Commentary/Opinion

When History Is No Longer Reliable

Today we want to share a brief but important thought for your consideration.

Winston Churchill famously said "Those that fail to learn from history are doomed to repeat it". But what if history suddenly becomes unreliable?

No doubt you have noticed that since the pandemic arrived in March 2020, not much has been the same as it was before, whether it be extreme weather events, the economy, behavior of the stock market, work patterns and locations, political discourse, driving, traffic patterns or personal habits such as dining and entertainment, parenting demands and a lot more.

This past week, as hundreds of new all time daily temperature records were set and headlines were dominated by reports of deadly tornadoes, unhealthy smoke-filled air quality and flooding around the world, something about all of these events became clear and made us think about it in the context of the insurance industry. Beyond just the economic implications for catastrophic claims and losses, something even more concerning came into focus.

The underlying assumption for virtually almost all insurance products - Personal, Commercial, Life, Health and Accident - is that studying the history of claims frequency, severity and outcomes along with other data inputs, enables underwriters and data scientists to price these products in a reliably fair and profitable way.

But what happens when retrospective (historical) data is no longer reliable for these purposes? What happens when "Black Swan" events emerge ever more frequently?

We don't have the answer but do think the industry should be focused on this.

Technologies that enable claim avoidance may be part of the answer but solutions and adoption are still embryonic. Connected IoT sensor and parametric insurance programs may address some of the issues. AI and predictive analytics can also help but a dependency on historical data may limit their effectiveness.

We look forward to remaining focused on this issue and to reporting and sharing what we learn. Please feel free to do the same.

Alan Demers and Stephen Applebaum, co-curators of 'Connected' newsletter

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