It is good to hear the APCIA is committed to sound risk management in these times. But I wonder if our methods should be updated.
I’m not convinced the P&C industry’s approach to underwriting the physical risks of climate change are actuarially-sound in many cases, since our rate-making methods largely rely on historical data that do not reflect the changing weather. I’d love to see the APCIA champion the fusion of CAT models with science-based climate models to better inform our risk assessments. Similarly, there is a direct correlation between the support of fossil fuel producers and increased climate risk. Withdrawing support from that industry would be a prudent act of risk management.
It is also unclear whether the use of credit scores caused the decrease in high-risk drivers or if it was coincidental over the 34 year period referenced. It has been well argued, however, that this underwriting method contributes to systemic inequalities. If the purpose of P&C insurance is to enable economic growth, shouldn’t we remove discriminatory barriers? Our industry is well positioned to tackle systemic issues while remaining grounded in our core principles. I would love to see the APCIA lead in solving environmental and social justice issues in this principled way.
Most of your post is spot on but the comment about the results of using credit scores in underwriting is unclear is not well founded but is rooted in the idea that the science is debatable. This is the same argument posited for climate change; however, I believe climate change is an established fact so arguing with facts is a non-sequitur. The actuarial basis for using credit scores has long been established and I, for one, see no reason to dispute actuaries as the experts. This is a sad state of affairs which goes against the progress we’ve made as a society where we look to experts to investigate problems to find answers and then dispute their findings. Four year olds do the same thing, ask a question and then argue with the answer. Folks who dispute the use of credit scores are not actuaries and so I generally have to evaluate their position as unreliable at best. I am confident that credit scores actually reduced premiums for many; you just can’t expect rates to be the same for different exposures. Applying the fairness doctrine is not an appropriate fit for insurance rates as we are not all the same. Equal treatment in this case would be warranted only if all insureds were the same.
If the P&C business has any public responsibility, it is to estimate the cost of risk as precisely as possible so that everyone–personal and commercial, public and private–can make decisions informed by the most accurate available information on the true cost of risk. If the application of certain underwriting and rating techniques reveals inequities in levels of risk, we must address those inequities, not the tools that detect them.
Also, the insurance industry is no more responsible than the rest of us for addressing climate change. As long as insurers are free to estimate climate-related risk, price the risk accordingly, and withdraw from risks that become uninsurable, they will continue to assume weather risks. If insurers can’t do those things, they won’t, and insurance capital will drift elsewhere.
It’s up to society in general to address social inequities and climate hazards. To that end, it would help if insurers did not habitually align with political coalitions that resist public action to address social and environmental problems. Let the public arrive at its responses, so long as they don’t distort how risk is measured.
It is good to hear the APCIA is committed to sound risk management in these times. But I wonder if our methods should be updated.
I’m not convinced the P&C industry’s approach to underwriting the physical risks of climate change are actuarially-sound in many cases, since our rate-making methods largely rely on historical data that do not reflect the changing weather. I’d love to see the APCIA champion the fusion of CAT models with science-based climate models to better inform our risk assessments. Similarly, there is a direct correlation between the support of fossil fuel producers and increased climate risk. Withdrawing support from that industry would be a prudent act of risk management.
It is also unclear whether the use of credit scores caused the decrease in high-risk drivers or if it was coincidental over the 34 year period referenced. It has been well argued, however, that this underwriting method contributes to systemic inequalities. If the purpose of P&C insurance is to enable economic growth, shouldn’t we remove discriminatory barriers? Our industry is well positioned to tackle systemic issues while remaining grounded in our core principles. I would love to see the APCIA lead in solving environmental and social justice issues in this principled way.
Thanks,
Most of your post is spot on but the comment about the results of using credit scores in underwriting is unclear is not well founded but is rooted in the idea that the science is debatable. This is the same argument posited for climate change; however, I believe climate change is an established fact so arguing with facts is a non-sequitur. The actuarial basis for using credit scores has long been established and I, for one, see no reason to dispute actuaries as the experts. This is a sad state of affairs which goes against the progress we’ve made as a society where we look to experts to investigate problems to find answers and then dispute their findings. Four year olds do the same thing, ask a question and then argue with the answer. Folks who dispute the use of credit scores are not actuaries and so I generally have to evaluate their position as unreliable at best. I am confident that credit scores actually reduced premiums for many; you just can’t expect rates to be the same for different exposures. Applying the fairness doctrine is not an appropriate fit for insurance rates as we are not all the same. Equal treatment in this case would be warranted only if all insureds were the same.
If the P&C business has any public responsibility, it is to estimate the cost of risk as precisely as possible so that everyone–personal and commercial, public and private–can make decisions informed by the most accurate available information on the true cost of risk. If the application of certain underwriting and rating techniques reveals inequities in levels of risk, we must address those inequities, not the tools that detect them.
Also, the insurance industry is no more responsible than the rest of us for addressing climate change. As long as insurers are free to estimate climate-related risk, price the risk accordingly, and withdraw from risks that become uninsurable, they will continue to assume weather risks. If insurers can’t do those things, they won’t, and insurance capital will drift elsewhere.
It’s up to society in general to address social inequities and climate hazards. To that end, it would help if insurers did not habitually align with political coalitions that resist public action to address social and environmental problems. Let the public arrive at its responses, so long as they don’t distort how risk is measured.