Paris, France

The civilized world has once again come under attack by barbarians.  The coordinated terrorist attacks in Paris on Friday provide yet another sad example of the dangers and risks we face in today’s world of highly charged geopolitics.  Whatever you may believe about the threat of climate change, and for all of the risks that we face as a result of natural disasters and pure happenstance, nothing is as heart-wrenching as the deliberate and premeditated violence of humans against other humans.

This blog post is not a lesson about the loss exposures posed by terrorism, nor is it about the role of insurance following terrorist incidents.  This is about humanity, or rather the lack thereof.  In the face of such inhumane acts, all we can do is unite against such evil and increase our vigilance.  We must learn to become more aware of our personal risk situation at all times, alert to suspicious behavior, and courageously confronting evil when it shows its face.  This is the most stark and most critical example of personal risk management that I can offer.

Pray for Paris, indeed.  Pray for all of humanity.  Survival of civilization depends on it.

 

TRIA Extended – Is that a good thing?

In recent weeks, the renewal/extension of the Terrorism Risk Insurance Act (TRIA) has been a very hot topic.  I’ve written about it a few times myself, here and here.  To the relief of many, the newly convened 114th Congress has now extended TRIA to 2020.  The House vote was 416 to five, in a rare display of unfettered bipartisanship.

But not everyone is happy about TRIA’s extension.  The Wall Street Journal’s Opinion Page called the measure’s renewal a “vast corporate welfare handout.”  Though this may be blasphemy among my risk management and insurance colleagues, I must confess to my libertarian leanings and admit that I am sympathetic to the WSJ editorial board’s disappointment.  On the other hand, I do take issue with some of the WSJ’s assertions.  In particular, the WSJ stated that “The private [insurance] market has healed [since the 9/11 attacks] and could price in and model the danger of terror attacks, but the permanent Washington backstop interferes with such commercial evolution.”  I’m not so sure I buy that.

Terrorism risk, particularly anything on the scale of the 9/11 attacks, is very difficult to price and model.  Among the textbook concepts that my students learn are the characteristics of insurable risks, and two such characteristics are that the loss potential should not be catastrophic, and the chance of loss must be calculable.  House fires and slip/fall liabilities meet all of the criteria for insurable losses, but using commercial airliners as weapons of mass destruction or detonating dirty bombs most definitely do not meet the aforementioned criteria.

The plain truth is that 9/11 changed everything.  Before that catastrophic event, terrorism exclusions were rare.  After 9/11, terrorism exclusions are all but certain in the absence of the federal backstop known as TRIA.  My libertarian economic philosophy is conflicted over this reality, but I would not characterize TRIA as a “vast corporate welfare handout” as the WSJ did yesterday.

Happy New Year 2015 (and Insurance Shopping)

Out with the old and in with the new.  Welcome to 2015.

Speaking of new, there are undoubtedly a large number of new insurance policies issued with January 1, 2015 effective dates for which terrorism insurance coverage has been scaled back or eliminated after the U.S. Senate failed to extend the Terrorism Risk Insurance Act (TRIA) before the holiday recess.  Conventional wisdom suggests that this matter will be taken up anew in the first few days of the new Congress.  Risk managers and insurance carriers both hope that proves to be true.

And now for something completely different… (with apologies to Monty Python’s Flying Circus for borrowing their title/catchphrase)

There is something about the turning of the calendar to a new year that just naturally causes the human species to ponder random subjects and of course, resolve to make changes.  Lately, while enjoying time with family and friends (and way too much food), I have been wondering about how typical consumers make insurance purchase decisions.  Weird, I know.

Insurance is not like most other consumer products such as televisions, appliances, clothing, and restaurant meals.  For those types of purchases, consumers generally get a little but excited and willingly research the attributes of various competing products.  Comparisons of features are matched with the consumer’s personal values and desires, and ultimately the consumer chooses the product that best suits their needs for the best price (i.e., value).  Why should insurance be any different?

Well, for starters, I don’t know anyone who gets excited about purchasing insurance.  I also don’t know anyone who has done much more than high-level product research and comparison of insurance products save for one attribute:  PRICE.  For most insurance consumers, it all comes down to price and they turn a blind eye to the differences in insurance coverage between competing insurance companies.  To be fair, it’s not easy for the average consumer to make such comparisons because the insurance contract isn’t delivered to the consumer until after purchase.  And even then, reading and understanding the nuances of insurance contract language is not for the faint of heart.  Furthermore, standard insurance policy forms are often used by insurance carriers thereby giving the impression that all insurance policies are identical, despite that fact that individual carriers do tweak their insurance contracts.

So the industry tends to fall back on nifty marketing gimmicks to differentiate themselves (e.g., vanishing deductibles, new car replacement, etc.) and as always – service.  Each carrier wants the consumer to believe that no one can provide policy and claims service better than they can.  What it all boils down to is whether or not consumers can make rational insurance purchase decisions in the current insurance marketplace?  If comparing insurance coverage attributes is really that difficult, then what is the consumer left with to base their purchase decision on other than price?

I smell a research project brewing here…  Happy 2015!

Terrorism Risk Insurance Act

The Terrorism Risk Insurance Act of 2002 (TRIA) is set to expire in 26 days, and today’s Wall Street Journal opinion page editorialized about the measure.  The gist of the editorial is that TRIA was supposed to be a temporary measure in the aftermath of the 9/11 attacks, but it now seems to be becoming a permanent government program.  The WSJ suggests that the insurance industry have had ample time since 2001 to develop actuarial models for the terrorism risk, and points out that the government would certainly step in (as it did in 2002) once again if a truly catastrophic event were to occur.  Therefore, why should taxpayers continually be on the hook for the TRIA backstop more than a dozen years after the 9/11 terrorist attacks?

Those arguing in favor of extending TRIA include powerful business interests who fear that economic damage will result from an absence of insurance capacity for the terrorism risk.  They suggest that without the government backstop provided to the insurance industry by TRIA, there will be little to no appetite for providing any insurance protection whatsoever against terrorism losses.  Given the current volatile state of affairs in the world, that may well be true.  But what about the notion that the private insurance industry can and should develop actuarially sound rates for this exposure?  Perhaps the most sensible solution is a compromise suggested by Reps. Hensarling and Neugebauer whereby TRIA is extended for five years but the threshold of the government backstop is gradually raised.  This would force the business-world and specifically the insurance industry to handle a gradually increasing portion of the risk.  Structured this way, everyone can plan accordingly and the economic disruption can be minimized.  Sounds like a reasonable approach to me, and I’m no fan of permanent government programs for any industry.  What do you think?