The Evolving Insurance Risk Landscape | Episode 8

Andy Labrot:   Hello! Welcome to the Sapiens Insurance 360 podcast. I’m your host, Andy Labrot, Sapiens’ Vice President of Product Management, and I’m so glad that you’ve tuned in; this is where we discuss the latest news, trends, and issues from across the insurance solutions and technology spectrum. We have a fantastic guest for today’s program: Ben Zimmerman, Founder and CEO of Opterrix, an insurance solutions firm whose powerful risk intelligence platform enables carriers to proactively identify, quantify, and mitigate avoidable losses. Ben has spent his entire career developing predictive analytics and visualization platforms for weather-sensitive industries. Before Opterrix, Ben helped scale a niche weather technology company into a global leader that was ultimately acquired by the Weather Channel and sold to IBM. He has developed products for both government and commercial entities in the media, renewable energy, public safety, agriculture, and insurance industries. Ben also spent several years with an industry-leading innovation team within American Family, a Top-10 P&C carrier, where he developed valuable machine learning and automation solutions throughout the organization. Today, we’ll be discussing, “The Evolving Insurance Risk Landscape,” and Ben, welcome to the program.

Ben Zimmerman:  Thank you, Andy. It’s a pleasure to be here.

Andy Labrot:   Well, welcome again. And Ben, it’s no surprise that given the effects of climate change, namely more extreme heat and cold, rising sea levels, and more frequent and severe weather events, insurers are more concerned than ever about how increased insurance risks will affect their bottom lines. The recent moves by several tier-one insurers to stop offering new homeowners insurance policies in California and Florida have kicked off a national conversation on insuring risk in an increasingly perilous climate. Momentum continues to build on this topic as the US National Hurricane Center has already seen 17 named storms this year, of which six were classified as hurricanes. So Ben, talk to us about the current insurance risk assessment models. Are the reserving and actuarial models currently used still viable, and if not, why, and what should they be replaced with?

Ben Zimmerman:   Yeah, wow. Well, loaded question right out of the bat, Andy! Thanks again for having me. Yeah, I mean, I studied meteorology in the mid-nineties, and I can tell you the last 10 years just don’t look anything like the last 25 years of my career. There are just things happening that the industry has just never really seen before. So your question, are the current risk assessment models still viable? Well, they’re all we have right now, traditionally catastrophic modeling leverages history to really guide a methodology of stochastic models. So you’re looking at the financial impacts of these synthesized events, whether it’s hurricane, wildfire, earthquakes, and those synthesized events, and we’re talking thousands, 10,000, 20,000 events and how they might impact your portfolio are guided by history. So that’s why you don’t have a bunch of hurricanes showing up in North Dakota. The problem is, like I mentioned, the last 10 years don’t look anything like the last 40 years. So it’s pretty safe to assume that a lot of these models are going to be underestimating some of the types of events that we’re seeing now. So are they viable? Well, they’re necessary. Are there better ways to model in the future by incorporating climate projections or different ways of measuring risk? I definitely believe so.

Andy Labrot:  Thanks for that, Ben. On a different note, are current risk mitigation strategies effective given the dynamic changes in the weather? Will capacity management become more and more of a requirement?

Ben Zimmerman:  Oh yeah, great question. So we’re tracking, [in] 2023, I think there’s already been 23 billion-dollar events. We’re already on schedule. NOAA, the National Weather Service, has been monitoring for the past many years, these billion-dollar disaster events, and 2023 is already on par to be one of the top five years in the last 20 years. A lot of that has to do with these secondary perils. So as a meteorologist, I’ve always been fascinated with severe convective storms and what are traditionally classified as a secondary peril. But if you look at severe convective storms in 2023, and actually if you look at them in the last 10 to 15 years, it is the driving force in losses in the insurance industry. So we definitely think there’s other ways to mitigate strategies, to mitigate some of these risks. Aggregate management or capacity management is one of the best ways to do that. I mean, one method that we have been delivering for several years is to just break portfolios into tiny little geographic areas and put caps on each of those small areas so that you’re just not carriers. Reinsurers aren’t putting too much total insured value in any given geography. The cliche, too many eggs in one basket, that is the easiest thing to do. But also other things like, just optimizing moratoriums, improving underwriting insights with better data that’s now available with some of these new data providers. I mean, there’s a number of ways to really help mitigate the changing landscape, and that applies both to personal lines as well as commercial lines.

Andy Labrot:  That’s really interesting, Ben. Thank you. So will the changing risk climate create an even larger excess/surplus market, as [the] increased need for flexibility may make filing traditional products cumbersome and limit speed of change?

Ben Zimmerman:  From my perspective, Andy, without question, we’re seeing a huge uptake in the specialty market. A lot of specialty MGAs are starting to pop up everywhere, and just like you said, it is the freedom of rate, the freedom of form that is going to enable carriers to provide services that can be profitable. I mean, it really comes down to that; provide excellent service in, but ultimately that incorporates the true actuarial risk associated with some of these products. So yeah, we’re doubling down on the specialty market, without question.

Andy Labrot:  Absolutely. So, what are the effects of the changing risk landscape on the personal market? On the commercial market?

Ben Zimmerman:  So we’re seeing, like you mentioned, a lot more flexibility, especially when it comes to pricing. So one thing that we’ve been providing is a different view of what we would call accumulation risk. So regardless of the probability of any events happening, we’ve got tooling that enables any user, any carrier, to actually look at accumulation through, I’ll just say a variable lens, whether it’s an event that might be a half mile or a mile wide, like an F-four or F-five tornado, whether it’s a massive swath from a hurricane, which might be more of a 15 to 20 mile radius, we give the controls to actually build, if this is a non-stochastic methodology. This is really just looking at no matter where an event may occur, where are your peak accumulations? And by leveraging a number of algorithms that we’ve actually built in order to process weather data, we’re dumping business data into those same algorithms, and we’re actually building a spatial distribution of accumulation. So the carriers now can actually see what their accumulations look like, not just a pinpoint on a map. They can actually see the spread of risk and how adding an account, let’s just say you’re being commercialized, what adding a large national account would actually do to the shape of your accumulation. And of course, we can route through all the financial calculations, all the financial structure, reinsurance, attachment points, exhaustion, deductibles, limits, both at location and policy. We take all those things into account to really help risk managers identify where are their peak accumulations and either use that data to set dynamic pricing or of course, in the need that you have to reshape your portfolio altogether, use that information to set things like non-renews and c spines. So yeah, I believe leveraging these new insights for both personal and commercial lines is really going to help drive profitability throughout the industry.

Andy Labrot:  One final question. Do you think that other states will find themselves in the same situation as Florida and California find themselves?

Ben Zimmerman:  Yeah, great question, Andy! I think I committed, when you asked me to come on this, I committed that we wouldn’t have a political discussion. There’s no question that the specialty market can help solve a number of the problems that we’re seeing, at least when it comes to just analyzing risk. When you start adding in other regulatory things that are a little bit outside of, I’ll just say Mother Nature’s control, that’s where we’re actually seeing some of the issues as in Florida and in California. So if we continue on the same trajectory, which is kind of the, we’ll just say the economic, environmental, and regulatory hurdles all combining at the same time, if we’re trending in this direction, we’re absolutely going to see more states like Florida and California. But I do also believe that the industry as a whole has the ability to solve these problems. And I think a lot of this can be solved through the specialty market. Carriers need the freedom of rate and of form in order to innovate and help and drive great products in customer-centric solutions to policy holders that need to mitigate from these risks. So I don’t know that everyone’s going to be able to afford these things, but I do believe that the specialty market can certainly can help.

Andy Labrot:  Thank you, Ben, for chatting with us today about such a timely topic that I’m sure we’ll continue to hear more about in the coming months. We really appreciate you sharing your time and expertise with us today.

Ben Zimmerman:  It’s my pleasure, Andy. Thanks so much for having me. And looking forward to seeing you in the near future!

Andy Labrot:  To all of our listeners today, thanks so much for tuning in and spending your time with us. We love hearing from you, so if you have comments or would like to follow us on social media, please reach out to us on our channels. We’ve got so much more coming, so be sure to subscribe and tune in next time to Sapiens Insurance 360.