Actuarial

The Courant ran an article on the trials and tribulations of coastal Connecticut homeowners seeking or renewing their property insurance.

The bulk of the story isn’t particularly surprising.  For the past couple of years, insurers have been faced with some hefty reinsurance bills, have started paying more attention to their aggregations of exposure, and have been forced to face the likelihood that a major hurricane in the northeast, though extremely unlikely, would also be incredibly catastrophic.

Bob Hunter provides one of the consumer advocate opinions for the article…and part of it expresses a sentiment I agree with:

J. Robert Hunter, director of insurance for the Consumer Federation of America, [...] noted that reinsurance rates are coming down, so “I think the insurance commissioner has to look hard” at insurers’ rate increases and ask whether they can be lowered by getting a better reinsurance deal.

Speaking from first- and second-hand knowledge, in the past couple of years, getting a better  reinsurance deal has been tricky.  When challenged with some seeming irrationalities in treaty pricing, the feedback has been essentially, “we’re charging this because the market will bear it”.  It’s an annoying answer, true, but it’s a necessary artifact of a free market.  As a result, insurers have been forced to give some real thought to the risk loading in their rates and the economics and risk theory associated with purchasing cat cover.

However, reading between the lines in Bob’s comment, you can see an implicit criticism that could be made about insurers’ ratemaking processes.  At many companies, ratemaking and reinsurance buying are discrete, mostly unlinked procedures.  Because of timing issues (mismatch of implementation of rate changes versus the timing of treaty negotiations and the lag time in preparing rates, getting them approved, and getting them implemented), reinsurance costs are not always as tightly linked in insurance rates as they could be.   In some cases, an insurer could be finally realizing increased treaty costs 9, 10, or 11 months after the treaty price was finally set.

That’s a problem given the expectation of some volatility in treaty costs.

I have the pleasure of working with one business whose products are mostly unregulated.  Essentially, once we know what the new treaty costs are, I can plug in the updated figures into a set of spreadsheets, and generate all-new rates reflecting that revised expense assumption.  The organization is flat enough that I can discuss the marketing/sales impacts of those proposed changes very quickly with the relevant parties.  There are no rate filings to speak of…and so we can usually get revised rates in place at about the same time as the new treaty takes effect.

That’s a handy ability to have in environments when reinsurance costs are rising rapidly, as they were until recently, or when they start to ease, as should happen in a year or two if we continue to be lucky.

You’d think that insurance regulators in cat-prone areas would see the value of such responsiveness, and would work to streamline the rate approval process and encourage insurers to quickly act upon such revised assumptions as quickly as possible.

Seen in Insurance Journal:

S& P said “models can be “used or misused,” if they’re not accompanied by “pricing discipline, a sound strategy, and an understanding of the market.” Panelist Stephen L. Way, former CEO of HCC Insurance Holdings Inc. and founding partner of SLW International LLC, noted that “discipline may be more important than all the modeling in the world.” The best model being “your own experience.”

That quote was taken from an IJ article on a recent S&P conference, cautioning on the perils of overreliance on modeling.

I have to admit, I love models. Big, complex algorithms that make sense out of the chaos of data to find new patterns and build better predictive mousetraps are the sorts of things that set might heart a-fluttering. (Of course, I’m strange. But you knew this already.)

However, even I, a model-loving analytic geek, have to admit that there are a lot of models being used in idiotic ways. For example, in a prior life, where my role focused on the use of credit data for insurance purposes, I saw too many competitors that saw credit scores as an easy bolt-on feature to their programs, without considering what adjustments needed to be made to their non-credit variables to avoid “double counting”, or without considering how to implement without alienating consumers.

While the changes in market dynamics largely have insulated insurers from the effects of the double-dipping effects long enough for rating relativities to be recalibrated, it was hard not to notice the consumer and regulatory backlash to one insurer’s idiotically naieve decision to nonrenew the bottom-scoring quintile of their book.

Modeling is a tool providing additional information to consider in rating and underwriting a risk. There’s great potential to using modeling techniques to get your hands around challenging business.

However, modeling is not a license to throw common sense out the window.

(And before someone weary from property insurance rate hikes on the coast in the Southeast misuses the preceding sentence, “common sense” still isn’t a reason to turn a blind eye towards a model’s message when you don’t like what that message says.)

As seen in an AAA press release:

The American Academy of Actuaries will discuss reform options to address Medicare’s and Social Security’s financial challenges during a series of briefings on Capitol Hill. The Academy will also highlight both programs’ recent trustees’ reports and the need for reform. During the first session, the Academy will present its new monograph on Medicare reform options—a compilation and overview of options for public policymakers to consider when addressing Medicare’s short- and long-term financial difficulties. During the second session, the Academy will review its monograph on Social Security reform options, which provides a broad range of options for reform as well as the implications of these options on overall program finances and participants in various circumstances.

If I’m not mistaken, the monographs in question are available on the AAA website (Medicare and Social Security).

It’s nice to see the gospel being preached. However, given that we’re already seeiming to be in full swing on the ‘08 presidential election campaign (only 514 days left!), I doubt that Congress will have the courage to touch this particular political third rail and enact reform.

There have been some folks in the actuarial community in the U.S. who have been concerned about the threat of some of the profession’s duties being outsourced to a hypothetical bumper crop of new actuaries coming in south or southeast Asia.

However, I wonder if those concerns might be a bit premature, given that The Star is reporting about a lack of credentialed actuaries available to support Malaysia’s booming insurance and takaful industry:

More actuaries are urgently needed to ensure the successful implementation of the risk-based capital framework (RBC) and other regulatory policies in the insurance industry, Actuarial Society of Malaysia president Raymond Lai said. [...]

According to Lai, of the 51 actuaries currently registered with the society, 42 are working in Malaysia. In the next five years, it expects to register 100 more actuaries.

He said the number of actuaries in Malaysia was very small compared with other countries. For example, Hong Kong had more than 1,000 actuaries and Australia about 3,000.

I think some politicians in Trenton are still upset with New Jersey auto insurance customers having been exposed to modern multivariate auto insurance ratemaking.

From the Courier Post:

Drivers without college degrees or better-paying jobs pay more for car insurance from GEICO, according to a study released by an advocacy group Wednesday in advance of debate on a bill that might ban such an actuarial application.[...]

“It’s not just a poor-person’s issue here,” said Gill, whose bill is scheduled to receive committee attention on Monday. “It goes directly to the middle class.” She said 73 percent of New Jerseyans lack a college degree.

Gill said her bill would eliminate using education levels or job status, items she said did not figure in actuarial decisions by some other insurers. “You don’t need it to be competitive,” she said. “You need it to be exploitive.[...]

The advocacy group New Jersey Citizen Action said it had gone to the Web site for GEICO, famous for its ads with the animated gecko, and sought rates for 449 phantom drivers where the lone differences were educations and jobs.[...]

The group said a 51-year-old professional woman from Camden driving a U.S.-built sedan paid $1,063 if she possessed a doctoral degree, but $1,712 if she had nothing beyond a high-school degree.

I’d say that the appropriate response to such an analysis is to go into a discussion of what the loss cost differences are for those phantom drivers…after first asking a few questions about any biases in study methodology.

However, somehow, I don’t think such thoughts would go over all that well with that crowd.

The Seattle Times has run a profile of the actuarial profession, centered around an interview with Margaret Meister, FSA, CFO of Symetra. Here’s a sample:

As chief financial officer, executive vice president and chief actuary at Symetra Financial, Meister oversees a 50-member actuary team that handles a $20 billion investment portfolio. But Meister dispels any myth that their job requires her peers to “eat, sleep and breathe numbers,” as she put it.

“I think people sometimes instinctively associate insurance with just a car or homeowners policy,” she says.

But today’s actuaries are responsible for a “much broader set of financial services — things like retirement income, 401(k) plans and wealth protection,” she said. “We provide the sort of financial services that are integral to peoples’ lives. Plus, ours is a trillion-dollar industry worldwide, so there is a lot of upside potential for smart, aspiring math whizzes out there.”

According to a Canadian Institute of Actuaries (CIA) press release, north of the border there has been created an external entity to oversee actuarial standards:

Established by the CIA, the [Actuarial Standards Oversight Committee (ASOC)] has been given the role of overseeing the activities of the Actuarial Standards Board (ASB), the body responsible for the adoption of actuarial standards of practice in Canada. Both the ASB and the ASOC have been created by the CIA as independent bodies empowered with mandates for developing actuarial standards of practice and overseeing the standard-setting process.

This new model for the development and adoption of actuarial standards of practice was designed by the CIA as a proactive step to meet its stated objective of serving the public interest. The model also aims to respond to increased expectations for accountability and transparency in the new business environment.

According to ASOC Chairperson John Solursh, “The creation of the ASOC recognizes that the process for the development and review of actuarial standards should stand up favourably to public scrutiny and be independent of personal, commercial and employer/client conflicts and pressures.”

Transparency and sunshine are always good things, but why does this smell like mostly just an extra layer of bureaucracy to be dealt with?

Wednesday, RiskProf posted an interesting discussion on the zone of fuzziness around what it means when a government-run program is required to have actuarially sound rates.

His concern:

The national flood insurance plan is supposed to have prices that are actuarially sound-yet it has a large deficit. If there was truly actuarial pricing there would be little or no deficit. In addition, a number of state plans are operating at a significant deficit. In fact, according to some figures I just saw but can’t quote, a major insurer is claiming that there is about $5.5 billion of losses in excess of premiums in state wind pools. This is a massive subsidy to homeowners on the coasts.

A somewhat flip response would be to point out the traditional standard of “adequate, not excessive, and not unfairly discriminatory”…and to speculate that in certain programs there is an inherent tendency to focus on the “not excessive” portion of the mantra.

But that’s not why I’m writing this post.
What actually caught my eye in RiskProf’s post was the following comment:

What is missing from Section 2(5) is the loading for the risk the firm takes by committing capital to the market. However, shouldn’t the government account for the risk in some way to recognize the fact it is creating a potential tax payer liability? That would be actuarial pricing.

I want to say that the answer to that question is “yes, but…”

Read the rest of this page →

One of my favorite aspects of my job is getting to build snazzy models to…well, predict things. So, it was with some interest that I encountered a reference to predictive modeling in Friday’s Wall Street Journal (subscriber link). The article discusses one auto dealership’s efforts to get Detroit to actually equip vehicles the way consumers want to actually buy them:

At one AutoNation Inc. location in Delray Beach, Fla., scores of “orphan” vehicles have been sitting on the lot for months. One hulking silver Dodge Ram pickup has languished unsold for 237 days, an eternity by automotive standards. The problem? Chrysler equipped the truck with a V6 engine instead of the V8 requested by most buyers of big trucks.

Parked nearby is a red Jeep Grand Cherokee with four-wheel drive, a feature popular in snowy climes but not sunny Florida. One Chrysler Sebring convertible is so loaded with options that its sticker price is $32,000 — nearly as much as a BMW 3 Series.[...]

Frustrated the Big Three aren’t moving fast enough, Mr. Jackson is taking matters into his own hands. About a year ago, AutoNation hired McKinsey & Co. and two other consulting groups with retail expertise to mine consumer data. The goal is to identify the few versions of every vehicle that are big sellers among the thousands of possible variations. GM’s Mr. LaNeve says his company is seriously considering joining with Mr. Jackson to create a “predictive modeling” system.

What’s surprising is not that this is happening…it is that it’s taken this long for Detroit to have started moving towards this sort of analysis.

Seen at Chicago Business:

An actuary who has spent his career in sports statistics has developed a program to determine who will win the Super Bowl.

John Dewan, who also happens to be a Chicago Bears fan, says he was thrilled to find that his prediction system showed his home team would win the big game. [...]

In the same way corporate actuaries evaluate the likelihood of future events, he has designed a method to determine victory by looking at the Bears’ and Colts’ rushing yards, passing yards, points scored, turnovers, regular-season records, total yards and points allowed to come up with his prediction.

Interestingly, though, when you look at passing yardage statistics, the results go against common sense.[...]

“That’s because the team that relies less on the passing game and more on the running game tends to win the Super Bowl. It’s opposite of what people might expect,” he says, unless you’re a Bears fan.

Personally, I find the idea of a football championship in which Manchester United isn’t playing rather odd…but that’s just me, I guess.