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Technology, Risk and Insurance

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Technology means more than computers, and biotechnology is making a big impact ... 96 means the first of April, 1996 - more colloquially known as 'April Fools' Day' ... – PowerPoint PPT presentation

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Title: Technology, Risk and Insurance


1
Technology, Risk and Insurance
  • Technology means more than computers, and
    biotechnology is making a big impact on
    insurance, and so are other kinds of technologies

2
Major developments
  • On the computer front This is a well talked
    about area but all aspects of risk management are
    never explicitly explored
  • Biotechnology Genetic engineering can
    potentially transform life/health business
  • Applied mathematics of securitization
    repackaging risks
  • Note These developments bring their own problems
    with them

3
Computer revolution
  • Tofflers view of three revolutions
  • Agriculture Development led to settlement and
    tremendous growth of stationary population
  • Industrial Revolution Industrial development
    transformed civilization
  • Electronic technologies Computing and
    telecommunication will have profound social and
    political implications

4
Insurance and technology
  • Changes in corporate strategy
  • Services strategy which allows decision making to
    move closer to customers
  • from head office to field office
  • from centralized to decentralized (autonomy)
  • Already it has transformed the reinsurance
    business around the world
  • Capital is very mobile via technology

5
Distribution channels
  • Internet as a distribution channel
  • For many companies, it is becoming another
    distribution channel
  • Banks are offering financial services via
    internet
  • They already had great success with telephone
    banking and the ATM
  • Increases efficiency and reduces cost of
    providing service (customers benefit)

6
Insurance Applications
  • Four areas
  • general communications
  • product pricing
  • agent support
  • direct sales

7
General communication
  • coordinated program or campaign to build
    awareness and build image with consumers
  • insurance businesses already have them in
    newspaper, radio and TV advertisements
  • internet will provide another channel, and in
    time, the biggest channel of communication
  • Why?

8
General communication
  • The Internet is a great medium for providing much
    more product detail and more current product
    detail than is typically available, and you can
    provide it much more cost effectively.
  • In that regard, its a good medium for making
    major announcements and getting the word out on
    new developments, whether it be to your
    employees, to consumers, or to your agents

9
General communication
  • A number of companies are using the Internet as
    the primary distribution channel for shareholder
    informationitems that companies are required to
    make available by law and the type of thing that
    companies spend a great deal of money printing
    and distributing.
  • They put it up on the Web.
  • It can be downloaded and printed out on demand

10
General communication
  • 1. Many are using the Internet as a tool to
    direct consumers to local offices and to local
    agents.
  • 2. Others are using it to collect customer
    feedback and distribute customer satisfaction
    surveys and other types of feedback devices.
  • 3. The most fundamental use of the Web now and
    what most people are using it for is as a
    stepping stone.
  • 4. Using it as an electronic form

11
Pricing
  • Agent function
  • Doing needs analysis and price quotes, providing
    product detail and carrier detail and taking the
    application is easily accessible to a
    well-thought-out Web site, and it typically
    ensures a degree of consistency and accuracy that
    you dont always get through the agent channel

12
Pricing
  • Result
  • Days of most agencies are numbered
  • Bread and butter functions can easily be tackled
    by the internet
  • How do we know?
  • Look at banking
  • ATM has revolutionized banking as we know it
  • Most teller functions can be handled by ATMs

13
Pricing
  • Front and back end efficiencies
  • Offering eletronic form with built in help
    wizards
  • an agent or a consumer can fill them out, and
    those data will be transmitted to all the
    necessary users of the data, the pyramid company,
    directly into the carriers underwriting system

14
Pricing
  • Using the electronic decision maker
  • Before an application is submitted
    electronically, its going to go through a screen
    that contains the basic underwriting criteria,
    and its going to make an immediate determination
    whether or not that applicant meets the basic
    criteria for the product. If the answer is no,
    the agent knows about it immediately and can
    direct the applicant to a more appropriate product

15
Pricing
  • The problem with the current system
  • when a large percentage of these applications
    come in, theres a great deal of work done on
    them only to find out that the product wasnt
    sold properly to begin with, that the applicant
    really doesnt qualify for the product that he or
    she is applying for, and theres a great deal of
    cost involved in that

16
Agent Support
  • provide product details and updates
  • Announce when a new product comes out, or
    announce a change in an existing product to the
    field personnel.
  • Typically it costs a great deal of money and
    takes a great deal of time. Even then, the agents
    often dont get it and dont use it.
  • When you make a change to product information on
    the Internet, it is available worldwide in
    seconds.

17
Agent Support
  • Real saving
  • When a company spends money for new forms,
    typically for many months after the new forms
    have gone out, applications still come in on the
    old forms. The Internet really solves all that.
    Its a good way to provide financial planning or
    sales tools to your agents. Needs-analysis
    worksheets, state planning worksheets,
    telemarketing scripts, and telemarketing letters
    can all be put out there and downloaded and used
    by your agents very easily!

18
Agent Support
  • Real time distribution
  • Most agents have the ability to provide price
    quotes now, but the distribution of that
    information is fairly awkward. Usually it
    involves creating diskettes at the home office,
    trying to get them out to people in the field.
  • The Internet provides an easily accessible,
    centralized place for storing all that
    information, and it ensures integrity of the data

19
Direct marketing
  • What will the consumer get?
  • Consumers are going to have direct access to
    information that, in the past, has been available
    only through the agents.
  • Theyll be able to go online and assess their own
    needs using basically the same tools that agents
    use now. Theyll be able to get price quotes
    across hundreds of carriers where they can
    actually get an unbiased view of the marketplace
    without any pressure

20
Risks from technology
  • Type of risk low risk high cost events
  • Electronic fraud
  • credit card problems
  • with electronic fund transfer, bank robber need
    not enter a bank to rob money
  • Laws currently cover paper based documentation
  • With electronic means, plagiarism can be more
    widespread

21
The Y2K problem
  • A problem that arises for computer dates that do
    not start with 19xx
  • What is the problem? If the date does not have
    four digits for the year, at the turn of the
    century, they will all go back to the beginning
    of time
  • How widespread is the problem?

22
Y2K
  • A banking pass in the Netherlands has an
    expiration date of four years. My brand new bank
    pass shows an expiration date of '00'. After
    filling up my car at the gasoline station their
    computer find out that my pass expired. Although
    2000 - 1997 3 but 00 - 97 -97

23
Y2K
  • Card expiration date of VISA card is still MM/YY,
    although Visa has threatened to impose fines of
    160,000/month on any of its merchants that fail
    to make their credit-card Y2K compliant

24
Y2K
  • Set PC date on 2358 1999, switch PC off , wait
    five minutes, set PC on, check date...result Jan
    4 1980! In case date is OK create a file and
    check the creation data. Investigation via
    Internet indicates that 75 of the PC will fail
  • Try to set the date manually. Type DATE at the
    DOS prompt and enter 01/01/00. What did you get
    as a response?

25
Y2K
  • In 1992 Mary Bandar of Winona was invited to join
    kindergarten because she was born in '88, in fact
    she was 104
  • Last year a 106 year old woman in Sweden received
    letter for the first grade (born in 1890),
    Needless to say, Mary Bandar didn't have to buy
    crayons and a backpack

26
Y2K
  • For Marks Spencer, the nightmare began with a
    tin of corn beef, rejected on the ground that it
    was 96 years out of date
  • Marks Spencers are auditing their 700
    suppliers for compliance

27
Y2K
  • New Year's Eve 31/12/1996 saw a software failure
    at the New Zealand Aluminum Smelter shutting down
    controlling computers without warning. Caused by
    a programming error that couldn't handle 1996
    being a leap year, temperature control in the
    melters failed causing extensive damage.
    Replacing them will cost in excess of NZ
    1,000,000.

28
Y2K
  • Two hours later, the problem was duplicated in
    Tasmania as Australia entered the new year. Both
    smelters used the same software
  • The global Positioning System week number
    rollover at midnight of 1999-08-21 setting this
    number back to 1980-01-05 This system is on board
    of satellites and can not be corrected

29
Y2K
  • Lufthansa recently announced they will be
    grounding their flights for a 24 hour period on
    19991231-20000101. Apparently they are not
    concerned as much with the electronics on their
    aircraft as they are with the various national
    air traffic control systems and the tremendous
    risk of legal exposure.
  • Other airlines are avoiding flight time

30
Why Y2K problem?
  • Lack Of Widely Accepted Date Standards
  • Nobody has a standard representation of dates
    that has been internationally accepted and
    implemented. For example, to an American, 1/4/96
    means January 4th, 1996. To an Englishman, 1/4/96
    means the first of April, 1996 - more
    colloquially known as "April Fools' Day".

31
Why Y2K problem?
  • Attempts have been made since the mid 1970s to
    set such standards, and even as recently as the
    late 1980's the ISO-8601 standard advocated the
    yyyymmdd format for date storage. But the use of
    these standards was never internationally
    mandated and they never achieved critical mass in
    commercial acceptance. Many IT shops have never
    even heard of them.

32
Why Y2K problem?
  • Computing Resource Restraints
  • Main memory, disk space and even punched card
    space was at a premium in the early days of
    computing. Whatever could be squeezed to save
    space and money was squeezed to save space and
    money. In the early days of computing, it made
    sense NOT to include any extra digits for years.
    In In the early days of computing, it made sense
    NOT to include any extra digits for years.

33
Why Y2K problem?
  • User Demand
  • Computers are designed to make life easier for
    users and to relate to users in a manner
    consistent with their known world.
  • Nobody wants to key in the century when he or she
    is not used to having to do it in other
    circumstances (for example, when writing checks).

34
Why Y2K problem?
  • 4. Applications Have Lasted Longer Than Expected
  • When designing a new application, a typical
    justification for using a date algorithm which
    would fail when processing dates outside the
    20th Century was that the application wouldn't
    last outside that era anyway. The older style
    applications have been required to soldier on
    while their much vaunted younger replacements
    have fallen by the wayside.

35
Why Y2K problem?
  • 5. Backwards Compatibility
  • As the reservoir of established applications
    grows ever larger so each and every new
    application written is expected to maintain some
    form of compatibility with previous systems. If
    Windows had not been able to run DOS
    applications, Microsoft would have been dead in
    the water when their GUI was launched. Windows95
    is faced with the burden of supporting DOS,
    3.1.etc...

36
Why Y2K problem?
  • Code Re-Use
  • It has always made sound economic sense not to
    redevelop the wheel. Virtually all new
    applications have algorithms and even code
    incorporated from previous systems. This speeds
    up development and results (usually) in more
    reliable systems. The re-use of algorithms which
    have a hidden date processing fault is one reason
    why the year 2000 problem is so huge

37
Why Y2K problem?
  • New complications with PC revolution
  • With the PC revolution, development and control
    of many applications has typically passed out of
    the control of the IT professionals into the
    hands of the end users. So changing the core
    corporation data means immense inconvenience and
    cost to all those end users

38
Costs and Benefits
  • Clearly, it will cost to fix the problem
  • How much?
  • There are benefits to be considered the
    additional cost that companies would have had to
    bear if they had used YYYY instead of YY (this is
    the concept of opportunity cost)
  • Which is larger?

39
Costs of Y2K
  • Direct cost The cost of fixing all the source
    codes
  • Gartner Group estimates that there are 225
    billions of lines of code to be fixed
  • 1996 cost is around 1.10 per line
  • Total bill 250 billion
  • More recent estimates of cost per line has gone up

40
Costs of Y2K
  • Some estimates put cost per line to be 3-5
  • If so, the cost can be as high as 6 billion
  • Is this correct?
  • The problem is routine fixing of lines
  • It can be easily handled off shore e.g., in
    India or in the Philippines
  • Then, the cost can be lowered dramatically

41
Costs of Y2K
  • Many programs with problem are mainframe programs
  • They can easily be phased out
  • Half the programs are not worth saving
  • This can reduce the cost by more than half
  • There will be cosmetic problems that are easily
    fixed by off-the-shelf program
  • Thus, cost can be much lower

42
Benefits of Y2K
  • In the late 50's and early 60's, when many of
    today's general accounting and core business
    systems were designed and programmed, a major
    constraint was the number of characters which
    could be recorded on an 80-column punched card.
    This physical limitation led us to record dates
    with only 2 digits representing the year to save
    precious space. This limitation was eliminated by
    disk storage when it became widely available in
    the early 60's.

43
Saving so far...
  • Disk storage devices greatly enhanced the
    usefulness of computers because of their ability
    to access data randomly, but this new type of
    storage was very expensive.
  • In 1996, as we upgrade and/or replace systems to
    accommodate the millennium change, the lease
    price of mainframe hard disk storage is under 10
    cents per megabyte (MB) per month.

44
Saving so far...
  • But in 1963, 1 MB of mainframe storage cost about
    175 a month to lease (that's about 10,600 per
    year per MB in 1995 dollars or nearly 1 million
    percent more than the 1996 cost). So, to save
    money we continued to use 2-digit year fields.
    And economic reasons were why we continued this
    space saving practice.

45
Saving so far...
  • By 1972 the price of mainframe storage was down
    to 36 per MB per month, but that's still over
    1,600 per year per MB in 1995 dollars (or nearly
    150,000 percent more than current cost)!
  • By 1983 the price was just under 22 per year per
    MB in 1995 dollars (but still 2000 more than the
    1996 cost). So just how much have we saved our
    organizations over the years?

46
Saving so far...
  • Depending on the industry and application, about
    3 to 6 of the data stored in organizational
    databases is dates. Using 4-digit, rather than
    2-digit year fields would have required 33 more
    storage for dates (MMDDYYYY versus MMDDYY). Using
    the lower 3 figure for date density, we
    conservatively estimate that 1 more disk storage
    would have been required through the years if we
    had stored all 4 digits of the year field.

47
Saving so far...
  • One percent doesn't seem to be very much until
    you consider several important factors the large
    volumes of data stored by organizations, the
    historically high cost of storage, and the rate
    of inflation. So for every gigabyte (GB) of
    organizational data stored, a 1 savings
    represents 10 MB. Designing systems to save 1 of
    storage costs since 1963 has saved between 1.2
    and 2 million per GB (in 1995 dollars) depending
    on how quickly storage equipment was upgraded.

48
Saving so far...
  • Then, there's the cost of capital, as well as the
    opportunity cost had those precious dollars been
    spent on storage rather than invested in other
    ventures. Using only a 10 internal rate of
    return (IRR) on capital, 16 to 24 million (in
    1995 dollars) has been saved per GB of total
    storage in the 30 years from 1963 through 1992.
    This is a more realistic indication of the
    economic benefits of our date storage decisions.

49
Saving so far...
  • In light of these savings, the 10 to 50 million
    estimated cost organizations may incur to correct
    the "millennium bug" pales in terms of benefits
    accrued. One organization, currently storing 12
    terrabytes of mainframe data and about 700 GB 15
    years ago, estimates that if their average
    storage over the 30 years from 1963 through 1992
    were only 10 GB, they saved over 100 million in
    1995 dollars. They estimate that their actual
    savings may be 5 to 10 times that size!

50
Insurance and Y2K
  • Is there insurance available to resolve the Y2K
    problem?
  • Some.
  • AIG recently announced the availability of
    "Millennium Insurance," which it describes as "a
    policy that provides business interruption and
    legal liability coverage in the event that 'Year
    2000' information technology system
    solution/conversion efforts by the insured or a
    third party fail.

51
Insurance and Y2K
  • The Millennium Insurance policy is comprised of
    three coverages direct business interruption,
    contingent business interruption and third-party
    liability.
  • The direct business interruption coverage covers
    loss of profits for business interruption
    resulting from unsuccessful conversion by the
    insured of its own systems.

52
Insurance and Y2K
  • The contingent business interruption coverage
    covers loss of profits and extra expense for
    business interruption of the insured due to an
    unsuccessful or incompatible conversion by a
    third party that results in the failure or
    interruption of a third-party system or data
    transmission capability. The third party
    liability coverage includes errors and omissions
    (EO) and directors and officers (DO) insurance
    and covers an insured's legal liability resulting
    from its own or a third party's conversion
    efforts.

53
Liability problems for internet
  • If I post an anonymous message against you on the
    usenet, who is liable?
  • Technology can create problems with privacy
    rights
  • credit card information, telephone records,
    medical records, educational records, insurance
    records, police records can be cross referenced
    and build profiles of people

54
Biotechnology
  • Pharmaceutical advance
  • drugs old method-mostly biological
  • new synthetic-example-plasma-it requires
    matching by blood types, in future, it will not
  • Medical advances
  • use of mechanical heart, liver
  • use of potato for skin

55
Genetic research
  • Human genome project There are 100,000 genes and
    3 billion pairs of ATCG DNA codes
  • Genome needed two ingredients gene mapping
    technology and advances in computer technology
  • Cure for potential diseases that arise out of
    faulty genes

56
Potential candidates
  • Most genetically linked diseases
  • Downs syndrome
  • Alzheimers disease
  • muscular dystrophy
  • genetically linked cancer (breast)
  • cure for baldness
  • screening fertilized eggs

57
Potential problems
  • Identifying problem gene does not mean
    identifying cure
  • so far, 4,000 dieases have been linked to
    specific sites on specific chromosomes
  • Potential to identify disease long before it
    manifests itself
  • Identified genetic risk factor may lead to loss
    of health insurance, workers compensation or
    life insurance

58
Examples
  • California man was denied health insurance when
    he changed job because he had the gene for
    neurofibromatosis
  • Missouri woman had a blood test showing that her
    unborn child may have abnormally formed spinal
    cord
  • Texas woman denied life and disability insurance
    because her mother might have died due to
    Hintingtons disease

59
The issue
  • Rights of insurance company versus the rights of
    the individual
  • Insurer use genetic information to underwrite
    risk for a homogeneous group
  • Discrimination when it is not justified by facts
  • Justification insurance companys
    view-statistical justification

60
Ultimate implication
  • Insurance is only available for individuals who
    are free from genetic diseases
  • Each group with sufficiently identifiable genetic
    disease potential can be insured
  • Many types of discriminations are not allowed by
    law based on skin color
  • Can an employer make hiring or insurance
    decisions based on genetic tests for cancer?

61
Hazards of technology
  • Industrial waste is a hazard to humans
  • cyanide is a poison used in many chemical
    processes
  • radioactive material is a by-product of nuclear
    energy
  • many industrial by-products are known carcinogens
  • some harmful effects are known later DDT

62
Example
  • Environmental cleanup in the US would cost
    500b-1trillion
  • Surplus in property casualty in the US is 200b
  • If insurance industry cannot offer insurance for
    the general market, government will have to
    step in and eventually the taxpayers will foot
    the bill

63
Technological advances in the financial markets
  • Financial and risk management are converging
  • Insurer can hedge risks of interest sensitive
    assets and liabilities with currency futures and
    other derivatives
  • Securitization derivative financial instrument,
    act-of-God bonds, Catastrophic Re Options...

64
Potential problems
  • Many in the corporations do not understand the
    new instruments
  • Hence, they do not understand the potential abuse
  • Barings problem one persons misuse brought down
    a company
  • If some complex derivatives are intentionally or
    deliberately mispriced, it could be a potential
    problem
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