The Changing Risk Landscape: Underwriting for the “New Normal”
October 27, 2021 | Webinar
In insurance, strong underwriting results come from having a deep understanding of the variables that impact risk, both for individual customers and across a company’s portfolio of accounts. In a complex world of cyber hacks, pandemics, weather volatility and more, that is not always an easy task. Travelers’ Chief Underwriting Officer Rick Keegan headlined this thought-provoking session examining how recent U.S. and global challenges provided a stress test for the insurance industry’s underwriting processes. He shared unique perspectives on how Travelers is gathering insights and connecting learnings about today’s complex risks to ensure the company stands by customers when the unexpected happens.
Presented by the Travelers Institute, the American Property Casualty Insurance Association, the MetroHartford Alliance, and the Master's in Financial Technology (FinTech) Program at the University of Connecticut School of Business.
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Joan Woodward in a video window in the upper right corner. Text, Wednesday with Woodward, Webinar Series
Thank you for joining us today. I'm Joan Woodward, and I'm honored to lead the Travelers Institute, which is our public policy and educational arm of travelers. Welcome to "Wednesdays with Woodward," a webinar series where I host leading experts for discussions about some of today's really biggest challenges. And there's a lot out there as everyone knows. We tackle business, leadership, insurance, and much more. As always, we want you to be part of our conversations.
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The Changing Risk Landscape: Underwriting for the "New Normal"
I'm also thrilled to recognize three organizations that are invested in advancing important business dialogues like this one. So our fabulous partners today include the American Property Casualty Insurance Association, the Metro Hartford alliance, and the University of Connecticut School of Business Masters in Financial Technology program. A huge thanks to this powerhouse group for their collaboration with us, and a special welcome to all their members.
OK, let's get started. Today we're taking a look at insurance underwriting and the evolution of underwriting strategies with a continually changing risk landscape out there. Maintaining a deep understanding of risk is paramount, as we all know, for the insurance industry. So how's Travelers, and the broader industry, maintaining a deep understanding of these evolving cyber attacks, pandemics, and increased weather volatility that we see all around us?
2020 was a really difficult year for all of us and served as the ultimate stress test for evaluating and analyzing the insurance industry's underwriting processes. So what does this all mean for underwriting and insurance going forward? How do we ensure that we stand by our customers when the unexpected occurs? And what will this mean for your business-- especially to our agent and broker partner friends on the call today? So welcome.
Photos of Woodward and Rick Keegan
Today I'm really thrilled to have my friend, Rick Keegan, as my special guest to help answer these questions for us. Rick serves as Traveler's chief underwriting officer, and he works closely with our global underwriters across all of our business segments to help Travelers manage our broad portfolio of underwriting risk and staying attuned to new and emerging risks. So with that 30 plus years of experience, Rick brings extensive leadership to Travelers and to the whole industry.
He previously held the position of senior vice president and President for the company's construction, energy, and marine businesses. And prior to that he served in a number of leadership roles in claim and across all of our businesses. He started his career, as I said, 35 years ago and he's seen both the risk landscape and underwriting processes shift dramatically in that time, as we all know. So he's going to kick off with an opening presentation, and then I'll rejoin him to keep the conversation rolling.
And then we're going to look forward to answering your questions. So with that, again, thrilled to have you Rick, and please take it away.
Keegan in a video window in the upper right corner. Text over yellow center lines on a road. Evolving Risk Landscape, Underwriting for the "New Normal"
Thanks so much, Joan. I appreciate the introduction. Let me just make sure we've got the slides loaded and ready to go here so hopefully everybody can see that.
They look good.
I am so excited to be here. I'm not used to having this many people interested in hearing me speak about insurance, usually folks head for the door when I start. So thank you for allowing me to ride the coattails of the Travelers Institute and "Wednesdays with Woodward" and have so many people interested in what I have to say. I think Joan, I'm an avid watcher of the series. And you've done a tremendous job over the last year.
Really laying the foundation and the groundwork for this very conversation.
The title pages of 10 previous Wednesdays with Woodard presentations.
And whether we're talking about marijuana legalization, autonomous vehicles, global pandemic, liability and tort trends-- or even the most recent presentation, that great cyber presentation from Jeff Klink and Eddie Chang. They all have one very common thread running through them, in that they all represent significant changes in the risk landscape.
The risk profile for our customers. The way they do business. And the risks that they face. And well I'm not going to dig nearly as deep into any of them, I am going to focus a little bit on some that represent more foundational changes. And I'd recommend to anybody who didn't get a chance to tune in, I know you said this at the beginning Joan, these are available on the website if you want a much deeper conversation and analysis of the issue.
But I thought a great lead in to what we're going to talk about today.
Underwriting Life Cycle. A pie chart divides into three sections; Customer Profile, Risk Landscape, and Risk Characteristics. Text around the chart includes Select, Differentiate, Price, Manage, Mitigate and Analyze. Understand the risk Product, Industry, geography. Evaluate the risk selection, pricing, terms and conditions. Manage the risk mitigation strategies, updated view of risk.
So with apologies for the Underwriting 101 here, I did want to talk a little bit about how we think about risk. And at its core the business can sound easy. I mean, you analyze, you select, you differentiate your price, you manage and mitigate risk.
Understand the risk; Product, Industry, Geography. Evaluate the risk; Selection, Pricing, Terms and conditions. Manage the risk; Mitigation strategies, Updated view of risk.
And part of that really depends on your ability to have a deep understanding of the risk.
So the product that you underwrite, the industry that you're underwriting, for the geography you're underwriting in. And that's and that's part of what forms a historical view of risk, and how it may perform over time. And you have this really complex piece around the risk landscape which is really the forward looking view. And that's the part that-- while it's all challenging-- probably presents the biggest challenge because it's unknown.
And one of the things we've learned in this business is that the future doesn't always behave like the past. So as complex as it looks on the picture, if I could animate it I would show all these things in motion at the same time. Because it is constantly changing, it is constantly evolving. And underwriting risk is a never done proposition.
Because even when you underwrite it for a particular policy period or term, it's likely that risk will change and evolve over time so that you have to constantly update your view of that risk. So I'm going to focus a little bit more on the risk landscape piece as we go through maybe the next 20 minutes or so, just to talk about what I think are some kind of core foundational shifts that really changed the underwriting equation. I'm going to give a little bit of a disclaimer before I do that.
Sometimes when I go through this type of presentation, or have this conversation, it comes across as a little bit pessimistic and a little bit doom and gloom. And it's certainly not intended to be. And in fact, I think this is a very exciting time for the industry. I think that the evolution of risk, and how we take risk, is evolving. The industry is innovating. We're thinking about new technologies and capabilities to help inform how we take risk.
And for underwriters, this is tremendously exciting and a great opportunity. It's what we do. So with apologies for what may sound like a little bit of doom and gloom over the next few slides, I don't want anybody to interpret it that way. This is really an exciting time for the industry. And I'm going to I'm going to draw back to something that Dr. Hartwig said in his July presentation, Joan, when he gave the overview. I think it was the insurance industry insights. And he does it like nobody else.
He went through a lot of what was going on in the industry. And I think it was 39 minutes in, he said, boy, you have all this going on in the insurance industry. We'll have to figure out how to underwrite for these
risks. And he shared his optimism, he said, I think they will because they've always figured it out. And I fully agree with him, and I share that optimism. This is for an underwriter, exactly the type of environment that we look forward to operating in.
So back to what's going on as we look out the front windshield. You have a lot of these things, we bucketed them into maybe five major categories. What's going on with changes in society, the economy, the environment, technology, customer behavior. And each of them has a lot of tentacles underneath it.
Changing Society and Geopolitics; Population Shifts and Talent Migration, Growing Civil Unrest and Activism, Balkanization of US, Flexible Work, Terrorism, Universal Health Care, Legalization of Marijuana, Increasing Wealth Disparity, Nationalism Vs. Globalism. Changing Customer Behavior; Growing Gig Economy, Social Feedback Loop, Customer and Investor Expectations On ESG Issues, Evolving Customer Preferences. Changing Economy and Business. Big Litigation and Plaintiffs Bar, Inflation/ Stagflation, Economic Volatility, Supply Chain Disruption, Increasing Regulation. Changing Environment. Increased Weather Volatility, Shifting Energy Resources, Eco-Friendly Everything, ESG, Growing Threat of Pandemics. Changing Technology. Blockchain and D L T, Personal Data, Digitalization and Virtualization, Artificial Intelligence, Commercial and Industrial Apps Of Drones, Autonomous Vehicles, Cryptocurrency, Smart Building Technology, Robotics and Shifting Liability, Cyber-Attacks, Connected Devices, New Scientific and Medical Frontiers (Custom Medicine), Developing Transportation (Space Travel, Hyperloop, Reusable Rockets)
So it's what's going on with ESG and expectations on that. What's going on with weather.
What's going on with shifts to green energy sources and a lower carbon economy. What's going on with digital, with blockchain, with AI, smart building, all of the above. All of these impact the future view of risk. And when you're thinking about a particular customer or a risk, these are all things that need to be on the radar. And by the way, the fact that the risk landscape is changing and evolving, that's nothing new. I mean, it always does.
A chart tracks the 10-Year Treasury from 1962 to 2020. It's 9.42% on September 1987.
But the pace, and the number of issues out there, is certainly unlike anything I've seen in the almost 35 years I've been doing this. So to dig in to a couple of what I think are the foundational ones, I'm going to start with something on the economy or business environment side. And I can hear-- even though I can't-- the collective groan from our agent partners when I put this up. And probably saying, oh, are we going to really talk about this again?
But if you bear with me and humor me for just a few minutes. I promise I'm not going to talk about this through a finance lens, I'm going to talk about it through an underwriter’s lens. And I'll go way back when to around the time when I wrote my first policy-- September 1987. You know, we used to learn kind of the basics of insurance, which is collect premium, you invest the money.
And the combination of the premium and the gains on the investment is what covers your loss content expense and some profit. And while that hasn't changed-- certainly the equation is the same-- how you fill those buckets has changed dramatically. And whether you've been doing this for four months, four years, or four decades, you've never operated in an environment where each product essentially needs to stand on its own from an underwriting profit standpoint.
And that materially changes the way we have to think about price, risk reward, premium commensurate with exposure foundational to underwriting principles. And this represents a major shift in how we have to fill up those buckets to cover traditionally the lost content expense et cetera.
On a bar chart, Impact Of Declining Treasury Yields. Illustrative Historical Target Combined Ratios Versus 10-Year Treasury (Hypothetical industry cost of equity capital at 8.5% R O E. 10-Year Treasure Yield %, Combined Ratio %. The chart depicts data from the 1980s through the 2020s. Work Comp in orange. General Liability in gray. 10-yr Treasury in blue.
So when you think about impact-- and let me start by saying this is purely hypothetical. It's illustrative. The math is real, everything else is made up.
But just to give you a sense of the impact on the longer top tail lines. Again, how we think about funding for risk. So take work comp and GL, two historically long tail lines, average duration and comp a little bit over six years. GL is a little bit less than four and 1/2 years. And based on the 10-year treasury, what you have to underwrite to cover a fictitious industry average cost of capital that we put at eight and 1/2 percent.
In the '80s, it was a 135 for comp, and today it's a 101. That's a material shift, a material change. To look at it a little bit differently using a GL example, to cover $100 worth of claimed costs using just standard present value I would have had to collect $69 for that in 1980. Again, just using that duration of a little bit over four years. $69 in premium to cover that $100 of future expected GL claim costs. Today, I have to collect $95. It's just math.
I know we talk a lot about it, but you can't fool the math. And it does materially change and impact the way we have to underwrite and price for risk.
Zeroes and ones over a hooded figure. Text, Cyber, Affirmative Risk. Liability, Breach Response, Business Loss, Cyber Crime.
Next up, cyber. I know we just had a very deep conversation on this. And I'm not going to talk about cyber as an affirmative risk. I'm going to talk about it a little bit differently. And that is cyber as a peril.
Arrows extend from a padlock graphic. They point to graphics of a judge's gavel, General Liability, a man in a tie, D&O, a house, Home, buildings, Property, three figures, Workers Comp, a sign with an exclamation mark, E&O, three figures, Employment Practices Liability.
Because cyber impacts more than just the affirmative cyber product.
And I know the industry is doing a good job to evolve the mindset, but we've got to go a little bit quicker here and expand the conversation beyond just whether or not to buy cyber coverage. This is a discussion about understanding the risks that individuals or businesses now have related to cyber. So think about a smart building system that can be infiltrated. A fire or an explosion ensuing suing loss. Think about resultant BI/PD.
Think about potential exposure for the failure to have a business resiliency or a cybersecurity strategy. All of these things impact risk broadly beyond just the cyber line of coverage. And that's why cybersecurity, cyber hygiene, cyber risk management, these are all going to be critical components to how we underwrite and think about other lines of business.
So we have to start evolving the conversation with our customers so they're focused on the bigger picture of risk management, beyond just the discussion of whether or not to buy it to cover the affirmative risks.
A bar chart depicts U.S. Industry Catastrophe Losses. Industry Insured Losses. $313 billion in the 1990s, $384 billion in the 2000s, $455 billion in the 2010s, and $134 billion in the 2020s. BFIT Losses ($ Billions) on the y-axis. Tornado/Hail in red, Winter Storm in blue, Orange for Wildfire. Earthquake/Other in Pale green. Flood (NFIP) in Deep red. Hurricane in Gold. Notes under the chart, Industry Verisk trended quarterly data as of October 2021. Losses trended for inflation, state population growth and wealth GDP by Travelers. Exhibit updated each quarter. 2018 includes Travelers industry loss estimate of 18 billion dollars for California wildfires, trended to 2021. Travelers estimate
It's hard not to have a conversation about foundational changes without talking about whether in-- first a special thanks to our friends at Varus for the use of this exhibit. I think it's just so incredibly powerful to show the industry losses from CAT exposures on a decadal view.
So if you think about the slide I had a few slides back around the evolving risks landscape, I use the words weather volatility. And I probably have to stop saying that, because volatility would indicate that things go up and things go down. And this certainly doesn't represent volatility because it's going in one direction. And this is why it's important to look at the business over time.
And if you look at an increase from the last decade of $50 billion, or if you go over the course of two decades-- $100 billion-- that is a significant shift in the degree and level of exposure. We are seven quarters into the current decade, and we're at $134 billion already. I'm not going to extrapolate the math out, it you know it ebbs and flows. But you can start to picture what that tower may look like when we tally this up eight years from now.
Other Factors Impacting Catastrophe Losses Increases. Population migration to high-risk areas, (e.g. coastal communities, rural wildfire-prone areas). Building code adoption and enforcement; Consumer/ contractor behavior; Post-loss demand surge; Regulatory changes.
And weather and climate are a major component of what's driving the increase, but it's not just that. There are a number of other factors, and to understand whether it's climate risk, CAT risk, you really have to take a step back and think about all these other factors. So things like population shifts, where people are moving. Building codes, have they kept up with some of the current challenges? Are they really reflective of the environments, the climates, the exposures, where things are being built?
Some consumer contractor behavior that certainly impacted severity, especially on roofing claims. We've seen this notion that gets a lot worse kind of post-CAT about demand surge and the cost to rebuild. And it's all these things together, with weather and climate as the grounding foundation, that are impacting the cost and driving them up so dramatically. And I'll give you a quick example.
A map of the United States as of August 17, 2021. Red and yellow areas throughout much of the western half of the country. Colors on the map legend, Gray for No Drought, Yellow for Abnormally Dry, Light orange for Moderate Drought, Orange for Severe Drought, Red for Extreme Drought, Deep red for Exceptional Drought Text, Climate Impact 2021 Drought Conditions.
If you take a look at-- and this was as of the summer, and hopefully this got a little bit better over the last week.
But the long-term impact is still pretty challenging relative to drought. So you look at drought conditions broadly across the country, and you see certainly the West is the most challenged area.
A map of California depicts Wildfire Hazard Zones. Next to it, a bar chart depicts California Population Growth Since 1990. On the y-axis, Population % Change Since 1990. From left to right on the x-axis, Low, Average, Moderate, High Extreme, State. A red circle around High Extreme.
But you have to look at that then in relation to this, which is where the population growth is bad. So if you look at population growth in California since 1990, you'll see that it's disproportionate in the highest severity zones. So you have these things coming together.
You have this climate related condition with extreme drought. And you have people moving to what could be higher risk areas. And the combination of those two together creates a true elevated risk environment.
Inflationary Factors Impacting Loss. Value Of Money, Demographics, Corporate Accountability, Lack of Personal Connection, Increasing Fraud, Increased Litigiousness, Medical Costs, Access to Information, Civil Unrest, Labor and Material Cost Inflation, Supply Chain Disruption, Demand Surge.
So a little bit on inflation. And I'll start by saying inflation is by no means something new. And it's certainly something we always have to think about in this business. I just don't know that I remember a time when it's been as complex as it is right now.
And that's because it's not one thing, it's a lot of different things. And even some of the traditionally more, what I would consider to be, quantitative factors have a lot of complexity to it right now. What's truly transitory as opposed to permanent? And now we're even debating what transitory means. Is it a couple of months? A couple of quarters? Or a couple of years? And you overlay that with some of the more subjective measures. The value of money, lack of personal connection, et cetera.
And it really creates this complex equation when you're trying to figure out your cost of goods sold. Which, of course, is such a unique exercise in our industry, because you don't know it at the time that you produce and issue your product. So inflation has always been there. It's just at a degree and a complexity that's unlike anything that we've seen.
Hot spots on a world map, COVID-19 virus, medical professional in a mask, COVID-19 vaccines. Text, Broad direct and indirect impact across product, industry and geography. Abrupt shift in the risk landscape. Long-term impacts will continue to evolve. Re-emphasized the importance of understanding the insurance contract.
And I'll say lastly, it's hard to go through the risk landscape without at least spending a minute on COVID.
Given the broad impact it had across lines across geography, and it really moved and shifted the risk landscape quickly. And I'll concede, if I was doing this presentation two years ago-- talking about the evolving risk landscape and what was on the horizon-- I don't think I would have had global pandemic as one of these five kind of buttons that I called out. It's not because we haven't thought about it. In fact, post SARS the industry gave a lot of thought to it.
But it just shows the unpredictability and the volatility of our business, and our industry, and how things can change quickly. Important to note that it is still early, and the long-term implications from a liability standpoint. From a comprehensibility standpoint-- whether presumptive or otherwise-- will play out over years. And maybe in some cases, over decades.
And if there's one thing I do want to emphasize that I think is really, really important is that understanding the insurance contract-- what's covered, what's not covered-- is such an important exercise long before the loss happens. And we know there is an awful lot of debate and interest over the business income, business interruption, exposures. And it really highlighted a lack of understanding with the consumer, the buyer, and others, relative to the insurance contract.
And I don't think that's good for anybody. So I do think it reinforces the importance of being good risk management partners, making sure there's clarity around expectations, so that there's an understanding of risk that's insurable and protected as opposed to risk that's not. And if anyone's interested in reading more I'll give another plug to Dr. Hartwig on this. I thought the paper he did on the insurability of pandemics was outstanding. And I certainly recommend anybody that hasn't read it to go ahead and do that.
The Ultimate Underwriting Stress Test. Loss Cost Inflation, Cyber, Weather, Lower Interest Rates, COVID-19
So on their own all these things are certainly challenging for the industry from an underwriting standpoint. Again, when I think of major foundational shifts and then you kind of put all the other stuff behind it. And Joan used these words in the beginning, and I really like them, you put them together and you say, boy, this is really the ultimate underwriting stress test. And hopefully-- so I did my best early on to try and stay a little bit positive.
I probably sucked all the positivity out of the room in the last 20 minutes. But I do go back to this is really an exciting time for an underwriting company. As the economy grows, as the economy evolves, as businesses innovate, all of that requires an underwriter to stand behind the risk. And to do that we've got to leverage things that have worked really well for us in the past, with new capabilities and innovation that will give us much deeper insight into risk.
Deeper Insight Into Risk To Inform Selection And Underwriting. Technology, Aerial Imagery, Telematics, IoT, Topography, Artificial Intelligence, Third-Party Data, First-Party Data
And this is probably the part that's the most exciting because I started at a time in this business where the process was entirely manual. And in fact, the job was called manual underwriter. And it's because it was a combination of things. You actually did the job manually, and you did it from a bunch of manuals. And when you look at now some of what's available to us on the technology front-- and not all of it proven.
But the ability to get deep insight into complex risk with capabilities and tools, that historically have been unavailable to underwriters, is tremendously exciting. Granularity and understanding risk, matching the right price to the right risk, that's foundational to the long-term success and sustainability of the industry. And we're going to have ability, and certainly capability, to do that in the future to manage this incredibly complex landscape.
I want to give one quick plug before I move on here to the bullet I have all the way down in the right, or the bubble, around first party data. I still feel like there's enormous opportunity here to leverage some of the insights that we have in the industry that come in the form of unstructured data. That, for lack of a better term, hit the cutting room floor right now.
But the insight we gained through the claim process, the insight we gain through the risk control process and engagement with our customers, gives us a lens and insight into how risk performs. Customer characteristics that are informative as to risk, we've got to figure out how to do a better job capturing all of that so that we can leverage it to make the process even more efficient than it is today.
So that if we know something about a customer that will help us underwrite that risk, and we gain that knowledge to an interaction with the customer, we can leverage that information to add efficiency or take friction out of the process. So this is a little bit of what might be changing and things we have available to us.
Two stick figures. Text, Managing The Complex Risk Environment
But I want to end with maybe some things that haven't changed. And for those of you that don't recognize a little bit of a tribute to the past with our stick figures.
Agent. Understand changing risk landscape. Continuously assess customer needs. Educate, inform, consult. Buying guidance. Support risk management and mitigation.
But when you think about the agent's role-- which is such a critical and important role as a consultant for your customer-- it's so important to understand what's going on out there and assess the customer needs. Back to that first slide, everything is moving at the same time. It's a never done. Just because we place the new business, or we write the renewal, doesn't mean that the risk is static and it's not going to have new or different needs going forward.
Helping the buyer understand the options around risk management. What is solvable with insurance risk transfer. What they can do for their own risk management and mitigation standpoint to control their total cost of risk. All critical elements.
Underwriter. Risk expertise. Right-sided underwriting. Thoughtful risk-taking. Consistency. Stability.
From an underwriter standpoint, critical to have risk expertise. Back to the early slide. Understand the customer. Understand the industry. Understand the geography. Understand the line. Understand the landscape.
Make sure that you can deliver a product that's responsive to the needs. And that invokes a really thoughtful risk-taking mindset. It's the only way to maintain consistency and stability in the industry. I do have a little bit of a bullet in here around right sized underwriting. I do think this is really important that the complexity of risk, the degree of difficulty varies significantly. And we have to make sure the underwriting process is flexible to align with that.
And I want to be careful, because a lot of times we go right to the, oh, smaller accounts are-- just because it's small doesn't mean it's not complex. I think medical technology, and bridge builders, and whatever it might be-- I can't think of one that's not complex regardless of size. But understanding that there are many, many different shapes and forms here, and the underwriting process should be reflective of that. And we should have as much information as we need to make an informed decision on risk.
And the process should be as efficient as and as friction-less as possible. And those two things should live in harmony. It should never be one at the expense of the other.
The stick figures move toward each other. Text, Agent and underwriter working together to solve complex customer needs.
So I go back to something that's worked, and that's a fist bump. It is COVID America, so we're not shaking hands. But it really goes back to some of the stuff that served us so well over the decades. Which is an agent and an underwriter working closely together to solve complex customer needs.
So, Joan, I could go on all day. And hopefully, I haven't sent people running for the exits like I usually do. But I know we've got some questions and we wanted to shift gears, so I was going to stop there.
I'm going to stop sharing my screen here.
Split screen Rick Keegan, Joan Woodward
And I think we'll go into Q&A.
That is terrific. That's a perfect place to stop. And I love your tribute to Chuck Clark, our former chief underwriting officer, with the stick figures. So I'm sure a few of our agents on the webinar will chuckle over that one. Rick, that was just fantastic. And I like how you walked us through all the perils and the evolving, changing risks out there. But we're going to turn the tables on our audience, just for a second here. Because we want to get your feedback on a couple of questions.
So this is new for our webinar series. It's very easy. It's all anonymous. Let's answer this question altogether and see what the audience is thinking. In your opinion, what potential risk factor will have the largest impact on the way insurance companies underwrite over the next 10 years? So just click one of those boxes. Cyber, pandemics, weather, low interest rates. Give us your thoughts. What's the largest impact do you think insurance companies will have with these different perils?
OK, I am seeing that the largest one coming in right now seems to be cyber attacks. And we just heard from Jeff Klink and the Department of Justice, Eddie Chang, on this. Go back and watch that replay it was a couple of weeks ago. Fantastic data and information there. Pandemics, we have a very hopeful audience Rick that only 5% of our audience thinks we're going to have another pandemic out there. I hope they're right. Weather volatility comes in at 40%.
And then, no surprise, interest rate one did not get that much take. So Rick, do you want to comment on these results for a minute?
Yeah. I didn't I didn't get a chance to vote, Joan. But if I did I would have picked the "I don't know" option. And I think it's no real surprise there. And there are no right and there are no wrong answers. And I think they're all there for a reason, which is these are very real issues and exposures that our customers face today. And being aware of and prepared for all of them, as well as the ones not on the page. There's people always ask me what keeps you up at night?
And I say it's the stuff I don't know to worry about yet. If I'm worrying about it, I feel good. That's what we do for a living. But it's the ones that maybe we haven't given enough thought to. So I do think those are great examples of very real exposures and risks that we have to think deeply about. And we also have to continue to challenge ourselves about what's next, and what's not on the page. And how do we help guide our customers accordingly.
Great. OK, and also for those of you who may have missed the chat. We just dropped in the chat that link to Dr. Bob Hartwig's paper on insurability of pandemic losses. So Rick, when you referenced that, we dropped that in the chat. So check that out. And then also, on the cyber answers here-- I want to let you know we are going to host another cyber security webinar here on Wednesdays. It'll be on December 1, so I'll announce that here.
On December 1, make sure you pin that in your calendar. OK audience, we're going to ask you another question then we're going to get to more discussion with Rick. What do you think will be the major driver of industry CAT losses over the next decade? Wildfire, hurricane, winter storms, tornado, hail. What do you think will be the major driver of CAT losses over the next decade? Because we are seeing lots of different climate evolutions here with the weather. OK, answers seem to be coming in.
Looks to me like we have a tie between wildfire and hurricane, both notching up there around 40%. And then tornado, hail came in come in last. So any comments here Rick before we get into the discussion?
Sure thing, Joan. And again, another one that there are no right or wrong answers because one of the things, again, we learn over and over again is we can't predict the future. We certainly would not have been talking about Texas winter storm had we done this at this the exact same time last year. The interesting thing there is, and it shows, one of the exposures that probably doesn't get enough attention is tornado, hail.
And that is probably one of the most significant-- if not the most significant-- drivers of weather and CAT exposure for the industry, and a little bit more widespread. But doesn't usually get the headlines that you get with a hurricane or a wildfire. But that is actually a more significant driver of exposure for the industry related to weather. That said, who knows what the next year, decade, has in store for us. But it will be-- the right answer is-- some combination of all of the above.
OK, all right. Let's move on now. Let's talk about technology, because it's really changed underwriting over the last decade-- and more recently over the last few years. So how do you see underwriting evolve as we look to the future with regard to technology? And then what should we make sure stays the same as we evolve?
Yeah, I think it's a great question Joan. Technology has changed everything in the business from how we do business, how we operate, to our engagement with our customers and agents, to the very risks that
they take. And this is part of what makes the business exciting. I did refer back on one of the slides to when I started way back when at a metal desk when everything was manual.
And the capabilities that the industry has developed since then to leverage technology to improve the process-- I go back to a day where you would manually underwrite every single personal lines homeowners and auto policy. Could you imagine doing that in the environment today? It would be impossible in this world of real time quotes, so I do think that there's capability for the industry to do more. I talked a little bit about that on the slide about underwriting for the future.
There's all this great information, and insight, and innovation, out there to bring technology to risk taking. To get a deeper, more granular view, whether it's a property risk at parcel level. Bringing in topography and other things that we've never had before, that will just make us better underwriters. And it will ensure that we do a better job of matching risk to price. So I think there's been so much advancement here, but there's so much more headroom that it's hard not to be excited.
I do think we have to understand this changes the risk landscape for our customers. A little bit of a conversation around cyber, right? They operate in a very, very different world today. And I think we've seen that speed up pretty dramatically over the last 18, 19 months that we've been in this environment. But we have to understand that whether they're a technology company or just a flower shop, this has changed their risk landscape. And we've got to make sure that we're working with them to manage it accordingly.
So I think it's changed everything. It's mostly for the better. To your point, we can't lose sight of some things. Which is I still think that relationships matter in this business. It's a very personal business. And behind every policy is a real person, or a real business, and there's real risks there. And we can't lose that connection. Back to the agent and the underwriter working together. So I think the two can live in great harmony, I think technology can only enhance it.
But we've got to make sure it's a little bit of both. I think that's the recipe for success in the future.
OK, great. So let's go to the pandemic, because we're all still in the soup together. So what's been the biggest challenge or change that underwriting has faced since the onset of the pandemic?
I think Joan, it almost gets right to where I left off with the last question. Which is I feel like to some degree it's depersonalized the insurance transaction a little bit. I think we've done a good job leveraging technology and capabilities to help us evaluate risk. So you replace physical inspection with video inspection, and some other information exchange. But I do think that depersonalizing the transaction and the importance of it has been a challenge.
And I do think some of the stuff-- and I think it will-- I do think some of the efficiency we've gained through operating in the pandemic, I think that stays with us. I just want to make sure that we don't leave some of the other stuff that's lost to the side here. And I think there's situations where there's no substitute for
being out and sitting with a customer, sitting with an agent, talking about their needs. Understanding the risk, understanding the business, understanding what's important to them.
And I think that's the part that's been stressed a little bit that we just have to make sure we remember when we come out of this.
OK, that's a great answer. You always don't have perfect information when you assess risk, so how do you utilize historical data to really assist with our future underwriting? Tell us about that process.
Yeah, I'll concede Joan since it's only like 1,000 of us here-- we can keep a secret. We never have perfect information. We just don't. But you start with exactly what you said, which is historical information that we think is informative to risk. And how it performs-- and I stress the word-- start. That's the starting point for the analysis. And that's when you get back to the three pieces of now you have to look forward. And you have to think about how informative the past is to the future.
And a lot of that gets to the changing environment out there. So in some situations, it's highly informative. In others it's maybe partially. In others it's not a great indicator at all. And that's where this notion of underwriting judgment is so important. And we call it a little bit of the development of gut underwriting, which is not knowing when the information is really predictive of the future.
And knowing one when you need to go a little bit deeper, or maybe give a little bit more weight to a future looking view, as opposed to history. So there's a balance here, but that's where judgment comes in and it's so important to get you to the right answer.
All right, as you said, knowing there's 1,000 or so of our closest friends on the line, we want to take a peek under the covers, Rick. And I'm going to ask you this question, give us a little insight. What role do underwriters play when it comes to developing those innovative, new product offerings? So how do we think about underwriters when we announce a new product for our commercial lines or our personal lines of businesses?
I think the two are inseparable, Joan. I don't I don't think you can develop a new product without underwriters involved in the analysis and the development. Because when you're talking about taking risk, that's underwriting. So we think product and underwriting are inextricably linked, and the two of them working closely in concert together to identify the need.
Because the underwriter will see that through their engagement with our agency partners or in the marketplace, and then working closely with product people to develop the solution to the need. To make sure that it's sustainable, and understand the risks associated with it. Nobody wants to launch a product for the sake of launching a product. You know you want it to be successful. You want it to address a true risk management need. And to do that, it's got to have an underwriting lens on it from start to finish.
So underwriters play a critical role in product development. I don't think you can separate the two. And I think the only way to have a sustainable risk management solution is to make sure that you use your risk-taking culture to inform your product strategy. I would say being good risk managers, being good stewards of risk, should actually promote innovation, product development, because it ensures you'll do it the right way.
Right, got it. Got it. OK, for us non-underwriters out there, what's the biggest misconception about underwriting? So there's a lot of guests joining in sales roles today, or other business functions. What should we understand that sometimes may get murky about your business?
Joan, I think you hit it with the second question about perfect information. I think that that's part of it. Underwriting is an imperfect science. And it is a combination of leveraging data, and analytics, and historical information with judgment. And I think sometimes we forget that along the way, and it is important to note and say, boy, business and risk takes place in the real world at real time. And it does happen quickly.
And making sure we understand that, and we're staying up to date with the needs is absolutely critical. But if anybody thinks that an underwriting view of the future, our ability to predict risk is a perfect science, I can tell you it's not. Which is why it's so important we constantly challenge ourselves; we constantly update our view of risk. We constantly stay in contact with their customers and our agency partners to understand their risk management needs, and we evolve our strategy accordingly.
I do think the other thing that's so important to underwriting it's the trust factor. And that takes time to build. But personal brand and brand reputation are incredibly important. And I started on the carrier side, but I spent a lot of years on the corporate risk management side before I joined the Traveler's family. And I remember one of the first things I learned from one of the most skilled and experienced risk managers in the business is to have a direct personal relationship with your underwriter.
It's one of the most important things you can do.
Well, you're going to have a lot of friends emailing you after the session. I'll guarantee you that, Rick. They want a relationship with you for sure. Very thoughtful conversation here. So I have one final question for you, Rick, before we get into our audience questions. And for that I'm going to spring a special guest on us today.
An on-screen window opens to Pete Miller
I'd like to welcome Pete Miller. Pete is the president and CEO of the Institutes.
They provide educational support, leading research, to help those in risk management and insurance serve the public better. So welcome, Pete. We're really thrilled you're with us today. And I'm going to ask you both this question. Can you speak to the young people joining us today who are either early in their underwriting careers, or thinking about going in a different direction? What's the pitch to them to pursue underwriting? And what's your advice to them for the future? So Rick, do you want to--
I'll start, Joan. And I'll start with the pitch. And I'm so glad to have Pete here to talk about the importance of continuing to develop your underwriting acumen through all stages of your career. But I'm going to start with the pitch. And I use this a lot when I talk to newer underwriters. It's a fascinating world out there, and there's so many things that happen on a daily basis.
There's first cars, and new homes, and business startups, and bridges and schools being built, and new products being manufactured, and all the above. And none of it happens without an underwriter there to stand behind the risk. And I think it's so important to always remember that's what you do as an underwriter. And sometimes this business can feel really transactional, because it has to. There's pricing documentation that has to be done, and there's regulatory-- there's all of this stuff.
But never lose sight of the importance of what an underwriter does and what an underwriter makes possible. And the other advice I'll give before I kick it to Pete is enjoy the journey. This is an amazing business an industry where you learn and you're challenged all the time. I still come in-- there's not a week that goes by that I don't see something new or different. And that's what keeps it exciting. But it does go fast, and I've met great people and developed great relationships along the way.
And one day you're at 21-year-old underwriter sitting in a sea of row to row metal desks with a bunch of manuals in front of you. And then you blink, and you're the special guest on a "Wednesdays with Woodward." So it does go that fast, and I think it's such an exciting career. And that's why I want Pete to talk a little bit about what he and the great folks at the Institutes are doing to make sure that they support underwriters and their growth and development throughout all stages.
So I'm going to flip it to Pete for that.
Well thanks, Rick. And thanks Joan, I appreciate the opportunity to be here. To a young underwriter-- first of all, I congratulate you on joining an awesome industry. Because if you think about this industry, what do we do? We do a lot of things, but to me, basically, we underwrite society. So society happens, modern economies happen, because of the work you do. Secondly, we make people's lives better and safer. And I can't think of a more noble purpose.
So I think at the high end, this is a great industry. It's taken me to 60 countries. And I can tell you in developing countries, and around the world, this industry is highly prized. Because they recognize without the work that you as underwriters, and agents, and the folks in this industry do, people's lives don't improve. And they don't get better and safer. So I think congratulations for doing that.
I think what we try to do at the Institutes is give you the tools, the knowledge, to be able to do your job more effectively for yourself and for your customers. So I think Rick has done a great job of talking about the different pieces of the industry, and all the things that you kind of have to digest in order to do your job effectively. And I think of three buckets. There's the risk itself. Do you understand the risk itself? Do you have the information you need? There sort of generalized knowledge.
As Rick said, what's going on in the industry? What's going on in the economy? Where are interest rates? Where's cyber? What are the different risks that you face? And what are the dimensions of all those risks? And then there's skill. And I think you have to be able to say, well here's the risk. Here's the knowledge I have. And have the skill to be able to distill down what's important, what isn't important. How do I stay current? How do I know what's coming down the pike at me?
And that's a lot of what we try to do at the Institutes because we work for you. We're a not for profit supporting the industry. And what we try to do is to say what's happening right now. We have resources for that. What's a common base of knowledge that you need to have. We have designations that can help with that. And then looking forward, where is the industry going?
And if you take and combine your understanding of the risk is an underwriter, your knowledge of the influences around that risk, and the economy as a whole in your industry. Where your company is trying to go. What the relationships are. And then you have the skill to be able to take and apply all those to a particular risk, and then come up with a price in underwriting terms-- then I think you've really advanced yourself. I think this is such an exciting time to be in the industry.
Like Rick, I've been around for about 35 years. And I actually started as a programmer. So it's been quite a journey, a fascinating journey. But I think the tools that you have available are enormously more complex and more useful. But as Rick said, the gut underwriting. I don't think, even though I have an IT background, you cannot replace judgment I do not believe. So I think the idea that you take the skills, you have the knowledge.
You have to keep that current-- through what we do or what others do with the Travelers Institutes, the great job that it does-- to make sure that you are the most up to date possible in what's really a rapidly changing industry that reflects a rapidly changing economy. So I'm very excited about this industry, and I think it's just a fascinating time to be here. And I congratulate you if you're a younger underwriter in choosing just a great industry that's driven by a purpose.
And it's really exciting and has a lot of great tools coming online.
Boy, that is great Pete. And your organization is doing so much more than just the certifications of the CPQ or other certifications. So actually, why don't we just have you spend an hour with us on a Wednesday session, Pete? If you'd be willing to come on and give us a complete overview. Because I know we talked the other day, you're talking about you're doing something with blockchain and crypto. So really exciting stuff what you're working on. So if you'd be so kind you join us on a future webinar.
I'd really appreciate that opportunity. Thank you.
Excellent. All right, thank you so much Pete for dropping in on us today.
Thank you, bye now.
And Rick, we're going to get to some audience questions. But I actually want to just spend 20 seconds on-- because I get a lot of questions of how I landed in insurance. And I have a very zig-zag path to insurance. I was working on Capitol Hill for 12 years. So I work for Senator Bill Roth. Had the privilege of working on the Roth IRA and John Kasich, former governor of Ohio, when he was a Congressman. So I spent 12 years there. And then I spent about 10 years at Goldman Sachs.
And I was running their Global Markets Institute, that's what it was called Rick. And I got a call from Jay Fishman and Alan Schnitzer one day saying, hey, do you want to come to Travelers? And I thought, no, I don't because it's insurance and I don't know much about insurance. And I didn't think it was that exciting. So after about six months of talking to Alan Schnitzer about the opportunity here to start this think tank for Travelers, I have never looked back.
It's an amazing industry and we're working with people like you, Rick. So that's my story.
That's a better story than mine. And I'm not going to tell mine because it takes too long, and it's not nearly as good. But it's an interesting theme, and I think it's one of the things goes right into the last question you asked. A lot of us who've been doing this for a while kind of ended up here by accident. 35 years ago, I didn't say this is what I was going to do for a living. It was one of the best decisions I've ever made.
But the quality of the young professionals that we are attracting into this industry is second to none. It is so exciting when I look at the young underwriters coming into some of the development programs who understand. Pete use the word I do with insurance sometimes, I'm glad I'm not the only one who does it. He used the word noble. They understand it and their purpose, and they want to make a difference. And they want to be in insurance and they want to be underwriters.
And I just think it's great. And it's so exciting, and such a healthy thing for the industry. And Joan, if you don't mind, there are a couple of things I was rolling through the chat real fast while Pete was talking. And some questions with some common themes. So I was going to hit two of them real high level. And I tend to do this when I give a presentation like this, I think I worry people a little bit about, oh boy, this feels like shrinking eligibility. And this is not about risk avoidance.
Risk avoidance is not a sustainable strategy in our business. It's what we do for a living. And there's just not enough vanilla out there. There isn't. Most risks have complexity to them. And this is really about understanding the risk so you can underwrite it. And that's ultimately the goal and the objective, which is
to make sure you've got insights into it no matter how complex and you can make an informed underwriting decision. Because that's what we do for a living.
And we've got to deploy our risk-taking capacity and our capital in a really, really thoughtful way. And so long as we can construct a program and price for a risk that we understand, we should have the ability as an industry to do it even on the most complex stuff. The other theme that came up a lot, Joan, was around the use of data and data protection. And how does that go into some of the strategies about leveraging? All excellent and great. Spot on. That's the balance.
And I look at it from the standpoint of the data that I'd be interested in, is data that's informative as to how risk performs. And you've got to balance it with privacy and others. But a lot of it is public data that's just more a matter of accessing it. Specifically, where a building is located, and the topography, and the attributes of the property and the premises, and all of that. That's how you make a really informed decision about the risk, how you deploy your limits, et cetera.
So I do think it's a balance. And I think we should be careful about it because it shouldn't be free access to everything. It's really back to what do we need to make an informed decision or have an informed view of risk so we can deploy our risk-taking capacity accordingly? And I think that's what we want to work and strive for. And that will take some time to work out and strike a healthy balance. And I think we all own that one together, and partnership is absolutely critical here.
Agent, insurance companies, regulators, et cetera. That's one that we should solve as an insurance community.
Great, all right. Let's take another audience question here. Can you talk about the term "social inflation" and how that might continue to impact the GL marketplace, Rick?
Yeah, I think it's an interesting one, Joan. And I go back to that inflation slide where I talked about some of the more subjective ones. And it's kind of hard to measure. I think there's always been some degree of social inflation. How elevated it really is beyond normal cost inflation, that's a tough one. I think it's real. I think the cost of risk, the cost of claims going out the door, is certainly inflated. As a practice, I read every large loss report generated by our claim department.
And I hope-- advice to underwriters-- I hope you do the same, because you learn a lot. I spent a number of years in claim. And I always say, I started my career as an underwriter. I learned to be a good underwriter working in claim. When I look at the value of claims, I see a notable change and there's no question about it. So I do think it will continue to impact the line. There is certainly an elevated cost of risk right now.
How much is pure inflationary as opposed to some of these more subjective things, I'm not sure there's a perfect answer on. But the more the pure inflationary pieces-- so medical costs, wages, et cetera-- the more inflationary pressure there, the more there is on the more subjective, less objective measures.
Because your pain and suffering elements, things like that, they're generally the baseline for calculating some degree of what the actual damages are.
So not a question you can answer with precision, other than it's certainly real. Loss costs are elevated. The cost going out the door is more. I don't think that we as an industry can just sit back and say, that's fine. We're just going to roll it into pricing. I think mitigation strategies are important. I think public education is important. Elevated tort costs, everybody pays for that. You pay for it in your cost of goods sold from the cost to get from A to B, to the cost to a movie ticket, to cost a meal at a restaurant.
It's all built in there, and I do think some awareness is a society the cost of tort is really important to control it. Because simply absorbing it and passing it on to the consumer doesn't feel like a great answer.
Good. All right, we're going to rapid fire you quick questions. How can I convince a business owner who has no claims in many areas to shy away from just focusing on that price tag on the insurance?
Boy, what a great question Joan. This is-- again, since it's only 1,000 of us, I'll share a secret. Nobody looks forward to get their insurance bill in the mail every year. They just don't-- me included. In the business you don't, but I gladly pay it. And in fact, I think I buy more coverage every year because I understand the importance of it. And that's the hard part if you're not an insurance person, and most of your customers are not insurance people.
They're contractors, and they're lawyers, and they're architects, and they're accountants, and they're small business entrepreneurs. And so they don't understand insurance, and you've got to be the one that helps them understand the importance of the protecting their assets and their business. And it is work, and for those of you that go way back with the Travelers, you may remember being deputized a long while back by Jay Fishman to be the chief worry officer for your customer.
And for those of you that haven't been formally deputized, I'm doing it right now. That's the role you play. It's really getting them to understand the importance of the protection, even when you don't use it. And in fact, not using it as the best thing because it shows you're a good steward of risk and that's directly reflected in lost cause. But I get it, it's a challenging conversation.
And that's where you bridge the understanding the importance of having insurance, or risk transfer mechanism, to protect all that you work so hard for.
All right, last question for you. And this is a really interesting one. Jonathan Aranow says, from an underwriting consideration perspective, how much weight does the quality of the management leaders, people in the organization, go into considering a tough risk? What are you doing? You're looking at the profile of the management team?
Tremendous weight. Great question. Obviously the impact varies by line, but I would say broadly across a commercial risk it is very important. And it's a little bit about, Joan, about the question you asked what's
changed in the pandemic. This is a great example of it. That's the piece that you can't underwrite without that physical interaction, because you're saying you're underwriting culture.
Commitment to safety, investments that they've made relative to worker safety, business resiliency, all of the above. The quality of the management team is incredibly important. And it's one of the things that it doesn't come out on an insurance application. And even historical loss performance might not be fully reflective of it because things change. But it's such an important component of understanding risk, the partnership in risk, and an organization's commitment to risk management.
So great question, and a great place to end because that's another place where an agent can really help their customers be good stewards of risk. And make themselves more attractive, even if they're in a complex industry or environment.
All right, well we have to leave it there. And Rick, thank you so much for coming on and just being so thoughtful about this. And thank you for your leadership for the whole industry. You are recognized by the industry, not just at Travelers, for your thoughtful underwriting approaches. So we appreciate it, we'll have you back next year. We're going to make this an annual thing, Rick. And so appreciate it.
Wednesdays with Woodward Webinar Series. Upcoming Webinars: November 3 - The Pandemic Era Opioid Crisis: Where Are We Now? How Can We Break The Cycle? Milken Institute's Sabrina Spitaletta and Travelers’ Rich Ives. Coming Soon: Winter Programming Announcement. Visit us: travelersinstitute.org
Please join me for next week's session. So we're going to talk with some experts in the field. The Milken Institute's experts, as well as our own workers' comp opioid expert, for the pandemic era opioid crisis. And what's been going on here? We see every day, employers struggling how to handle this crisis with their employees. And we have really good experts talking next week, next Wednesday, at 1:00 about how employers what they can do.
How they can do it on strategies for helping your employees with this very sad disease. So join us then. And don't forget to fill out our survey if you like today's program. We're going to be sending all of you the replay, so you can share this wonderful wealth of knowledge with Rick Keegan and your teams. So again, thanks for being with us. Get your vaccine, folks. We'll see you next Wednesday.
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