Teaching Risk Management and Insurance

Mike HubbelProfessor Emeritus

Olivet College

Did you know?

Travelers are more likely to die from taking selfiesthan from shark attacks!

12 died in falls or hit by vehicles while taking selfies8 have died from shark attacks

…and earlier this year, Waterton Canyon recreation area in Denver was closed to the public after too

many visitors were trying to take selfies with bears.

Source: “Taking Selfies Now More Deadly Than Shark Attacks,” Business Insurance, September 28, 2015

Why?The process of risk management and the use of insurance is an important,

integral part of our business and personal lives

The fields of risk management and insurance

(RMI) offer a variety of challenging and rewarding

career opportunities for your students

An education in risk management and insurance

gives job-seekers a significant advantage

The RMI industry offers many college scholarships

and internships

Why?The Michigan Department of

Education has approved

“Insurance” in the Finance

Cluster, Insurance Pathway

for Career and Technical

Education

- Tom Knight

CTE Curriculum

Consultant

Because insurance exists…

Costs to Society• Insurer overhead• Inflated claims• Fraudulent claims• Increased tendency to sue

(knowing that insurance coverage exists)

Benefits to Society• Payment of losses• Less worry & fear• Source of investment funds• Loss prevention & reduction• Support for system of credit• Meeting legal requirements

Promise

$

The Insurance Mechanism

Premium & Risk

LOSS

$

$

$

$

$

$

The Insurance Consumer Insurance

Company

Pools Exposures

and$

$

U.S. Insurance Employment

L&H Insurers870,200

35%

P&C Insurers605,400

25%

Reinsurers25,300

1%

Agents & Brokers732,200

30%

Other*227,600

9%

*Other includes independent claims adjusters, third party administrators, other service personnel

April 2015 preliminary data; seasonally adjusted

Source: U.S. Bureau of Labor Statistics; Insurance Information Institute

17,390 agencies

1,607 insurers

Insurance Employers in Michigan

Source: Michigan Department of Insurance and Financial Services 2013 Annual Report, http://www.michigan.gov/documents/difs/DIFS_Annual_Report_2013_463315_7.pdf

Reinsurance Intermediary

(optional)

Reinsurer Retrocessionaire

Reinsurer Retrocessionaire

Other Insurer Retrocessionaire

Other Insurer Retrocessionaire

The Insurance Market

*Nonadmitted insurers are also called Excess & Surplus Lines insurers

Insurance Customer

Risk Manager

Retail Agent or Broker

Coverage readily

available? Go

Admitted

Can’t buy coverage

from admitted insurer?

Go Nonadmitted

Admitted Primary Insurer

Wholesale broker, Surplus Lines

Broker, or Managing General Agent

Nonadmitted Primary Insurer*

Non-traditional Insurance Players

Google!1

– Beginning with personal and small commercial insurance comparisons

– Eventually using their data and analytics to underwrite risks in innovative ways?

1Source: Banham, Russ, “Googlezilla – Replete with capital and data, Internet giants prepare to devour the insurance industry,” Leader’s Edge, Council of Insurance Agents and Brokers, January/February 2015.

Capital markets competing through the

catastrophe bond market

Life Cycle of an Insurance Policy

Compliance obtains approvals

Marketing & Product Development designs new policy

Actuaries calculate rates for new policy Marketing promotes

new policy to agents

Agents quotes & sells policy

Finance invests the premium

Underwriter approves issuance & prices policy

Risk Control may inspect applicant’s exposure

Underwriter may reinsure policy

Reinsurer assumes portion of risk

Claims Department may receive claim

Reinsurer may be responsible for portion of claim

Claims adjuster inspects damage; pays claim

Underwriter reviews policy for renewal

Premium auditor audits auditable policies ABC

INSURANCE

We hereby agree to insure you against…

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Entry-levelPositions

MedianAnnual Salary

National

MedianAnnual Salary

Lansing

Requires Bachelor’s degree or

higher

Projected Annual Job

Growth 2011-2016 Michigan2

Agent – Sales $46,728 $44,205 46%1 9%

PC Claims Adjuster I $41,713 $39,460 78% 4%

Risk Analyst I $50,492 $47,766 90% Not available

PC Underwriter I $50,662 $47,926 80% 8%

Actuary I $65,919 $62,360 87% Not available

Source: www.salary.com October 1, 2015 (data above does not include bonuses or other benefits) (Detroit & Grand Rapids > Lansing)

1O-Net OnLine, CareerOneStop, U.S. Department of Labor, http://www.onetonline.org/find/industry?i=52&g=Go, accessed October 1, 20152 Industry Report Prepared for Greater Lansing Insurance & Financial Services Council, Economic Modeling Specialists, Inc., www.economicmodeling.com

Entry-level Salaries

After at least seven years…

Top RMIPositions

MedianAnnual Salary

National

MedianAnnual Salary

Lansing

Requires Bachelor’s degree or

higher

Agency Executive $198,424 $187,709 75%

PC Claims $223,397 $211,334 87%

Risk Management $184,268 $174,318 94%

PC Underwriting $221,938 $209,953 87%

Actuarial $287,676 $272,142 100%

Source: www.salary.com October 1, 2015(data above does not include bonuses or other benefits)

If you have an interest in…

• Be an underwriter!• A decision scientist: decide who & who not to insure

Solving puzzles, decision making?

• Be a claims adjuster!• Investigate losses, help clients recover from losses

Helping others, investigating?

• Be an agent!• Sell insurance, help clients recover from losses

Running your own business?

• Be an actuary!• Study catastrophes, gather statistics, create formulasMath?

Disciplines Needed in Insurance

Math, Probability & Statistics

Psychology

Management & Marketing

Communication & Negotiation

Finance & AccountingEngineering

Law

Computer Technology

& Applications

RMI Curriculum Content• Process• Risk management tools

The risk management process

• Risk transfer• Pooling and the Law of Large Numbers• Spreading the unbearable losses of a few over many

The insurance mechanism

• Legal nature and structure• Auto, home, life, healthInsurance policies

• Market – structure, regulation, cycles• Providers – private sector, government

The business of insurance

• Agents/brokers• Actuaries, claims investigators/adjusters, underwriters• Risk management analysts

Career entry points

Insurance Curriculum approved for High Schools*

• Concepts, terminology• Insurance market, regulation, financial aspects, operations• Nature of property and liability insurance exposures and provisions• Risk management

Principles

• Automobile• Home• Life and retirement• Disability and health

Personal Insurance

• Property, business interruption, crime, large equipment breakdown• Inland and ocean marine• General liability, business automobile, workers compensation• Businessowners package, specialty and emerging coverages

Commercial Insurance

*Approved in 2013 by the Michigan Department of Education in the Finance Cluster, Insurance Pathway

Risk Management Exercise

• Car accident• Speeding ticket• Bad grades• Hit a deer with car• House fire• Loose books• “Total” car• Serious injury

• Hurricane• Flood• Car stolen• iPhone stolen• Loss of car = loss of dates• Death• Illness

Discuss the risk management of these exposures…Avoid? Control? Insure? Retain?

…not everything is insurable!

What loss exposures do you face each day?

What do Americans worry about?

Food Safety Concerns & Risks

Transportation & Travel Risks

Extreme Weather & Natural Disasters

Personal Safety Concerns & Risks

Cyber, Computer Technology, Data Breaches & Risks

Personal Privacy Loss & Identity Theft

Financial Concerns & Risks

13%

11%

13%

14%

21%

25%

30%

41%

42%

43%

51%

57%

60%

66%

“How much do you worry about these things affecting you or someone in your immediate family?”

Worry a great deal Worry somewhat

Independent survey of 1,029 Americans ages 18 to 69, by telephone and online

Source: Consumer Risk Index, Travelers Insurance, October 2015, https://www.travelers.com/prepare-prevent/risk-index/consumer/2015/consumer-risk-index-report.pdf, accessed October 6, 2015.

Risk Management Project

Personal Risk Management PlanProperty – auto, apartment, personal belongings Liability – auto, other liability Life – needs following death, e.g. medical bills, burial,

dependents?Health – major medical expensesRetirement – future financial security

– Farm Bureau Insurance Company of Michigan financial calculators at https://www.farmbureauinsurance-mi.com/insurance_101/calculators/

Insurance Policy “Puzzles”

Given:An automobile crash loss or homeowner loss scenarioA list of questions to analyze a policy for loss coverageParent’s auto or homeowner policy

Determine:? Covered losses? The amount of coverage? Options to reduce the “out-of-pocket” loss

RMI Curriculum Delivery• RMI content fits well in the following high school courses:

– Introduction to Business or Management– Careers– Consumer– Economics– Family

• Guest speakers– Insurance Institute of Michigan http://

www.iiminfo.org/FORTHECLASSROOM/tabid/1688/Default.aspx – Michigan Association of Insurance Agents http://

www.mifuture.org/behindthescenes/request_speaker.asp – Gamma Iota Sigma – professional society of college students &

faculty; chapters at Central Michigan University, Ferris State University, Northern Michigan University, Olivet College http://www.gammaiotasigma.org/

• High School & College Partnering– Eaton ISD with Olivet College, Ingham ISD with Ferris State– Students can take 3 insurance courses and earn 9 transferrable college

credits in RMI– Delivered in a blend of live meetings at Farm Bureau Insurance or

Accident Fund Insurance Companies in Lansing, online coursework, field trips, job shadows, internships

– May take national exams simultaneously and an ethics module to earn a professional designation

– Qualifications: high reading level, average writing level, Algebra II– Other universities are interested!

• RMI Tours– Agencies are located in most communities– Insurers are located in the Greater Detroit, Dowagiac, Flint, Fremont,

Grand Rapids, Hastings, Howell, Lansing, Traverse City– Large corporation risk management tours almost anywhere

Enhancing RMI Curriculum Delivery

Insurance Information Institute• Glossary• Videos• Hot topicswww.iii.org

RMI Curriculum Resources

Griffith Insurance Education Foundation• Lesson planshttp://www.griffithfoundation.org/k-12/curriculum-online/lesson-plans/

Insurance Institute of Michigan• Local issues• Speakerswww.iiminfo.org

PBS• Videos• Gameswww.pbs.org

andwww.pbslearningmedia.org

Project InVEST• Provides insurance agent

oriented lesson plans, games and presentations

• Students form and operate model insurance agencies and insurance company offices

www.investprogram.org

Brochure on careers in the insurance business http://www.mifuture.org/docs/resources_docs/CPCU_Insurance_Careers_Brochure.pdf

RMI Career Resources

Video (5 ½ minutes)

about careers in

“surplus lines”

insurance market

for large, complex

business exposures

http://www.youtub

e.com/watch?

v=LWpq3e6Pn0s Video (7 minutes) about insurance agent careers

http://www.youtube.com/wa

tch?v=NsIcNsi9boc

Michigan Collegiate Programs

RMI Programs

• Cooley Law School• Master of Laws – Insurance Law

• Davenport University• Grand Rapids, Lansing, Livonia, & online

• Ferris State University• Michigan State University

• (new program in development)• Northern Michigan

University• Olivet College

Actuarial Programs

• Central Michigan University• Ferris State University• Michigan Technological

University• Michigan State University• Northern Michigan

University• Olivet College• University of Michigan

Why do we need young people in the insurance business?

Insurance industry retirements are projected to reach25% of the workforce by 20181

New, young professionals are needed to take their places!

and

We need fresh ideas and approaches for the new risks that we’ll face in the years to come…

1Source: Building a Talent Magnet: How the Property and Casualty Industry Can Solve Its People Needs, McKinsey & Company, 2010http://www.mckinsey.com/clientservice/Financial_Services/~/media/Reports/Financial_Services/Talent_in_PandC.ashx

Emerging Risks for the Insurance Business

High Impact

• Cloud computing security• Contagious emerging

financial market crisis• Short-termism of macro-

policy measures• Air pollution as mortality

& litigation driver• Super natural

catastrophes• Challenges of the Internet

of Things

Medium Impact

• Concussion crisis in sports

• Widespread genetic testing – false results

• Digital slander• E-cigarettes & liquids

used• Food and water safety

trade-offs with growth• Aluminum health risks• Smart cities –

vulnerabilities, privacy• Urban farming

Low Impact

• Action cam liability – use in “extreme” activities

• Epigenectics: genome modification as a liability loss driver

• 4D printing – adding the dimension of time (materials that change over time, implantable material, nanobots)

• Missing aircraft triggers technological change

• Methane hydrate – new energy source?

• Traffic jam in the skies

Source: Swiss Re SONAR, Emerging risk insights, Swiss Re, 2014 and 2015

Driverless Vehicles

Google’s Driverless Car

After 6 years of testing in Mountain View, CA, the driverless car was involved in 11 accidents:• 10 caused by other drivers• The accident caused by the Google car was

actually caused by the staffer driving in manual mode

Freightliner’s Driverless Truck

Source: Cheboygan Daily Tribune, May 16, 2015 Source: http://www.ft.com/cms/s/0/4a4dc50af46311e499de00144feab7de.html#axzz3ZhUjMp7x

Drones

• Issues– Lack of operator training and

safety– Invasion of privacy

• Two insurers provide coverage similar to aircraft hull liability

• Several insurers now have FAA approval to use drones– Underwriting risk assessment– Claims settlement

Source: http://www.rmmagazine.com/2015/04/01/dronestakeflight/

Solar Storms• Impact

– Power grid– Communications– Air travel– Satellite navigation systems

• Further research needed– how widespread could the impact be?

• Monitoring and forecasting• Mitigation

– Alternative procedures/processes, business continuity plans– Back up generators, solar panels– Insurance for physical damage and business interruption

• Too catastrophe for private sector?• Too catastrophe for government sector?

Source: Space Weather Public Dialogue Final Report, 3KQ & Collingwood Environmental Planning, February 11, 2015 http://www.stfc.ac.uk/3508.aspx

Now…go out and take some risks today…

…but not too many!