will get adjusted up or down, and eventually the losses will settle. Usually, the loss ratio slowly creeps upward. The table is called a “triangle” because obviously the rows are shorter for more recent years.

Now let’s fast-forward by another 6 months.

So we’ve added another 6 months’ worth of development to the book. The loss ratios for each year have increased a little bit. We also added a new row for the recently-closed year of 2014.

If you look at the numbers above, you can see the story of the company’s recent history. You can see that 2011 and 2010 are converging towards a similar result – maybe you could even make a guess that ultimately, at 48 or 56 months’ maturity, 2010 and 2011 will most likely still be under a loss ratio of 70. Then, look at the “12 months” column for all of the years. You can see a steady trending downwards from 2010 to 2013 – so maybe, if your company made good underwriting changes, you could even guess that 2013 and 2012 might eventually close out even better than 2010 and 2011 did.

How’s that? Make sense? This is pretty much how liability underwriting managers track their books of business – at least as far as I know. I was only ever a field underwriter, not a manager.

Why is this important? If you do business with insurers, it helps to know how they think. The person sitting across the table from you has their own set of priorities and concerns. Foremost among them is the need to keep one's job. One common way for an underwriter, or an underwriting manager, to lose their job is to fail to turn a profit. Now, everyone's heard the old line about "lies, damned lies, and statistics". Obviously these loss triangles are raw material which still need to be interpreted, and I only hinted in the above article about how those stories are told. My guess is that reading those tea leaves is one of the dark arts which one must master in order to play the game of insurance company middle management politics. Anyway, if you are a broker or risk manager, the more you understand about how the insurers think, the better you can bargain with them. This is just one of the terms which are thrown around in the monthly or quarterly internal meetings at which insurers gauge their performance.