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Uber Insurance, Fair Risk Distribution, Political Correctness, American Politics

Posted By Thom Young, March 29, 2016

Uber Isn’t Above the Law

It wouldn’t be a blog without some comment about Uber. As I’ve often indicated in the past, the laws regarding the operation and use of livery vehicles in urban areas clearly define vehicles for hire. While many have repeatedly referred to the unique manner in which the Uber ride-sharing works, it is a taxi service by another name with unlicensed individuals and automobiles operating outside of the current rules. Recently in several Canadian jurisdictions, and of particular note to us in Edmonton and Calgary, the municipal authorities have bent over backwards to somehow accommodate the Uber approach to moving people around for a fee. In each case, they’ve attempted to change the rules not only to allow Uber to operate but also to ensure that it operates with the same standards of equipment, driving experience, and insurance as taxi companies. These equivalencies have proven to remove the Uber advantage, though they haven’t seemed to deter Uber from operating (even though Uber has claimed to have removed itself from some jurisdictions). The result has been urban sting operations run by bylaw enforcement officers and an increase in the number of people being charged for operating a taxi service without a license. While the fight isn’t over yet, the more things change, the more they seem to remain the same.

Ensure you let your clients know that the insurance restrictions on the use of their private-passenger vehicles do not allow them to operate as vehicles for hire. They need to know that doing so will place their coverage at risk in the event of an accident, and their material misrepresentation in the use of their vehicle on the application will probably make them a poor risk from then on. Stay tuned, this discussion isn’t over.

Fair and Equitable Distribution of Risk

Modern technology continues to improve risk selection in every facet of the insurance industry. In the life and group benefits side of our business, the ability to analyze the predisposition of an individual to incur a certain kind of medical event that influences morbidity (disability) or mortality (death) has reached the point that the percentile of accuracy for some things is approaching 100%. In our industry, risk selection is a primary component in the competitive success of our product pricing. If a potential claim can be avoided in the company’s underwritten pool, then the members of that group (the insureds) benefit through lower premiums and the managers of the pool (the insurers) benefit through better returns on capital invested to sustain the group. What appears to be a win-win situation at first glance is, however, more complicated for those who form the group with a certainty of a claim. These people become uninsured or are pooled with higher risk insureds and create the opposite effect on the performance of those pools. Higher premiums occur for the insureds and lower returns for the insurers.

For insurance to work, the transference of claims cost to the group has to occur in a fair manner. While many may dismiss ethical concerns from the risk-selection process, the sharing of claims costs for high risk groups has beneficial attributes in the normal marketplace. Automobile insurance is a particularly good example in which those with very poor driving records are still able to obtain at least the statutory insurance coverage necessary to operate a motor vehicle on public highways through a pooling of high risk drivers in the Facility. All insurers operating in the jurisdiction participate in the pooling and subsidize it with capital and cash contributions. Of course, they also share in the distribution of any excesses that occur. This pooling ensures that everyone can get insurance. Without a facility association for Life, Group benefits, or Property and Casualty coverages, it is possible to become uninsurable for these classes of coverage. The industry has no requirement to serve the public should individuals be identified as “high risk” for any reason.

Apart from the government-mandated catch-all that the Facility provides to ensure that everyone who is legally required to have insurance can obtain it, the highly regulated automobile insurance structure also defines the nature of the groups that people are put into for premium calculations. Within reason, automobile insurers can select who they wish to insure, but they cannot reject providing coverages to people who qualify for the posted classes or create rates based on new criteria and information outside of the rating parameters set out in the regulations. When auto insurers start to use new criteria to select risks without getting the criteria approved, the regulator gets quite annoyed and, as we saw in Alberta, will implement reforms to ensure the public isn’t unfairly selected against in the underwriting process.

My original intent in this story was to point out once again that underwriting predictions are increasing in accuracy due to the ability to analyze the data and define the insureds into increasingly selective groups based on predictions of loss. This accuracy is great for making profitable inroads in the marketplace. Being able to select those who have a lower predictive chance to have a claim creates a huge competitive advantage in the marketplace. The trouble is that the service of insurance is about covering claims, not about avoiding claims or avoiding the people who are likely to incur claims. If data defines those who will not have claims to the extent that the risks are almost certain, risk management procedures will remove many individuals from the insurance pools. This loss in premiums increases the loss ratios. The end result is increased premiums for those who are going to have claims. Far too often, the underwriters believe their goal is to eliminate claims through selection. However, the insurance process only works when enough money is charged to pay for our costs of doing business, including a fair return on investment to our shareholders and paying the claims incurred by the people we insure. Finding the average risk is the purpose of underwriting, not identifying the lowest risk. Without the good risks contributing to the pool, the price of the coverage becomes unobtainable, and without the bad risks driving claims against the pool, the need for coverage at all becomes debatable. Balancing insurance pools with these competing realities is going to become harder and harder as our technology allows us to select the risks without consideration of the average.

Clear as mud?

Politically Correct?

How many differing opinions can dance around the point of a pin without offending the dancers? I’m a big fan of a pluralistic perspective. In terms of social decency, that means you’re welcome to your thoughts and I’m welcome to my thoughts. While my tolerance of your perspective isn’t required, my respect for your right to them is.

The term “politically correct” has been attributed to a number of sources. Most recently an email has been circulating referencing discussions between President Harry S. Truman and General George McArthur using the term in organizing the surrender of Japan to the Allied Powers at the end of WWII. Like most of those stories, this one is untrue and puts General McArthur in a poor light. The history books show McArthur was more concerned and aware of the cultural issues in those negotiations than anyone. Wikipedia documents the use of the term in English writings from the 16th century: “In 1793, the term ‘politically correct’ appeared in a U.S. Supreme Court judgment of a political lawsuit. The term also had occasional use in other English-speaking countries. The term probably entered use in the United Kingdom around 1975.”

My issue with the manner in which the term is most often used is that it suggests that being polite and respectful to others who hold different views on any number of topics is a fault or imposition. These disparaging implications suggest, “I’m being civil and respectful only because the majority considers it necessary, not because I am.” That’s quite a disingenuous point of view, isn’t it?

Certainly, we don’t all have to agree on everything and hold utopian ideals. Vigorous debate and discussion with elevated passion and even vitriol enlarges our minds. In the end though, after both perspectives are presented, we need to go our own way respectfully hoping that others will join us and agreeing to disagree!

The American silly season is in full swing. Sanity seems to have been set aside in that political contest, especially on the conservative side of the aisles. Somehow attacking the premise of being politically correct has become equated with an attack on flawed ideology. Making outrageous statements against people based on their heritage, culture, gender, and other preferences seems to be garnering support from the body politic within the conservative movement. Suspending human rights and violating international treaties that govern proper behaviour in conflicts all appear to be getting a majority of support and are reported on particularly by the conservative media as the new way of doing things.

Clearly, only part of the story is being told here. As usual, the more outrageous the news, the more it gets played for our attention. In reality, the majority of people continue to believe that being correct is more about proper behaviour than it is about political interaction. As we will soon see the American contest of wills on the political front come to a four-year conclusion this November, the success of a politics of bigotry, hatred, and fear will become evident in the outcome. I’ve little doubt that the winners will be more inclined to favour the pluralistic view than what we’re hearing in the press these days. As a long-time conservative, I am hopeful that I can wear that moniker without being compared to the nuts that claim to speak for us.

In Closing

The Easter weekend is almost over. Running my own family resort has been fun this year but, I must say, busy and a little stressful. Spring break always has been like that for us though. I hope the Ishtar bunny brought you many treats and that you enjoyed the holiday from whatever perspective brings you joy. I am now going hiking on the Apache trail!

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.

 

Tags:  data management  ethics  Facility Association  group benefits  insurance regulation  life insurance  livery business  politically correct  ride sharing  risk distribution  risk management  statutory coverage  taxi regulations  Uber 

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Troublesome Flood Coverage, Uber Legislation without Industry Backup, Mark Prefontaine Seconded, Blog Activity

Posted By Thom Young (Full first name: Thomas Clifford John), February 22, 2016

Troublesome Flood Coverage?

The introduction of another company’s coverage for overland water (used to be called flood) leaves me underwhelmed with the industry’s attempts to meet the needs of our customers adequately. The underwriting of these products seems limited only to those who are outside of the red zones demarcating high risk for overland water damage. Since the number of insurers even willing to provide this coverage remains minimal, adverse selection will likely favour those who don’t get on the bandwagon. Only those who live where the flood risk is the highest will want to purchase the coverage. Those who don’t live in those zones won’t want to share the cost for claims and return on equity through their premiums and will seek another provider. Well, we’ve been here before, and history repeats itself.

A recent article in Canadian Underwriter magazine sums up a lot of the data being developed to map the risk of flood coverage in Canada. While the accuracy of the models in use can be easily challenged, data management, even with suspect data, is the baseline necessary to determine an actuarial model of rate. As I’m often reminded when I think of those very difficult classes in statistical analysis that I endured way back in the day, even poor data enables easier adjustments in the equation than hypothetical estimations. Although all actuarial prediction is really hypothetical, I know several actuaries who will spend tremendous energy vigorously arguing the scientific merits of their predictions, even when the historical accuracy is different. Such is the mystic nature of number manipulation. Regardless, the data from the research shows that "20% of Canadian [households] could be qualified as high risk, based on our metrics and about 10% of those would be considered very high risk and that's about 1.8 million households." That percentage implies 18 million households and numbers that should lend themselves well to actuarial predictions on the average loses per household from flood. If the actuarial mapping results in the application of a proper rate for these risks, then the competitive contest for these risks will have a proper outcome. If not, then little interest will be generated for continuing to provide coverage for this peril, and we’ll be back where we began.

Of course, identifying the risk exposure is the first part of the process. Knowing that 1.8 million homes are at an ultrahigh exposure to the peril won’t be very helpful until the frequency of loss is determined. In reality, we have no records for most of North America that are relevant for losses of any type over 150 years old. Forest fires, flood, and earthquakes that occurred over 100 years ago had little consequence to any large group of people simply due to the demographics of that historical era. If 10% of the dwellings in Canada incurred such a loss in any calendar year, people would clearly be concerned about the availability of coverage in Canada, but that’s not the way catastrophic losses work. Flood losses usually occur in a small localized area on an infrequent basis. We toss around terms like 100-year, 500-year, and 1000-year floods as if they have meaning when, in fact, these descriptions are only an excuse for the lack of mitigation efforts.

I still believe that flood coverage needs some form of statutory basic wording so that the competition between the insurers is based on risk selection and premium, rather than on limiting the coverage through different definitions of the peril. As brokers, we should not be forced to present our solutions to the clients based on the shortcomings of one company over another in the definition of the insured peril. That process is confusing to the public, fraught with errors and omissions exposures for each of us, and goes against the principles by which we currently manage the competition between our insurers. When the choices go beyond the cost and drill down into the wordings, how do you assure clients that what you are giving them the best option in the market? How do you know which company has the most comprehensive coverage when you have no access to its wordings? When we present options to our customers, will we have to provide a disclaimer that “better coverage may be out there, but this proposal is the best I can do?”

Some may say that forcing statutory wording upon the insurers is unfair and that a residual risk-sharing facility could allow those companies that prefer an alternative wording to cede their risks into a pool. Australia and England follow this practice to provide an even playing field in the market for these coverages. In these jurisdictions, the capital necessary to backstop these losses comes from government guarantees that insure neutral charges to the insurers. Strangely enough, the losses in these pools have been manageable and have produced positive cash flow. Stability appears to have some advantages over time.

The efficacy of flood coverage in Alberta will not be tested until the next significant flood event. I, like most observers in our industry, will be watching closely to see if this recent private-corporate response will mitigate the amount of money our governments end up throwing at these losses. Whether the premiums for the coverage produce underwriting surpluses or deficits will also be interesting to see. Time will tell.

As I reflect on the review of yet another “new” overland water endorsement and attempt to determine what makes it better or worse than the other three I’ve looked at, I’ll close this discussion today by once again pointing out that I’m not alone in my continued insistence that consistency is preferable to total confusion. We need more industry leaders calling for an agreeable wording that sets a baseline for overland flood coverage and standardizes the coverage. While supporting the need for consistency, Philip Cook, CEO of Omega Insurance Holdings Inc., suggests another approach to consider—developing catastrophe coverage that would respond to a variety of catastrophic losses.

Municipal Uber Legislation without Industry Backup

Many articles have appeared in the press about the municipal legislation that Edmonton City Council passed to address this new (old) form of ride sharing, and most of them are touting it as the new model for municipalities across the country to address the issue in their locations. The legislation didn’t make everyone happy and was particularly unpopular with the taxi owners and drivers who see this new entrant into the livery business as direct competition to them in their highly regulated and access-regulated marketplace. Still, it was an attempt to find a compromise that addresses the reality that Uber is here to stay, and ignoring it or waiting for it to go away is not likely going to change that. The legislation requires Uber drivers to match the level of insurance protection that is in place for the traditional taxi industry. While the model seems to resolve a number of issues, it unfortunately fails to address the fact that the insurance industry has yet to introduce the new coverage products. So far, I’ve seen one company announce that a new product is coming, but I’ve seen no information yet as to what it will look like or cost, or when it will be actually available. Some companies have tightened their underwriting procedures and included questions that specifically ask if customers are using their vehicles for ride sharing, while others are polling clients on renewal for confirmation of their current use. Meanwhile at the regulatory level, no changes have been made to the SPF 1 in Alberta (or elsewhere) regarding ride sharing of any sort, the SEF 6 has not been modified to allow for Uber-like exposures and rating, and no additional endorsements regarding ride sharing have been created. Under the automobile regulatory regime, any such changes would have to be approved by the Superintendent of Insurance in Alberta for use, and, as far as I am aware, nothing is pending on these.

While the Edmonton municipal authorities have addressed the problem, everything else remains in limbo pending the application of the insurers for new tools and the approval of the regulator for their use. So, despite all the optimistic articles on this topic, nothing has changed so far.

If anyone has anything new to share on this issue, I’d be happy to hear about it.

Mark Prefontaine Seconded

Speaking of the regulator, did you know that our current Superintendent of Insurance, Mark Prefontaine, has taken a new temporary role within the finance ministry? While our government has made no official announcement as yet, the following memo about Mark was posted on the Pension Information page in the Alberta Treasury Board and Finance website:

Effective January 11, 2016, Mark Prefontaine will be taking a one year secondment within Alberta Treasury Board and Finance as Senior Assistant Deputy Minister. Mark will be working closely with the Deputy Minister and will be responsible for  key organizational strategies and will oversee and manage special projects and priorities spanning across government, the department and multiple divisions of Treasury Board and Finance.

Please be advised that Nilam Jetha (see bio) will be the Acting Assistant Deputy Minister of Financial Sector Regulation and Policy (FSRP), and also the Superintendent of Pensions, Insurance, and Financial Institutions. Nilam has been with FSRP for the past two years in a project management capacity, and brings over 25 years of Government of Alberta leadership experience to the role.

I suspect that in due course additional information will be distributed. However, I would have expected/appreciated a more widely spread official government message assuring us all of continued stability in the regulation of our volatile industry. In a memo on February 18, 2016, George Hodgson assured us that IBAA will continue to have a good working relationship with the Superintendent’s office, that he has met with Ms. Jetha, and that Mark will assist her throughout the transition. That message may help quell uncertainty among IBAA members, but the transition affects more than those in the association. Official reassurance from the government that the course of the department will remain steady should be a priority.

In Closing

As I sit here in Playa del Carmen looking out over the pool and the beach, I’m reminded in the top right corner of my computer that the weather in High River is less than 10 degrees off of what we’re enjoying here. The pool is likely cooler though!

We could use some more subscriptions to this blog. The distribution list (while rising) has deteriorated substantially since we made it necessary to get to the website to view it. Please let your staff know that it is still being produced and easily available. Website interaction on any of the issues I’m going on about is also lacking. I’d very much like this blog to initiate a dialogue with several people on some of these points. Come on, folks. Give it a try!

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.

 

Tags:  catastrophic risk  E&O  livery business  Mark Prefontaine  Nilam Jetha  overland flood insurance  ride sharing  SPF 1  statutory coverage  Superintendent of Insurance  Uber  Young's Stuff subscription 

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Uber Confusion

Posted By Thom Young, August 27, 2015
Holidays continue to cut into the production schedule. Attempts to get this done have been made in four provinces and one other country. Thank you for your patience.

Uber? This innocuous Germanic word is one of those strange ones that can mean a number of different things depending of the turn of the phrase. Loosely meaning about, over, or even better depending on the inflection or context of the phrase it is used in, it has made its way into the English language as a noun referencing several different business enterprises. From our insurance perspective, it means confusion on automobile coverages for people involved in a ride-sharing program. In its simplest form, a ride-sharing program hooks you up with people who share the cost of a trip to a common destination. The Uber phone app simplifies the contact process and makes it immediate. Confusion arises, however, with the commercial aspect: a person with a perfectly good automobile and some free time can offer Uber services at a fee, which makes it a livery business with driving services and automobiles for hire.

The structure of the modern taxi business has evolved from a chaotic free for all. In the beginning, drivers with a horse and buggy could cruise the streets of a town or village offering rides for a fee to whomever they wished at whatever rate they wished. Following pure capitalist form, at busy times rides cost more than when the demand was limited or when the competition was intense, and equipment standards and driver qualifications were virtually irrelevant. The term caveat emptor (buyer beware) certainly applied as customers had no assurance whatsoever that their interests were being protected, and they were often injured in person or in pocket by the services offered.

The public was not very well served, and the industry had quite a reputation for both taking advantage of their customers and caring next to nothing about their safety. Additionally, the industry was rife with graft and crime—routes and stops were often controlled by organized criminals who ran a protection racket skimming money from even the most honest hack. Because of this reality, the taxi business became and still is a highly regulated and intensely supervised business. Rules cover everything from the condition of the vehicle to the kinds of insurance needed to operate a taxi. Further, becoming a taxi operator requires a fairly large investment of capital to obtain first a license and then a vehicle. It’s not hard to imagine why the taxi business is up in arms about wide-open competition from a group of independent, unregulated, and unsupervised operators who have none of the regulatory expenses to deal with and can cherry pick the best locations and clients with a technological advantage. Those of us who participate in our highly regulated industry should be a little understanding of how unfair this discrepancy is to the honest hard-working cab drivers.

Considerable evidence is mounting that people providing and taking ride-sharing services through Uber are not properly insured. Public liability coverage is a bit of a grey area as Uber does purport to provide some form of overlapping coverage for those who participate. While I have looked at the wording, I’m not prepared to make a committed statement to either its adequacy or inadequacy until someone challenges it before the courts and the Canadian judiciary weights in on the scope of coverage. I do know from my cursory review that there are enough potential gaps to drive a cab through. Certainly, the statutory conditions in the owner’s SPF 1 would preclude any payment for physical damage incurred by a vehicle in this service. The conditions involve two issues of disclosure and change of use and touch on a specific exclusion. No coverage would apply outside of the statute coverages for the third party under section A and occupants under section B, and the owner would be liable for reimbursement if these coverages were triggered under the statute.

Many of us have had a number of clients approach us over the past couple of months about their coverage when providing this service. No doubt, we all have been clearly conveying the short comings of their policy for this ride-sharing service and clearly warned them about the possible consequences of losses that might occur. If you’ve been unclear or vague on the topic, you should rethink your position. The Superintendent of Insurance offices have circulated a memorandum to all General insurance license holders on what they feel are the short comings of both the personal coverage for the undisclosed use of a vehicle in the Uber program and the apparent short comings they see in the much-vaunted insurance coverage that Uber claims will protect the service providers. We’ve already seen a number losses in which people who have been participating in the Uber program found themselves uninsured for their own physical losses and in doubt about the limits of coverage for third parties.

These stories have recently made their way into the industry press and supplement the frequent news coverage of cab drivers’ angst over the encroachment of the Uber system on the taxi market and the discord amongst civic authorities on Uber’s interference in the regulation of the livery business. Uber is certainly here to stay. If the regulatory authorities want to reign in the effects of Uber’s disruption of regulations and lack of insurance protection for all participants in the Uber process, they need new legislated tools to do so. The regulatory authorities need to quit whining about the change and respond to it. Municipal and provincial entities need to produce new enforceable regulations and begin policing them. As a broker, I’ve got nothing but bad news for my customers about their personal insurance coverage and really little in the way of reasonable options to present my clients if they want to obtain coverage for this exposure! On top of that, my clients are being told by Uber not to worry because they are covered by its policy, a statement we know to be untrue!

Remember when all we had to worry about was our clients delivering pizza with their private passenger insurance coverage?


That’s all for this week—from Manitoba, Mexico, Saskatchewan, Alberta, and BC. Follow the bouncing ball!


The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.

Tags:  livery business  public liability  ride sharing  SPF 1  statutory coverage  taxi fees  taxi regulations  third-party liability  Uber 

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