Experts from the National Association of Mutual Insurance Companies plead their case for a U.S. disaster policy, express concerns about U.S. versus international regulations and discuss the impact of insurtech on the mutual insurance sector.
- John Weber
- September 2018
An ounce of prevention is worth a pound of cure when it comes to dealing with natural disasters. That's the message the National Association of Mutual Insurance Companies President and CEO Chuck Chamness and Senior Vice President Jimi Grande, communicated to A.M.BestTV in a recent interview. They said the U.S. government's response to disasters has been inconsistent and driven by politics. Focusing on resilience and establishing a policy would help those problems, they said.
Senior Associate Editor John Weber conducted the discussion. Following is an edited transcript of the interview.
Chuck Chamness, NAMIC
What is the government disaster policy?
Chamness: The baseline would be our federal government doesn't have a very good disaster policy. We, of course, have agencies like FEMA that are charged with dealing with disasters, but the policy today is broken. We've been working to fix it.
New Jersey had Superstorm Sandy a few years ago. It's a good example. Obviously, it was a major flood event, it also impacted our industry. That's where insurance and government policy intersect.
Obviously, we're charged with helping people rebuild after disasters from our private insurance market. Then there's federal government aid that is necessary, too.
Today, too often we have situations like post-Sandy where we have a regional group of state delegations from the affected area asking, “Help us rebuild.” Then a federal response organized through Congress, done through a special appropriation that's very political, and not very well-planned, and often very wasteful in the way the assistance ultimately makes it to the places that really need it.
It's a policy that needs improvement, and Jimi, and our D.C. office and some efforts there, have been at work on that.
What are some of those efforts?
Grande: For too long the government used hope as a strategy. Hope the storm doesn't hit here. Hope the storm doesn't land there.
We've been asking government at all levels for a number of years now to consider creating a national mitigation investment strategy. As we started to ask that question, I think many elected officials throughout Washington and around the country were almost embarrassed by the fact that we didn't have one and no one had thought that through.
Some very simple principles that we all learn at a young age—an ounce of prevention is worth a pound of cure. If we spend a little bit of money on the front end before the storms strike to build resiliently to protect ourselves against the storms, we can reduce the amount of damage that'll happen during a storm. We know this from many perils. It's not just hurricanes along the coast.
We know today—thanks to the great work being done at the Insurance Institute for Business &Home Safety—that simple construction techniques can mean the difference between a home staying up and being gone during a storm.
We've worked with Washington to try to start to shift some of their resources from post-disaster to pre-disaster. In February, the president signed into law an exciting new provision that will change the cost share that the federal government will pay post-disaster. It will be worked out on a scale based on the resiliency and the mitigation that states and localities use.
It's not always a state. It may just be a city. When you look at a state the size of Texas, it may not be the whole state. Perhaps we could strengthen the codes along the coast there.
We could have places like Houston and Rockport that were devastated build using modern science and modern techniques to survive the storm, and at least mitigate the amount of damage and the loss of life and property.
Are there any mitigation strategy models you can work off of in implementing this?
Jimi Grande, NAMIC
Grande: When you talk about mitigation, generally as an insurance industry, that's what we do. Part of our job is to make sure bad things don't happen to our policyholders and to make sure that we teach people how to mitigate against disaster.
It can depend on the peril. If it's a flood, you can put in flood vents under your house to allow the water to come through or you can elevate the structure so that you don't have the same damage.
You can keep your roof on by using roof straps that you can get for $3 a piece at Home Depot. We've learned a lot about how you build homes.
Each state has a mitigation plan. Some of them do it well. Some of them don't. What we're seeing now for the first time is an awareness amongst public policy officials that they realize and believe that mitigation is an important tool in helping us mitigate against the future.
Where are we headed regarding regulation?
Chamness: We're at an inflection point. Going back a few years—and I've been in this role 15 years—and so the debate back then, early 2000s, was really about do we have our state system of regulation or do we change to a federal system of regulation.
We happen to believe, [and] our members believe, that our state system, while imperfect, does a pretty good job. It needs to be improved, but we think it's worth keeping. We were not in favor of a federal regulator.
The financial crisis, of course, reset the debate entirely. For some, even those that were supporting at the time a federal regulator, they saw that federal regulation's not a panacea.
In fact, some of the damage we saw in our industry was about insurance companies that were regulated by a federal regulatory agency on their financial-services side, not the insurance side, that didn't do its job very well. It caused some of the problems we faced.
Coming out of the financial crisis, there was a call by the leaders of the G20 through their central bankers, organized under a group called the Financial Stability Board, to harmonize regulation to improve financial services regulation, broadly defined. Of course, we're included as part of financial services.
There's no easy system in the U.S. to engineer these improvements. They can't just drive them from the top down even through the Fed because it's a state regulation system, a national system of state regulation. So FSB goes to the IAIS, the International Association of Insurance Supervisors, and they start to put in place some new standards. Again, for other countries that have national regulators, they were fairly easy to implement.
It also is worth sharing that at the same time, Solvency II—which had been developed over 14, 15 years in Europe, a new regulatory system from scratch, basically—was coming to the scene. It exerted a lot of authority over the standards being set by the IAIS.
I would say that where we are today is this push-pull with our durable, time-tested, stress-tested national system of state regulation. Improving as it does every year, but still imperfect, faced with changes from international arenas that are incompatible in many ways with some of the ways we do regulation here.
We also have features in our regulation that are not found in other parts of the world. We have rate regulation which is found almost nowhere else. We have market conduct regulation.
We have a guaranty fund system to help deal with insolvency. Again, our system is so different that it doesn't fit easily with some of these new international standards.
We see here in the U.S. even some of the international policy that's being pushed into our system being supported by those companies that may be based in some other markets and more used to Solvency II versus our state system, and they'd rather have it evolve more into a European style of regulation than our U.S. system.
This was part of the debate around the covered agreement which took place over the last few years, another feature of Dodd-Frank that basically set up a regulatory agreement treaty between the U.S. and the EU on issues related to regulation.
We strongly believed, our members asked us to make sure that there was clarification done on that covered agreement. We succeeded in getting Treasury to clarify it before they eventually signed it last year. It's now in the implementation process.
Again, the big theme would be state-federal not really an issue anymore. International versus U.S. is an emerging issue and one that we're working on very closely in all those bodies that I mentioned.
Grande: I think it's fascinating the way Chuck describes this paradigm shift in insurance regulation. The smallest of insurance companies to the largest that are domestic, may have incoming threats from the international community.
If you're an insurance company that's not based or domiciled here in the U.S., you may be used to a different style of regulation with different rules, different levels of capital adequacy.
Only politicians could try to figure out a way to create harmony where it's not necessary, meaning that you don't need every jurisdiction around the globe to have one-size-fits-all insurance regulation. It doesn't work within the political and legal realities that exist around the world.
At NAMIC, what we're trying to do is make sure that our regulators and our officials in Washington understand that it's OK to get on the world stage and talk about the way we regulate the business of insurance here at the state level and how we've been very successful at it for a great many years.
We hear about insurtech all the time. How is technology impacting mutuals?
Chamness: In a way, as it is the rest of the industry. Our member companies which range from very large, national, international writers to regional companies, one-state writers, and then small, rural companies operating in rural America—they're all facing it.
Whether it's something as “simple”—and I put that in quotes because it's not at all simple to convert from a legacy system to some other type of operating system—but our companies are doing that routinely.
We think back to a few years ago, maybe 10 years ago, there were certain technology leaders that were thought of in the industry that had some advantages by virtue of their technology. Now good technology is just table stakes really for any company doing business in the industry.
We're seeing other new elements like all kinds of new AI systems that some companies are implementing. In rating and underwriting, we're seeing the internet of things being used around claims. Really, you can't even begin to list or enumerate these various factors, but they're all there.
Then you see, besides, how companies are adapting to, or indeed, developing technology that they can use in insurance. We're seeing insurance companies increasingly invest in insurtech.
Many of our members now have venture capital affiliates that are, in part, making investments that are expected to earn returns and add to surplus over time. Also in the process, these companies are learning a lot about technology and how it can be applied in our industry.
Finally, we have those companies that have used the technology model to try and disrupt either the industry itself or certain segments of the industry. They are also interesting stories.
I would say the early word—and some of them have reported financial results now based on a year or two of experience—I would say what I've seen in those reports has been that customer acquisition is a very expensive proposition. Starting a new company is a very expensive proposition.
Whether the improvements that they expect will come through—I've never seen an insurance company that can continue to exist that's not good at underwriting. The early results are I haven't seen strong underwriting evidence in the first few years of financials.
How successful they are long term, or whether they become part of the fabric of insurtech that is brought into the industry and used to supplement insurance companies—that in the case of our members are 200-250 years old in some cases—they could just end up being part of what we'd call the industry today, but maybe an improved, future version.
It's a very interesting part. The meetings and things that we attend routinely, you can't talk enough about insurtech and all these developments.
Grande: An area where technology's not just impacting the business of insurance but every one of our policyholders and every American for that matter is the intersection of technology and automobiles where we talk about the autonomous vehicle.
A myth that's been perpetrated in the recent years around this is that tomorrow morning we're going to wake up and there's going to be magical cars that can drive all by themselves, and we won't have to worry about it.
There's even a statistic that gets repeated—93% of highway deaths are caused by humans, which is a true fact. However, there's a leap that gets made that so therefore, if you eliminate the human factor, deaths on the highways would go down by 93%.
We believe that the prospect of autonomous vehicles and autonomy in vehicles can lead to safer vehicles and protect lives. There's all sorts of smart technology that can make driving safer. However, to try to remove the human being from the situation and just have a fully autonomous vehicle, we're probably still a decade away from being able to do that safely.
At NAMIC, what we're trying to do is to make sure that we work with policymakers so that they understand we want to make sure that we support innovation, and we want to bring innovation to the market as soon as we can, but we don't want to move so quickly that we overlook safety.
As an insurance industry, that's our job—to make sure that before we have these on the road and people are in them, that they're safe and they're safer. That's the whole point. We're supposed to make the highways safer, not just a little bit more exciting to talk about.
John Weber is a senior associate editor. He can be reached at email@example.com.