Notes in General
By Anthony Cappelletti
General Insurance Insights, June 2024
Welcome to the June 2024 issue of General Insurance Insights, the SOA’s biannual newsletter for those with an interest in general insurance (aka, GI, property and casualty insurance, or P&C). This issue includes several articles of interest to GI actuaries. The first article is one that I wrote, “Property Insurance in California and Florida: A Problem of Availability and Affordability.” In this article, I delve into what is occurring in these property insurance markets. The second article is another one I wrote, “Cyber Risk for Automobiles?” which looks at potential cyber risks with connected vehicles. The third article is “FSA Changes for 2025” by Stuart Klugman, FSA, CERA, Ph.D., in which he outlines the new GI curriculum under the revised FSA pathway starting Fall 2025. Also included is “General Insurance Research Update” in which I provide information on the latest SOA research relating to general insurance.
Lately, it seems that lithium-ion batteries are showing up in many rechargeable electric devices—laptops, tablets, cell phones, smart watches, portable chargers, solar power storage, UPS[1] backup power, alarm systems, e‑cigarettes, medical devices, vacuum cleaners, lawn mowers, snow blowers, power tools, hoverboards, electric vehicles. I’m sure I’ve missed some, but you get my point. They are everywhere. Lithium-ion is used in so many different products because it has a relatively low weight and high energy density compared to other electrochemical storage materials. But there is a downside. Lithium-ion batteries contain toxic materials and if improperly disposed of, can contaminate land and water. This is because many end up being disposed in landfills instead of being properly recycled. Also, lithium-ion batteries are highly flammable and can quickly start a high intensity fire if they are damaged, over-charged, exposed to extreme temperatures, mishandled, exposed to a short-circuit or defective. A recent Gitnux report, Lithium-Ion Battery Fire Statistics: Market Report & Data, listed many interesting statistics regarding lithium-ion battery fires. One statistic in the report is that 1.5% of all lithium-ion batteries are involved in an overheating, fire or explosion event. I recommend reading the report. This issue could (or should) be a concern for general insurance companies as these batteries are included in numerous products in most homes.
Insurers are slowly embracing artificial intelligence (AI) or machine learning programs in underwriting, rating and claims functions. Recently, I read about a Canadian lawyer that got into trouble because they used ChatGPT, which cited fake cases.[2] I know this wasn’t the first time a lawyer faced repercussions for using ChatGPT citing fake cases. This also occurred to two lawyers in New York last year.[3] The lesson to be learned is that ChatGPT is an AI tool that can be used for many applications, but results must be checked. Insurers should take great care using AI tools. There is great risk with great opportunity.
One of the risks of AI systems is that they can introduce discrimination based on characteristics that are not permitted by law, such as race/ethnicity. Insurers must be sure that they do not discriminate on race/ethnicity. However, race/ethnicity is not a data element captured by insurers from their policyholders. How can insurers then check to see if AI systems have introduced discrimination based on race/ethnicity? The answer would be the use of a proxy, such as the modified Bayesian Improved First Name Surname and Geocoding (BIFSG) method.[4] But this will not be perfect. It will test to see if there is a strong correlation with rating factors to BIFSG imputed race/ethnicity. BIFSG has been shown to be highly accurate on a population level. So, my question is, if a factor is highly correlated with BIFSG imputed race/ethnicity does that mean that the factor is highly correlated with race/ethnicity? Probably. But not necessarily. It would likely depend on the strength of these correlations and the number of policyholders in the insurer’s correlation analysis. I may look at this issue in a future General Insurance Insights article.
Most automobile insurers now offer usage-based-insurance (UBI) telematics policies. Not all drivers have shifted to UBI. Many have stayed with traditionally rated automobile insurance policies for a variety of reasons. One of the reasons is privacy concerns. So, if one stayed with traditionally rated insurance, one would expect that insurers are not accessing telematics data. Apparently, some automobile manufacturers collect this information in vehicles with internet access. They then sell the data to a data broker that then sells the data to automobile insurers that can then use it to underwrite and rate the policies. It makes one wonder if this is legal. Apparently, when purchasing a new vehicle with internet access there is fine print in the contract that acknowledges the purchaser’s consent to have the manufacturer provide the data to a third party.[5]
Regarding the National Flood Insurance Program, the reauthorization cycle continues. Since 2017, the program has been kept operational through an unprecedented sequence of temporary extensions each lasting between several weeks and 12 months. Another temporary extension will expire on Sept. 30, 2024. Once again, I anticipate another temporary extension when it expires. A longer-term reauthorization is required for stability of the program. Additionally, a longer-term reauthorization should also include reforms to benefit all the program’s stakeholders. Can legislators accomplish this within the next two years? My guess—not likely.
On March 26, the Francis Scott Key Bridge in Baltimore, Maryland collapsed after being struck by a large cargo ship. Six construction workers are presumed dead. Thankfully the bridge was closed before the collapse otherwise the loss of life would have been much greater. This accident triggered the closure of a key shipping port in Baltimore. The closure of the port and the destruction of the bridge caused economic damages to many businesses. The ship was owned Grace Ocean, chartered by Synergy Marine, operating the ship DALI sailing under the flag of Singapore. There will be many lawsuits filed because of this accident. The lawsuits will likely be filed in federal courts in the United States under the U.S. laws for open-water navigation. Maritime law will also apply. All told, the losses could be several billion dollars. Maritime law limits the shipowner’s liability to the present value of the ship, which is purported to be just over $40 million. It’s likely that most of the insured claims will be paid by insurers of businesses through their business interruption coverage.[6]
As I write this introduction, there is news of a major earthquake in Taiwan. There are at least nine deaths, over 1,000 injured, numerous people trapped/stranded, landslides triggered and significant damage to buildings in Hualien City. My thoughts go out to the people affected by this earthquake.
Our goals with General Insurance Insights are to keep readers informed on topics of interest to GI actuaries and to develop the GI actuarial community within the SOA. We welcome your feedback and ideas to help us achieve these goals. If you have questions, feedback, or ideas regarding this e‑newsletter, feel free to contact me.
I would also like to take this opportunity to inform our readers that we are always looking for volunteers in general insurance at the SOA. Please visit the SOA Volunteer Opportunities Database. The database includes all open volunteer opportunities at the SOA. If you do not see a GI exam committee or GI research committee volunteer opportunity in the database and are interested, contact me directly. We can always use new volunteers. In addition to this, we are also looking for ideas on GI continuing education offerings and authors (or ideas) for articles in upcoming issues. Let me know if you would like to contribute.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Anthony Cappelletti, FSA, FCIA, FCAS, is a staff fellow for the SOA. He can be contacted at acappelletti@soa.org.
Endnotes
[1] Uninterrupted Power Supply.
[2] CBC News, B.C. lawyer reprimanded for citing fake cases invented by ChatGPT.
[3] Reuters, New York lawyers sanctioned for using fake ChatGPT cases in legal brief.
[4] A good resource for BIFSG is: Ioan Voicu (2018), “Using First Name Information to Improve Race and Ethnicity Classification,” Statistics and Public Policy, 5:1, 1-13, DOI: 10.1080/2330443X.2018.1427012.
[5] Business Insider, Your car might be secretly recording every drive you take — and sending data to your insurance company.
[6] The Insurance Journal, How Lawsuits Over Baltimore Bridge Collapse Are Likely to Play Out and Ship Owner in Bridge Collapse Seeks to Limit Its Liability.