EP14 – 2nd & 3rd Order Implications of COVID-19 on the Insurance Industry. A Discussion with Lance Poole of Juniper Labs and David McFarland of Coterie

Obviously, COVID-19 is affecting the entire insurance industry.

As we all debate the near term impacts, Lance Poole of Juniper Labs, David McFarland of Coterie, and Nick discuss the longer-term implications of the pandemic on the insurance vertical. What does this really mean long term for auto? How will workers comp rates be affected by massive shift in employment? How will insurers look to remain profitable in a potentially negative interest rate environment? Believe it or now, we discussed that AND more in this episode of The Coverager Podcast.

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Lance Poole
Juniper Labs Homepage
David McFarland
Coterie Hompepage

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Transcript

Nick
And we're live on a Saturday talking insurance. So you might have the three biggest insurance nerds in the world...volunteering to spend so much time on a Saturday. David, Lance, welcome. David is obviously in some sort of attic. Lance's ready to golf at Augusta. And I had I'm cleaning up from a tornado. So pardon...pardon the appearance, guys. Happy Saturday.

Lance & David
Happy Saturday, Nick.

Nick
Yeah. So just to give the audience a flavor of how nerdy we are and who but you know who we are. Why'd you start with give, you know, give a quick elevator pitch and then Lance off to you.

David M
Yeah, yeah. Thanks for having me on. So I'm David McFarland CEO of Coterie Applications Inc, we just call ourselves Coterie. And I'm a fellow in the Casualty Actuarial Society (CAS), large background in the insurance space. Prior to Coterie, I was working with Clearcover, Chief Actuary head of insurance product there and prior to that just heavy on various lines and insurance. As far as what we do a Coterie we use modern tech to make it super easy to integrate commercial insurance in places where it's relevant to people. So this really involves building out our own tech around insurance products and hooking them into places where it has a lot of data that we need to write and rate the policies and kind of make it easy on the end customer and get some interesting data while we're at it.

Nick
Excellent, Lance...

Lance P
Cool. Thanks, Nick. Yeah, so it's cool co Juniper Labs, like David also an actual by training, Nick, I think you've got the good fortune to have two actuaries on the day that that look at other people's shoes instead of our own. Just you know we are the outgoing actuaries. Yeah. So, spent first 10 years of my career, working in life and annuity world, launched of tech startup and digital mortgage, and have recently transitioned to to launch Juniper Labs and so focused on commercial insurance. Just a quick intro on Juniper, we help make the small business segment more profitable for commercial insurers, Insurtech and brokers. So we're using a combination of open data and machine learning to build data products and automated underwriting tech. So for instance, if you're an Insurtech and you're looking to enter a new market, we can help with customer experience challenges like pre fill or strategic problems like understanding where openings might be from a product and pricing perspective.

Nick
Yep. So we got a really Good background here of everybody. I'm I'm the non-actuary. So that means there's a lot of pressure on me to keep the conversation moving. Just kidding, guys. No, but you guys have both, you know, the mathematical background, but also the technical ones in that you've either been with other startups or that, you know, had you have more experienced than what you're doing now in the startup area. So, you know, Lance and I were chatting, we thought this would be fun to have a conversation between three of us, and I thought, you know, potentially kick it off with current events. And so it's just hard in this environment to not talk about the pandemic. And I think it was Lance's podcast (he was a guest) that kind of spurred some deeper thinking on my end regarding the impact. I think most of the impact I've seen has been very shallow, but I think it I think, Lance, it was you on Nigel's podcast that talks about workers comp and talk about it beyond just potentially claims that pop up today whether they're covered or not, but the future of comp and how this could lead to much more comorbidity and increase rates going forward because now we have a bunch of the population that's injured so we don't have to necessarily talk about comp but this is the this could be the defining event that changes automobile insurance, property insurance, like this is going to touch a lot of different areas. So Lance, let's start with you. Like you're let's go let's go second, third order thinking here on the effects of what this is going to do to the industry.

Lance P
Yeah, it's super interesting, we've seen is that we're pretty bad at predicting the future. You have two actuaries on who are a lot of what we do is tend to trying to predict or model what's going to happen. And so yeah, it's interesting to think about, you know, what's going to happen with, you know, a line like workers comp where claims, you know, or longer tail, you know, happen out in the future. What's the impact going to be of Coronavirus? I mean, there's just the report today from the World Health Organization is that getting the getting getting COVID-19 doesn't protect you from getting reinfected. Right. And so we're learning something new every day in terms of the impact of the virus, and it's tough to know, what's that going to do to people's immune systems? You know, two, three years from now and what's that going to do to claims? How long is the injured worker going to be out of work? Because they're potentially sick? Yeah, so it's really interesting to think about all the unknowns that are out there for insurance companies mean, insurance executives are typically people who worry about things they don't know. So yeah, I think this is all likely creating a lot of anxiety for people that are in charge of carriers and Insurtech and other other companies?

Nick
Mm hmm.

David M
Yeah. Yeah, workers comp is fascinating. And if we just look at like, before we even get into second and third order, like what's happening right now. So what is that? We have a lot of businesses going under and commensurate with that a lot of people being laid off. So in the workers comp space, like what's the exposure base for workers comp...it's payroll, right. So like massive amounts of payroll are now going outside of the markets, we're going to have huge decreases in premium, which is not ideal. If you're an insurance company. Commensurately, your business, eventually you're going to have rehiring, right. Like we'll have a resurgence, hopefully, people are going to be brought back on. But also there's redeployment of skill sets. Anytime you have rehiring outside of recession or coming out of recession or redeployment of skill sets. Usually the employers are by virtue of the fact that they're hiring people, they're less talented at the job they're being hired for. And so you have claims go up. So you're going to have this this mix of things where we have, you know, a large decrease in workers comp premium. Once once things start getting better, you're going to have an increase in claims, coupled with the fact that, bonds are not really yielding the highest amounts and the stock isn't really generating returns, you're going to have these insurance companies being like, where are we going to get our money from? They're going to get their money from increasing rates, especially since like workers comp has consistently been going down year over year. Granted, like NCCI is really the controlling arm and where the rates go, but insurance companies can still follow LCNs and all that kind of stuff. So I didn't anticipate that second, third order like longer term, we're going to see workers comp rates go up, kind of make up for the decrease in premium the fact that they're not really getting much return and eventually the spike in claims but yeah, who knows, they could see such great loss experience over this period where no one's really doing anything that I don't think that's going to be the case because the premium audit will end up bringing the premium down significantly.

Nick
Well, you have so in a lot of cases, right, you have there's this transition to essential workers. Yeah. Yeah. Right. And so as, as you were talking, David, I started to imagine what if...we have extensive unemployment for a considerable period of time? Well, let's just let's just imagine like Great Depression level of unemployment, 20% range for an extended period of time. And, you know, there's already this political push to sort of give some benefits to these essential workers, more pay, etc, etc. What you're saying makes sense. What you would end up seeing is a lot of folks that have a particular skill, including selling themselves, deciding I need a job. I'm going to, you know, there are people hiring for these essential slots. I'm going to go fill one of those, even though I've never done that before they could be working. Yeah, it could be a work, warehouse, truck driver, things that they have never done before. Now. you know, the, we've had a very stable economy, stable, fairly stable rates of stable connection of lost costs to rates over time. And now that could be severed.

David M
Yep.

Nick
And we have, it's disjointed it, there's going to be a whole bunch of these things that are sort of going to be disjointed. Even if we have a U-recovery. It's going to be kind of broken for a while.

David M
Yeah. I mean, just look at it...It's like we have all these workers who are laid off right and so now they're going to be redeployed in the essential skill sets and I mean even look at things like even just look at almost a non essential but not as essential services that are now in high demand. Right? Everyone is doing improvements to their home, they're buying furniture, right? Like Wayfair went up by like 48%. Well, you're going to have more people who are going to go into like furniture manufacturing, I've never done it before, right? It's doing freelance work on these Home Services marketplaces, and it's gonna result in a different types of claims experience on the Workers Comp side. Yeah. It'll be interesting.

Nick
As a big push to go local. Yep. So you're right. Like I hadn't even connected those dots where if by chance, there's this disconnect from society where it's like, okay, you know, we've been aggregating in these big cities now there's going to be a, you know, emigration to, you know, the the rural areas of the country where all of a sudden people are going to become farmers??? and furniture makers?? There's like that, that it's I, maybe, maybe not. But it's if you said that a year ago, I would have laughed...now...yeah, like there there's actually a pathway where the folks that do farming or furniture making or you know, become artists or whatever, could increase by double digit percentages.

David M
Yeah.

Nick
That's how crazy this time is.

David M
Yeah. It Yeah, I mean, just looking at looking at the various things we're seeing just now about the areas that people are going into like what what people are demanding, like puzzles are through the roof. I literally cannot buy a puzzle, right? Right. But all this like we like to spend money and will spend money to keep themselves entertained and various things. So that's where the jobs are gonna go.

Nick
If, if Hollywood can't record, right, then there's going to be a need for people to be like Homemade Movies, you know? low low quality. But you know, there's Netflix is I think Netflix just tried to raise like a billion dollars of debt to invest in more content. I mean, that's their entire business model and so if if there's not like if Reese Witherspoon is not creating a new series, who's gonna do it?

David M
Yeah.

Lance P
What's the what's the sports equivalent of that, Nick? Are we gonna see, you know, backyard football being broadcast?

Nick
Well, they're already talking about games with no fans in the stadium, right? Yeah. You know, can you imagine an NFL game? Have you guys watched the NFL Draft?

Lance P
Yeah, I've seen it. I've seen a bit of it.

Nick
It was better than I thought it was gonna be.

David M
Yeah,

Nick
You know it. Roger Goodell is just an awkward dude. But outside of that they actually I thought they did a fairly good job I think you could see someone more content or entertainment around that sort of you know, recording/broadcasting you know kind of like this? How do we make this more entertaining? Well, Lance could turn around like actually like start bouncing a ball off a golf club and then giving it a whack and then it actually lands on the green.

Lance P
That's right.

Nick
So comps one area...auto. It it just seems inevitable that the work from home thing is going to take hold, It'll, it's gonna be it's a real thing. Right? So, what percentage of personal auto driving mileage will go down? I have not driven my car in like forever.

Lance P
I've it's probably been two months since I've had to get gas.

David M
Yeah, same.

Nick
Yeah. And if we did, it'd be like 50 cents a gallon.

David M
Yeah.

Lance P
Yeah, yeah. So it's like another line where exposures are going way down. And like you're saying, Nick, it might not just be a temporary shift. There's gonna be some permanence there. So yeah, if you're an auto carrier, what do you do? Like you were a year ago, you were worried about in the distant future of self driving cars and a need for auto insurance. And now we'd like fast forward several years, and we're seeing, you know, a much less reduced need for auto insurance.

Nick
Yeah, what's the size of the auto personal auto market? Like 280 billion?

David M
That's like, yeah,

Nick
Could it get down to under 200 billion under 150 billion? Like, could it could it be reduced by 50%?

David M
I mean, if things stay the way there are right now, Yes, right. Like we will have to dramatically reduce the loss cost because the exposure is just not there and no one's really driving. There's a ton there's so many other factors right like. so first like the exposure like how many miles were driving specifically but also just look at look at what's going on right now. Right We have 25 million people roughly who have filed for unemployment. A third of people miss their rent payments in March or April. And I'd imagine that you know, all this is impacting the private passenger auto people as well. It's a pretty hefty premium to pay. And so what you're going to have is you're going to have a large group of financially responsible people, who a bad instance has happened to them, that was fairly uncommon in their life, probably up to this point, who are probably good drivers, right. But now they're letting their car insurance lapse. Right and they may be suffering certain other financial responsibility hits on their credit. Well, look at every model that's out there on the private passenger auto side, Progressive Geico, everybody. It's all based off what? Like financial responsibility score, household make-up, lapses in your insurance. And now you're going to have all these good drivers coming coming into their data set, where it's like, oh, well, we got to reject all these guys, because they all have lapses. And they all have bad credit. No, these are good drivers. So like, the one who's going to win is going to be the guy who thinks about it beforehand, figures out how to monkey around with his model, so he's not rejecting these good drivers. That going to be super interesting.

Nick
So you have a background in auto, doing this, do the Progressives and the GEICOs to the world have it within them to to actually do this, my guess is given the size and given how, you know how much inertia has developed with their current system, that you know, it would take a lot I would take long time for them to decide. Okay, yeah, we should anticipate what you just described.

David M
Yeah, I think I think it'll stop there. Right. It'll be like we should anticipate what you described. But to your point. It may not make it passed those words. And I could be wrong. I don't have a lot of faith in their ability to move quickly with regard to this because they're huge, right, that will take an Act of Parliament. Um, but, you know, I to what we were talking about earlier, like, who has an advantage here like Insutechs or legacy, I think Insurtechs. Insurtechs have the ability to be very nimble and to make adjustments to underwriting and rating models and hopefully they'll, be able to take on these these good insureds even and really spot them finding them it's going to be difficult, but at least I think they'll be able to receive them in a way.

Nick
Didn't Metromile just like lay off like a quarter of their workforce?

David M
Yeah, they laid off 10 people.

Lance P
Yeah. You know, I think you'll see that from a lot of the Insurtech because they're trying to conserve capital...got 18 months of runway, how do I stretch that to 24? I haven't seen any layoffs Root yet.

Nick
They have

They've laid off?

Yes.

Lance P
Yeah. So it seems like everyone is bigger is having to make some cuts like that. But I think to David's point, you know, they're in better position to make changes and potentially grow in the coming months, because folks are going to go get an auto quote, when they need to drive again, and it's going to be two or three times what it was before, and they'll start looking around and maybe, you know, routes and more attractive off option at that point.

Nick
Yeah. Have you guys heard of Just Auto?

David M
No, I haven't heard of Just Auto

Nick
Yeah. So I just I just interviewed the CEO. So I think they're only in Arizona, but they're based out of Southern California. And I saw I interviewed him for this podcast and I brought that up, I brought it up, you know, your business models completely designed around telematics and mileage based pricing. And but now, nobody's driving. Isn't that a harm to your model? And he had the opposite feeling. He said, yeah, of course, you know, they drive less. It's less premium. He's like, but it's also a fewer claims. And he, he sort of described it as a, you know, social function, what he's doing that...to your point, Lance, once they, once folks start coming back, they, they may not want traditional auto insurance, there may be more working from home and they might be more open to mileage based rating. And so he's sort of positioning himself and the company in that regard in that this will be the one that you know Metromile and Root have not really succeed because they try to implement mileage based into a traditional auto model and his/their entire text platform is based off of mileage base. That is how they charge and they actually charge by the month, so month by month as you drive your balance is going up and down. So it's a it's a completely different model. I'll share some info with you guys on that later. But it's that opportunity right like the State Farms of the world could never do execute on this. Oh no, but a startup that has a little bit of runway has has the ability to to execute on it because there are fewer obstacles in their way.

David M
But in like you said State Farm also the fact that I do not want to be disparaging against independent agents, like agents are fantastic. They do an amazing job. That Just simply because the fact that we're having this social distancing is an impediment to how they conduct business, right, like at this point and going forward, there is going to be some hesitancy, right, of people going into someone's office to get auto insurance especially or any insurance especially when you can do it right from your computer. So I imagine this will probably accelerate the number of people who are going to be shopping online for insurance and couple that with the fact that like the people who are shopping probably had a lapse or something and they're going to get hit from all the other bad guys who the Insurtechs will be right there ready to take them especially guys who are doing true mileage based.

Lance P
Yeah, any any business with physical space these days. It's like a serious liability. So it's interesting thing about if you have, you know, if you're a carrier and there's tons and tons of offices, you know, if you've got a captive agency or even, you know, you have a big agency has offices around the country. People aren't going there. So they're just sitting there empty. And, you know, that's will be temporary. I think we may be at a future two years from now, when people do go back to the office, people are at Starbucks, we don't know how long that's going to be. But for the short term, it's it's a liability to have physical space/physical presence.

Nick
In both in both ways, right? A liability to your business model, but also a liability, like a legal liability. Yeah. You know, for sure, right. For your employees, and for others, if one of your employees gets a customer or someone who comes in sick.

Lance P
Yeah, that's right.

Nick
Why were you open? So it's something I was thinking about this morning, I I wanted to tweet about it, but I want to have this conversation first and kind of think about it a little bit more which is there's a lot of lawsuits to the P&C carriers to cover this for business interruption. Now, you're already starting to see Arch, AXA, a couple others have already said there will be a financial consequence. So a lot of these companies, I think, see the writing on the wall and are kind of going through their policies and saying listen, anything that's ambiguous we have to it's not worth the core costs for this so let's kind of pay this out. So I think Arch had a 100 million dollar, they're going to add 100 billion dollars to their reserves to accommodate this. So how do you guys think this is gonna play out?

David M
That one's tough. So post SARS...most insurance companies added the pandemic exclusion, so communicable diseases, exclusion to all policies associated with this. And because we saw what happened into insurance companies over in Asia. It wrecked them. It was a it was a serious, serious thing. And we knew that like, we can't cover this, and we were the exclusion is very specific. It's right there on the policy. But thing is like no one really reads the policy. Right. And now we're at this point where we had this big pandemic, and people were talking about like, well, what are we going to do? Do we..or are the states going to make this retroactive liability for insurance companies? And if if they do, that's going to be tough, like it's one thing to just like, pay it out, right? Like just say, all right, well, we'll cover you but if they expect to just have this built into the insurance policy going forward, it's gonna it'll raise rates significantly.

Nick
Has to!

Lance P
There's already been pandemic you know, coverage out there was so expensive that no one would buy it. But I think that's the and you know, businesses if they were honest, he said, hey, we can add this to your policy for $25,000 a year. Do you want it? No one would would take it. So I agree, you know, we can't, it's not gonna gonna get added. And yes, if the government goes too far, it's state insurance commissioners go too far, there's going to be another bailout on their hands. Because, yeah, carriers won't make it through it.

David M
We kind of had this happen in not at this scale. But we kind of had this happen post 911, right. We had terrorism exclusions on all these policies. And then after that, the United States at a federal level basically said, like, we've got to do something, we have to have some type of pot over here that's gonna pay out if a terrorist event happens, but to protect these businesses, and so we had TRIA (terrorism insurance) introduced so it's actually 3% on all premiums, and that that may be a way going forward. Maybe some type of pandemic fund at a federal level, but I have no idea if that's actually going to happen. We'll see.

Nick
Yeah, so that that brings up the other point, which is where, where I was kind of imagining this going is, if I were an attorney, I would push for my clients to get the declination letter as soon as possible. I think there might be a bigger pot going after the brokers.

David M
E&O exposure?

Nick
Yes.

David M
Yeah.

Nick
I think it because you don't have to prove the exclusion. Yeah, all you have to prove is that like this was never even offered to me.

David M
Yeah.

Nick
Right. Like Lance what you just said it was it wasn't even offered to me. Therefore, it's the brokers fault that I don't have they were not the trusted advisor that I thought they were. I think that's an easier hurdle to jump over.

David M
Maybe it's, there's there's some idea of like, the amount of like care and diligence that they put into it and since like, it was ubiquitous, like everyone did it. Maybe except for like the risk manager Wimbledon. I'm sure you saw that. But yeah. Maybe that could get But to your point, like it's going to be jury based, right? And these guys are just going to probably lambblast the agents and insurance companies and make them pay. That's what happens a lot of times.

Nick
Yeah. Either way, it now opens up a, you know, Pandora's box around how agents and brokers need to behave and, you know, what else are we not trying to sell, that we should be selling that you know, Meteor coverage? Yeah, right. You know, like, honestly, you know, we live in the United States, you really don't have to worry about this too much except in the Pacific Northwest, but like, volcanic eruption coverage, although that's I think that's in most property policies. There's a gonna be a complete reevaluation of this and one of the things I think is like really interesting since Lance you have, you know, actuarial experience on the on the life side, just with with your degree. Life Insurance stocks took a beating, when this when the pandemic first came, we have slashed by more than 50%. And, ironically, net net, there may not be any new additional deaths this year because of the number of car accidents have gone down. You know, aside from is did they actually die from this from COVID-19. But let's assume they didn't like bucket flus and stuff like that this, the shelter in place would automatically reduce other viral infections, right. And so like the one insurance arena that you thought might really take it on the chin and really suffer, may actually come out...and and Lance, was it your your white paper on the on the Spanish flu...wasn't that the like the impetus for the life insurance industry of the 20th century?

Lance P
Yeah, there's a lot of growth because of that. And anecdotally, I've heard from carriers in the life world, too. They've seen applications go up because of this, you know, folks are having that conversation, should we buy life insurance? And so there are more policies and like you say, a lot of the deaths are occurring to people who are older, who were sicker, who likely weren't covered, you know, or it was kind of expected that they would die in the next few years, too. So yeah, I completely agree. A lot of that a lot of the beating. You know, David made a point earlier that, that just the, the conditions in the market are not favorable for life insurance, part of the way insurers make money is take that premium you give them and invest them in, you know, typically bonds and fixed income assets, and so not a lot of yield there. So that's the other thing that's kind of hampering carriers from making money these days is the financial market.

Nick
David?

David M
Oh, no, I agree completely. I think we're gonna see a huge volume spike in the life insurance space. And to Lance's point, the people who are mainly dying are 65 Plus, and most of them don't necessarily have life insurance. So

Nick
it was expected, you know, there the the life tables were like, Okay, well, there's not a lot of years left in this anyways. So, yeah,

Lance P
yeah. And then and then if you write annuities too, you end up actually in a better position because the risk for annuities is longevity. And so it's older people that are living a lot longer than you'd expected. And so there could be, you know, some small some small pickup there. Yeah. For annuity carriers.

Nick
Yeah. So that I wanted to kind of transition a little bit this is not specific to Life, but the May contract for oil went negative. Yeah, I don't know if you guys saw that. Yes. So there were people desperately paying others to not deliver, like I bought this oil contract, but I will actually pay you to not show up with it in a tanker with the oil. So what was interesting about that and where the insurance tie-in is with interest rates. So we've seen it in Europe and other parts of the world where there are negative interest rates where you're actually pay your bank/pay your government to hold your money. I am not I can't even fathom what what does that what does a negative interest rate do to, I know life insurance is really sensitive to interest rates, but they're all investing in something. What is the negative interest rate due to pricing, capacity, business models and insurance.

David M
The short answer is it increases the rate...because they're not gonna make the money off of the money they're investing in, so they're gonna make it off the customer. So they've either got to figure out how to reduce expenses, right? Like he can either keep the rate the same and reduce the expenses, they can reduce the expected losses, arguably, like passenger auto, the expected losses are going to be reduced in the future, right? reduce the expenses, reduce expected losses, or you just increase the rate. Those are those are really your options.

Lance P
Yeah, I mean, I think it's, you know, it's not good, right? The thing that I think I'm holding intention here is this phrase that this too shall pass, but at some point down the road, we'll, we'll feel like okay, we're back to some sense of normal, some new normal, some next normal, whatever term we want to, we want to call that but in the short term, whether that's next three months, the next two years, we're in store for some bumps, you know, there's all these dynamics we're talking about, and we haven't mentioned too Many things he had on this podcast that are good news. It because...

Nick
Well there's so much uncertainty, right? It's like we don't know, right going into a time. You know, there have been plagues before. And they've disrupted things. But this is the first plague in modern environment. I remember reading, I read a tweet that said, Could you imagine this occurring like 20 years ago? pre internet?

Yeah. You know, like, yeah. What would you do? How would information get spread? Like it's, maybe we're almost fortunate that it happened. When it happened, then we have the ability to work from home and do a a, you know, get content so we're not, you know, having to carve out our own puzzles out of cardboard.

Well, you know?

David M
If I can't get I can't get a puzzle pretty soon I'll be I'll be doing that myself.

Lance P
I'll ship you one we have David.

David M
All right.

Nick
Another little financial twist that I read yesterday as well, which is, Black Scholes option model for options, which is used in the derivatives trading to hedge certain things cannot accept negative interest rate values. So you have bankers and others who are desperately looking for other option models that can handle that. Like it, all of these small nuances that are just throwing it's one it's death by 1000 stings, you know, like, we're just getting one little curveball after another like, Oh, we never anticipated that.

Lance P
Right.

David M
Yeah. So what this kind of gets into like, every lot of what we've built today is just like, data goes into the machine. We learn from it. We put out a number by and what we're seeing is like We now have this black swan event, this huge anomaly, right? That is feeding data. And it's impacting all these various areas. So we're getting unique types of unique different types of data into these into these machines. And it's been nothing's we don't really understand. And this is, this is interesting from two perspectives. So first off, it's going to make us like reevaluate how we use these, these tools, which that'll be interesting. But the the kind of negative side is, as we've been, like fighting against, especially in like legacy insurance, fighting against the use of like, insurance as an art. And Lance, you probably know this and like trend selection and all this other nonsense, right? Like how you set rates by these actuaries, and product managers. It's like, well, this trend could either be here or here and it makes the rate either go to like a plus 15 or like a minus three. And now we have this giant anomaly that's going to be coming I mean, into these systems, I have a feeling it's going to push things back about 15 years to the age of insurance as an art. And this is going to create more underwriting cycles in the future, except for the ones you know, like, like Berkshire companies who do a really good job of like, being systematic rather than subjective with with what they have. Yeah, exactly.

Nick
I think that's an opportunity. Yeah. I, you know, like it's, I look at it, there was, you know, there's huge advantage for some of some of these firms with a lot, you know, a lot of assets a lot of capital. And, you know, I think for the most part, you know, State Farm went considerable period of time where they were either on the underwriting side they were either breaking even or losing money, but they were making it making it up on their float. So because of the size of the the personal automobile. Get, you know 280 $300 billion of annual premium. You know, that's what Warren Buffett's in it for, you know, he's not in it for the gigantic underwriting profit because that doesn't exist in auto. He's in it to get cash to then invest in other things and the model is going to get flipped upside down. And you know, I've seen it in the property market where because I spend most of my time in Nat Cat, you can't go after the premium. You always blow up. If you go after the premium, you have to find the niche. There's no there's no net that you can throw over something, say I want all of that. That doesn't exist. And I think we're going to start seeing that in a lot of these different areas. But where to your point, David, it's beyond just the rate making, like the the select the risk selection. Yeah. Like now with a magnifying glass instead. Have we want everyone in the zip code? Do we? Yeah. You know?

David M
Yeah. Yeah. So

Nick
Anyways, brave new world. Thanks, guys. This was this was really geeky. I felt like we could I felt like we could get more geeky on it. But this was, uh, this is interesting. It got me got me really thinking.

David M
This was super fun. Good. Good to talk insurance with a couple of insurance veterans. It's always nice to do on a Saturday.

Lance P
Yeah, like I said, Nick, there's probably two hours more of everything we could we could take on, you know, what's gonna happen with the world?

Nick
Yeah. You know, it might be fun and interesting, rather than like a question/answer and have this is

maybe a hackathon, right? Like, we get a bunch of us folks, and we sort of go go through a product design on what this might mean. And so how have the you know the actuaries who can provide some analytical mathematical muscle and some others and we'll get some claims people and we could sort of hack together a new entity that will rise like a phoenix out of I don't know. I honestly I when, as this event has unfolded, I can't help but think when the ninth 1994 Northridge Northridge earthquake occurred in Los Angeles, and the earthquake market in the property market in California was like vanishing. Yeah, right. And so the state of California decided to create the California Earthquake earthquake authority to provide some stability to the market in some earthquake capacity. And Warren Buffett stepped forward and wrote a billion dollar the first billion dollar policy limit he wrote a billion dollars of reinsurance coverage on that, and he got paid $400 million.

David M
I learned about it.

Nick
Right for a for an event. I may I may be wrong with a 400 million I might actually be confusing that with the billion dollar coverage he wrote for the Sears Tower after 9/11 Oh, yeah. Either way, he's always stepped forward after these events. When there's blood in the streets, he's always stepped forward and got these absolutely ridiculous rates online. And I'm thinking for a really smart ensure I would be open to offering event cancellation coverage where you know, your maximum exposure, and you know, for like a million dollars in coverage, someone might give you 100 $200,000 a premium.

David M
Yep. If you're not going to count out to the underwriting cycle. This is when you're going to make tons of money, right like Price adequately all the time consistently, don't go off this genda Don't Don't tell me what they're gonna do. That also means if you're going to make hay now, you've also got to be willing to give up when the cycle turns out, right. And everyone's just giving away. Right, right. It's, it's, it's a disciplined approach, and it's one that everyone wants to do when there's, you know, time to make money in these crazy times. Of course, you'd have to, you have to be kind of willing to run into the fire when everyone's running out. And, thankfully, Warren Buffett has a pretty nice cash cushion to be able to do that.

Nick
Yeah. Awesome. Let's pick it up again.

David M
Cool. Okay.

Nick
All right to everyone watching Lance, David. Thank you.

Lance & David
Yep. Thanks, Nick. enjoyed it.