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Risk Insider: Mark Watson

Specialty Insurance: The Domain of Humans

By: | December 11, 2017 • 3 min read
Mark Watson has served as President and CEO of Argo Group since 2000 and has been with the company since 1998, when it was Argonaut Group. He can be reached at [email protected]

Despite warnings by thinkers no less admired than Stephen Hawking and Elon Musk, humans are scrambling to deploy the power of artificial intelligence in every discipline. After dawdling for decades, the insurance industry itself is now eagerly experimenting with technology. Online, automated offerings for coverage in standard lines appear weekly, with the new proof of AI savvy being the lowest number of questions an insurer must ask a policyholder before underwriting a risk.

But what of non-standard lines? What of specialty? Will the role of the specialty underwriter soon be obsolete? Not in my opinion. Here’s why.

Insurance contracts are either transactional or negotiated. In transactional business, where efficiency and scale are critical, technology can shorten the time and lessen the cost of clearing, rating and assigning business.

In some consumer transactions, the whole process from quoting to binding can be automated. But here’s the catch: the risks that can be managed in this category must be static, with little or no variance from year to year. Such risks are generally small in size of both premium and payout, confined to well-defined silos (life, auto, home, pet), and immune to changes in weather, politics and the economy. That’s what makes them transactional.

Negotiated insurance is a people business.

Negotiated risks, on the other hand, are unique. They tend to be large. They are influenced by a customer’s finances, the state of the economy, the hunger of the competition and a dozen other factors. Changing conditions influence the kinds of exposures needed by that customer in any given year. In such situations, end-to-end automation is seldom useful. It is practically impossible to establish underwriting rules where a system can understand, discuss and then deliver customized responses.

Enthusiasts will offer that until Deep Blue beat Garry Kasparov in 1997, we said exactly the same thing about chess. True.

The wonder of artificial intelligence is that it can learn to match or better the human process of judgment. But data crunching, no matter how nimble, requires data. Bridget van Kralingen, senior vice president of IBM Global Business Services, contends that 80 percent of the world’s data is out of reach of traditional computing systems, and that security concerns may keep it that way. The specialty underwriter’s deep-domain experience, therefore, may remain an advantage for some time.

Negotiated insurance is a people business. Specialty underwriters learn to interrogate a risk in part by assessing the character of a company, the quality of its management and the reputation of the partners with whom its executives work. I question whether software alone will do that adequately.

Will artificial intelligence be able to assess the impact of weather six months out on the profit margins of a fixed-price contract? Or notice unsound assumptions in a cashflow projection? Or read non-verbal cues to determine the likely success of a CEO’s plan for growth in an emerging market? Unlikely.

In my view, specialty insurance will long be a domain where human intelligence will be just as important as artificial intelligence. Will specialty underwriters be replaced by computers? Not any time soon. Chess players may be a different story.

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]