AAIS had a strong turnout for its 2009 Main Event conference, and interest is high for the 2010 event, April 11-13 at the Sanibel Harbour Resort & Spa in Ft. Myers, Fla.
Below is a description of some of the 2009 conference sessions.
 Howard Mills has some good news for property/casualty insurers concerned about the fate of their industry under regulatory restructuring proposals in Congress.
According to Mills, former insurance superintendent in New York state, now chief advisor for the insurance industry group of Deloitte LLP, congressional Democratic leadership acknowledges that regulatory restructuring will take longer than previously anticipated.
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Executive panel discusses topical issues
The executive panel discussion is one of the most anticipated segments of the AAIS Main Event, and this year’s panel featured four highly-experienced company executives:
- Stuart Henderson, president and CEO of Western National Group, Edina, Minn.;
- Judy Jackson, president and CEO of NLC Insurance Companies, Norwich, Conn.;
- Chester Szczepanski, vice president and chief actuary, Donegal Group, Marietta, Pa.; and
- Richard Zick, president and CEO of Utica First Ins. Co., Utica, N.Y.
The panel was moderated by AAIS President Paul Baiocchi. The following is an edited transcript of the questions presented to the panelists and their responses.
If a federal charter and federal regulator become a reality, what will be the key considerations for companies as they choose between state and federal charters?
Judy Jackson: “If we have an optional federal charter, companies will probably still have to follow state laws. . . . There’s [rules] built into every state, little laws and regulations that make each state its own universe. By bringing in federal regulation, can we solve that problem? . . . The other thing I worry about is that I just don’t believe it will be one [system] or the other. I think we’ll have both [state and federal regulation] and all the costs associated with two regulatory systems. . . . It’s kind of the question of the devil you know versus the devil you don’t. Well, they’re so fed up with the devil that they know, that they’re willing to go into the unknown with great energy.”
Stu Henderson: “Keeping the politics aside, what’s in your best interest? Your choice, if you have one, is going to depend on the number of states you’re in, the number of filings you do, and the state regulators, how easy it is to do business with them. . . . If yours is a big company doing the same [compliance] things in 50 states, all these filings, I’d probably want the same thing. I think the reason I don’t is that I’m in fewer states and I value being able to go to the regulators in those states and get anything done that we mutually agree is good for the consumer.”
Chet Szczepanski: “We might end up with a merger of the two systems. . . . I can see the perspective, if you’re a large company, that you’re being nipped at your heels by 50 barking dogs. . . . On the other hand, every state has unique laws and regulations. Every state regulates auto insurance . . . Every state has a different way of regulating workers compensation. Every state has a different way of regulating medical malpractice. . . . I don’t think any state is about to give up control of prices in those markets. . . . Politically and pragmatically, my bet would be that we’re not going to see the states being forced to relinquish that control. . . . I think the federal government probably has something to bring to the table in managing and understanding systemic risk.”
Richard Zick: “You have three major trade associations on the insurance side, and they’ve got three different views. . . .If I’m sitting there in Congress listening to the trade associations, [I hear] one of them pushing systemic risk, another one pushing state-only [regulation], and one pushing for both. Then you have a bonus, with agent associations saying, ‘Whoa, we want no part of federalization.’ It has to be extremely confusing for someone at the federal level. . . Another thing that will come into play on this is that NCOIL (the National Council of Insurance Legislators) is a very powerful group. It’s hard for me to sit here and believe NCOIL is going to say, ‘Okay, we’re going to relinquish all this, all the [model] laws we passed in the states . . . We are now going to turn the keys over.’”
Judy Jackson: “One of the forces pushing for federal regulation is international companies. . . .
If we have an optional federal charter, and international companies join the auto business or the homeowners business, I think we’re up for some incredible competition.”
Chet Szczepanski: “One argument for federal involvement in this process is, if there is something we are really good at, it is creating financial products, creating ways to spread risk, creating ways to manage risk. If there is something we can [sell] in international markets, it is insurance and things like that.”
Judy Jackson: “Uniformity in the states is a huge problem. When you see some of your states try to adopt a model law, sometimes you see the attorneys general say, ‘You’re giving up power to control things.’ You’ve got pressures within states that are not allowing even the well-meaning insurance commissioners to make the changes that they need to make.”
What’s the future look like for credit-based insurance scoring in light of consumer and regulatory criticism of it?
Chet Szczepanski: “Credit-based insurance scores are a very efficient, predictive tool to segregate risks. . . . Segregation in and of itself, particularly among risks, is not necessarily a bad thing. What’s bad is unfair discrimination. Who decides what’s unfair? At the end of the day, it’s really the public that decides what’s fair and unfair. And that’s through a process of education. And we all know that, in the political arena, oftentimes it’s the good sound bite, the best advertisement, the ability to explain and advocate a position, which wins out, not necessarily the economically or socially best solution. . . . We’re at a critical point when the industry has to advocate and explain why [credit-based insurance scores] are good and make it very clear that they are a benefit to most consumers.”
Stu Henderson: “We’re going to have to argue about it every year, over and over again, until we educate enough people. . . . In a couple of our states, we go to the legislatures and we just lay it out for them. Here’s what happens. ‘[If you prohibit use of credit-based insurance scores,] 80% of the people will get a rate increase. They’re voters, by the way. Let us know when you want us to do that.’ Eventually, the objections go away. But, they will be back next year.”
Richard Zick: “We are probably one of the few [companies] that take a different track on use of credit scoring, and that relates to the type of business we write. We’re a large writer of contractors, and I can tell you, if you ran a credit score on most small contractors, and looked at the payment stream of most small contractors, it would be an extremely difficult class of business. . . . That being said, though, everyone else is successful because they use credit scoring effectively. From that perspective, I’m definitely against states meddling into how we underwrite our business.”
What other rating and underwriting factors are companies looking at, in addition to credit?
Chet Szczepanski: “We live in an incredible time with regard to computer technology and database technology . . . Next to the folks who work in the organization, probably the most valuable asset an insurance company has is its own data that the company needs to be slicing and dicing and examining in a zillion ways. . . . This is really the same kind of analysis that went into developing credit-based insurance scores, but there is more information in your database.”
What kind of performance indicators are companies monitoring most closely today?
Richard Zick: “One of the things I struggle with the most is retention. This is a tough economy today. If you’ve been writing a lot of contractors like we have been writing, they go out of business. If you’re writing restaurants, they don’t open sometimes, but they do close a lot. If you’re writing homeowners business, where you can’t afford to be stuck on homes that are being foreclosed on, it’s a very difficult situation. . . . Three or four years ago we were more concerned with how do we grow this book of business, how do we write more homeowners, how do we write more restaurants, how do we write more contractors.”
Judy Jackson: “One of the most interesting things I’ve seen over the last couple of months since the financial crisis started is the increase in fraudulent claims. . . . Our fraud unit today is busier than I’ve ever seen it. It’s really been a quickly escalating problem. . . . In a couple of years, I think we’re going to be saying that a certain number of points in loss ratio were added over these last couple of years because of the economic situation.”
Stu Henderson: “We tend in this business to measure things after they happened. We’re very much ‘look back’ people. And we tend to do it in intervals, quarters, at most. Some have suggested that we look at and track activities that produce results. . . . [Another idea is to] look at things on a rolling 12-month basis. You take 12 months’ worth of whatever you’re measuring, whether it’s loss ratio, whatever it may be, and, as a new month comes on, you take one off. So, within a year, you have 12 touch points instead of four, and it tends to show [trends] more quickly.”
What are companies doing to hang onto their best customers?
Judy Jackson: “It’s a really tough question. We write a lot of homeowners and people are leaving their houses vacant and not paying the bills and the banks end up taking the houses on their own accounts. People aren’t buying new cars. So, keeping your best customers is really the toughest thing that we face. Price seems to be the only thing that does that, and that contributes to the ongoing soft market. The forces are there for a harder market, but it may not happen.”
Richard Zick: “We’ve done a lot to change our payment plans, particularly with contractors. [We accept] credit card payments, [payments] directly out of their checking accounts, I’ve noticed our retention has ticked up a bit because of these things that we’ve been able to do. . . .One thing that bothers me and we all wrestle with a bit is, if you walk into any agent’s office, or talk to many CEOs, the first thing they talk about is cross-sell ability. You walk into an agent’s office and he says, ‘I’ve got to have the auto, the homeowners, the umbrella, and if I can’t do this with you, then I don’t really want you.’ Well, we’re not an auto writer. We’re actually getting out of the auto business. Now, I walk into an agent’s office and I say, ‘Wait a minute, in New York State, something like 65% of the auto business is with direct writers. Who’s writing all this homeowners business?’ [Cross-selling] is something that’s been ingrained in us through a lot of consultants, and we sometimes miss out on opportunities to write things we write very well because an agent is saying, ‘If I don’t have these three or four lines of business, I can’t use you.’”
Chet Szczepanski: “When we talk of all this use of credit-scoring, data mining, all these things, at the end of the day what we’re doing is we’re segregating risks into groups. Within those groups, there’s no better indicator of their future experience than what they’ve done in the past. When you look at retention, you need to look at what kind of experience they have brought to the table. That’s a good indicator of what they’re going to bring to the table next year.” |
For now, at least, regulation of P/C carriers appears to be a secondary consideration to identifying and managing systemic risk to the global financial system.
In his address at the AAIS Main Event, Mills said that “discussion of systemic risk slows down the movement
of regulatory reform. It gives Congress something to chew on.
‘The appetite of the federal government for regulating insurance is very broad but very shallow,” he continued. “Congress does not want to get into the weeds of insurance regulation.”
If that’s true, the bill recently introduced to create a federal insurance charter and national regulator faces an uphill battle. The dynamics of deliberations could change, however, for several reasons.
One reason, according to Mills, would be if a huge storm were to collapse what he called the “house of cards” set up by Florida to control insurance rates and use mandatory assessments to fund hurricane reinsurance.
Some experts believe Florida’s state-run system is under-reserved for a major catastrophe, and that a huge hurricane there could trigger losses with systemic impact.
“The entire Florida system is built on the assumption there will be a federal bailout if it collapses,” Mills said. He predicted that would set off an intense debate whether the costs of living in storm-prone regions should be subsidized by people outside those regions.
In addition, there are renewed attempts to repeal the McCarran-Ferguson Act, which grants insurers a limited antitrust exemption for sharing premium and loss data and developing standardized policy forms.
If McCarran were repealed, P/C advisory organizations might find their activities curtailed or subject to regulation by the Federal Trade Commission.
“Repeal of McCarran-Ferguson provides a good sound bite when members of Congress have nothing else to offer,” Mills said. The act’s provisions had nothing to do with the nation’s financial crisis, he said, and its repeal “would accomplish nothing of any benefit.
“At the end of the day, I don’t think you’ll see a repeal of McCarran-Ferguson.”
Nonetheless, Mills warned his audience that congressional debates are at a point where “good politics leads to bad policy.”
Referring to institutions that have received federal bailout funding, he said that “it’s good politics to bring these companies up before a congressional committee, but is that really going to help them recover and give the government’s money back and get the government out of their board rooms?”
People throughout the U.S. are asking if recent moves by banks to reduce limits on unsecured credit will adversely affect their credit scores.
The same questions pertain to credit-based insurance scores, now used almost universally by property/casualty carriers as a component of their personal auto and homeowners insurance pricing.
 Many people would be surprised to learn that credit scores and credit-based insurance scores have improved for most consumers in recent months, according to Lamont Boyd, director of insurance market scoring for Fair Isaac Corporation, a leading developer of predictive scoring.
“The vast majority of people have seen their scores increase (improve),” Boyd said in his address to the AAIS Main Event. “It would take a lot of deterioration in a lot of scores to have a substantial reduction in scores.”
Thanks goes, in part, to consumers themselves, who are becoming more prudent with credit. “Cautious, conservative people are becoming even more so,” Boyd said.
Responding to skepticism in the media and among regulators about the validity of credit-based insurance scoring (CBIS), Boyd noted that numerous studies, including one conducted by the Federal Trade Commission, found CBIS scores to be “objective tools” that “benefit most consumers.”
Boyd noted that the CBIS developed by Fair Isaac and used by most carriers take no account of a consumer’s race, religion, age, gender, marital status, or other factors that would make for unfair discrimination.
To the surprise of some, CBIS also do not take into account one’s income, occupation, employment history, and other factors that impact or reflect a person’s economic condition.
According to Boyd, a person’s credit-based insurance score is built upon five principal factors--payment history, outstanding debt, length of credit history, pursuit of new credit, and credit mix--that most consumers can control.
How do you account for what you don’t know?
 That’s the question facing insurers as they consider emerging new exposures, said Gerry Finley, senior
vice president for casualty treaty underwriting for Munich Re America, in his address to the AAIS Main Event.
In contrast to the typical review of emerging exposures, Finley laid out a conceptual framework for integrating what a company doesn’t know about potential new causes of loss into the management of its books of business.
Odd as it seems, Finley suggested that prudent insurers won’t wait until they’ve heard of a potential new exposure before they begin reserving for them.
“These are exposures on our balance sheets right now,” he said. “This accumulation of reserve risk threatens our companies. If we haven’t reserved for these exposures, and they become paid losses, it becomes a threat to solvency.”
To illustrate, Finley reminded the audience that asbestos was once regarded as a “wonder mineral that made the Industrial Revolution possible.”
The challenge for insurers is to be constantly monitoring economic, social, legal, and technological changes to identify latent loss exposures and project the frequency, severity, and extent of the losses they might cause.
Whereas it was once difficult to find sufficient information on emerging exposures to underwrite and price them, said Finley, “today the challenge is ferreting through information to determine what’s relevant, what really has meaning.”
Thanks to the recession, property/casualty insurers may have different reasons for embracing predictive analytics, but they are embracing it nevertheless.
 According to independent consultant Mark Gorman, survey research of P/C executives indicates that companies that initially utilized analytics to increase market share have shifted their strategic orientation to protecting existing books of business.
However, that does not imply that interest in analytics is flagging.
“The debate is over,” Gorman told the audience at the AAIS Main Event. “This is now a given part of how organizations, especially large organizations, are doing business.”
In his presentation, Gorman said that 70%-80% of P/C survey respondents have predictive analytics projects underway for a range of specific applications in underwriting, claims, marketing, and enterprise risk management.
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 AAIS had an extraordinarily productive year across most of its lines of business in the 12 months leading up to the Main Event, reported Deborah Summerlin, AAIS vice president of insurance lines, in the “AAIS Update” segment of the conference.
Summerlin reported on several comprehensive program filings undertaken during that period, including the introduction of the new AAIS Agricultural General Liability Program, a comprehensive revision of the AAIS Boatowners Program, and a revision of the Builders’ Risk section of the Inland Marine Guide that includes clarifications of the treatment of “soft costs” and debris removal that are significant for the construction insurance industry.
AAIS also initiated a countrywide filing of revised Homeowners forms, and was preparing a similar filing for its Mobile-Homeowners (MHO) Program forms and manual. The MHO program filing is significant, said Summerlin, because it was the first AAIS program to provide separate wind/hail and non-wind rating information on countrywide, not just in coastal states.
The development of separate wind/hail and non-wind rating in property programs is the result of the incorporation of EQECAT catastrophe modeling software into AAIS loss cost development.
In addition to its program updates, AAIS has been revising programs to meet new legal and regulatory requirements. Most significant in this respect has been the countrywide filing in all lines of new water exclusions drafted to preclude claims on the basis of arguments made following Hurricane Katrina. Those challenges to existing water exclusions were rejected for the most part, but AAIS and other program filers have acted to preclude the possibility of future claims made on those bases.
Looking beyond AAIS product developments, Summerlin commented on how AAIS is monitoring new trends in insurance, including “green” initiatives in building design and utilization, for their potential impact on future insurance product design.
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According to Gorman, who did the research in conjunction with Insurance Networking News, more than 70% of respondents found it to be difficult or moderately difficult to collect and prepare the data needed to develop predictive analytics, to build and validate the models, and to implement the models.
Given the investment required to implement predictive analytics effectively, Gorman said many companies need to commit to a cultural change within their organizations while they develop their analytics capability.
“Today, most insurance organizations reward operational excellence,” he said. “You are typically paid according to the number of people reporting to you and your span of organizational control.”
In the age of analytics, Gorman said that companies need to “start rewarding thought leadership,” even though the importance of new ideas is much less certain and discernible only in the long-term.
 “Data mastery” is one of the new buzzwords in insurance, but the term often means different things to different people, said James Barber, sales director of property/casualty warehouse solutions for Information Builders, in his presentation at the AAIS Main Event.
To information technology professionals, the term suggests the development and management of a large data warehouse. To business executives, however, “data mastery” suggests the identification and use of specific metrics that measure company performance.
Successful companies, said Barber, will develop a common outlook toward data mastery throughout their organizations.
“The most frequent answer I hear is that data mastery means empowerment,” Barber said. “People are saying, ‘I want the data I need to make decisions.’”
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Jack M. Rader, executive vice president and COO of Farmers Alliance Companies, McPherson, Kansas, was elected chairman of AAIS at the AAIS annual meeting held in conjunction with the AAIS Main Event executive conference, April 26-28 in Half Moon Bay, Calif.
Rader succeeds James W. Sullivan, president and CEO of Co-operative Insurance Companies, Middlebury, Vt., who remains on the AAIS board of directors.
Christopher P. Taft, president and CEO of Preferred Mutual Ins. Co., New Berlin, N.Y. was elected vice chairman to succeed Rader.
In addition, R. Douglas Haines, president and CEO of Buckeye Insurance Group, Piqua, Ohio, was elected a member of the AAIS board. Haines has served as a board member in the past.
The other AAIS board members are:
- Edward T, Berg, president and CEO of Pharmacists Mutual Ins. Co., Algona, Iowa;
- Roy Bubeck, president and CEO of Badger Mutual Ins. Co., Milwaukee, Wis.;
- Stuart C. Henderson, president and CEO of Western National Insurance Group, Edina, Minn.;
- Judy S. Jackson, president and CEO of NLC Insurance Companies, Norwich, Conn.;
- Jeffrey B. Kusch, president and CEO of Austin Mutual Ins. Co., Maple Grove, Minn.; and
- Paul Baiocchi, president and CEO of AAIS.
The 2010 AAIS Main Event conference is scheduled for April 11-13 at the Sanibel Harbour Resort & Spa in Ft. Myers, Fla
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After a corporate commitment to data mastery is established, a company must develop and organize the two principal elements that make up data mastery: Enterprise data and the personnel to analyze it to make decisions.
Too often, said Barber, once business strategists decide on a data management strategy, they “throw it over the wall” to IT professionals to develop a system, often without adequate input from the professionals who would use the system.
Companies should carefully weigh the costs of developing a proprietary data warehousing system against those of purchasing one already built, in essence, by a vendor. According to Barber, the competitive value of a proprietary system can erode substantially over the time it takes to develop it.
Companies may be surprised to learn, Barber said, that developing the “people skills” necessary to achieve data mastery has often been found to be far more challenging to P/C carriers than the “data challenges.”
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Conference Report on the 
