Category Archives: Interview

Insuring an uninsurable world – the pricing actuary’s Mission Impossible?

In InsuranceERM, David Walker published, yesterday  Insuring an uninsurable world – the pricing actuary’s Mission Impossible?

“Actuarially, it is entirely possible – and often documented – that the technical premium reflecting pure risk without political intervention, mutualisation or capping varies by a factor of 30 or more, depending on exposure to flood or forest fire risk,” says Arthur Charpentier, author of a 2024 book Insurance, Biases, Discrimination and Fairness and professor of mathematics at the Université du Québec à Montréal. This level of variation is exhibited in real life, too. Annual premiums for high-risk properties in Canadian provinces of Ontario and Alberta can exceed C$3,000 ($2,185), “compared to under C$100 elsewhere”.

In Canada, premiums are very moderate, as flood insurance is often excluded from basic policies, and “overland flood” coverage remains limited and capped (“Overland flooding … is typically not covered by a standard policy. Optional residential overland flood coverage is now offered by many insurers for the majority of homes across the country and is based on riskhttps://www.ibc.ca/stay-protected/severe-weather-safety/flood-and-water). However, technical premiums, calculated by modelers (JBA, Fathom, Swiss Re), vary by a factor of ×20 to ×50, depending on proximity to a watercourse, elevation, soil type, and flood frequency. Some properties in Ontario and Alberta have an expected annual cost of more than $3,000/year, compared to <$100 elsewhere. The report “Adapting to Rising Flood Risk” (Federal Task Force, 2022) states “Total residential flood risk in Canada… $2.9 billion per year. 89.3% is concentrated in the top 10% highest risk homes” (https://www.publicsafety.gc.ca/cnt/rsrcs/pblctns/dptng-rsng-fld-rsk-2022/index-en.aspx). This means that the most exposed minority accounts for almost all of the expected annual loss, reflecting a high degree of risk heterogeneity—the basis for justifying highly differentiated technical premiums. The same report states, “In high-risk areas, flood insurance is cost-prohibitive for Canadians, if available at all, and especially so for low-income households. In some areas, risk-based insurance premiums could reach $10,000-15,000 or more for flood endorsements alone, on top of other home insurance costs.” The actual actuarial cost is rarely passed on to the buyer, but private insurers take it into account by sometimes refusing to offer coverage or by excluding certain areas. In fact, actuarially, it is entirely possible—and often documented—that the technical premium (the one that reflects pure risk, without political intervention, mutualization, or capping) varies by a factor of ×30 or more depending on exposure to flood (or forest fire) risk. This is true in Canada, Europe, and Australia, even though this technical reality is often invisible to the insured due to political adjustment or solidarity mechanisms. For example, in France, the observed premium is uniform: 12% of the MRH contract via the CatNat scheme, regardless of the risk. But analyses show that the “real” actuarial premium could vary by a factor of 20 to 30 between a house in a non-flood zone and one in a red zone of the PPRI. Some municipalities have a loss ratio 30 times higher than the national average, but this difference is completely smoothed out. This is not the case in Germany, where flood insurance (Elementarschaden) is optional and therefore not widely mutualized. There, the commercial premium often reflects the risk more accurately, with differences of ×15 to ×30 for the most exposed areas. Three factors are often cited as reasons for this: Spatial risk heterogeneity (one neighborhood may be partially located in an area at risk of a hundred-year flood, while another, in the same zip code, is completely safe); Increase in property values (as real estate values increase (e.g., $1 million homes in coastal areas), the higher the potential capital cost, even for a low-frequency event); Changing climate and frequency (the risk is no longer stable: in Germany, Canada, and France, areas that were previously “marginal” are becoming high-risk due to climate change).

Talk with CCR and chaire PARI, in Paris, on government intervention and welfare

This afternoon, I will give a brief talk on welfare and optimal policies for government intervention, at CCR, in Paris. I have some slides to present. The presentation is based on a papers we wrote a few years ago, Government Intervention in Catastrophe Insurance Markets: A Reinforcement Learning Approach

This paper designs a sequential repeated game of a micro-founded society with three types of agents: individuals, insurers, and a government. Nascent to economics literature, we use Reinforcement Learning (RL), closely related to multi-armed bandit problems, to learn the welfare impact of a set of proposed policy interventions per $1 spent on them. The paper rigorously discusses the desirability of the proposed interventions by comparing them against each other on a case-by-case basis. The paper provides a framework for algorithmic policy evaluation using calibrated theoretical models which can assist in feasibility studies.

In this paper, we used the concept of Marginal Value of Public Funds, or “MVPF, introduced in 2020 by Amy Finkelstein, Nathaniel Hendren and Ben Sprung-Keyser, in “Welfare Analysis Meets Causal Inference“, and “A Unified Welfare Analysis of Government Policies“. See some slides online, or the website https://policyinsights.org/.

Assurance des catastrophes : les routes de l’enfer sont pavées de bonnes intentions

C’était le titre initial de l’article qu’on avait écrit avec Laurence Barry (co-titulaire de la chaire de recherche PARI – programme de recherche sur l’appréhension des risques et des incertitudes – placée sous l’égide de l’Institut Louis Bachelier en partenariat avec l’ENSAE/CREST et Sciences Po), la semaine dernière et qui a été publié sur le site du quotidien Le Monde,

Je mettrais l’article original en ligne  plus tard, mais en attendant, je peux mettre en ligne un brouillon de la partie sur ce qui se passait en Californie (et qui présente l’avantage d’être en partie sourcé). Pour le cas français, je peux remettre un lien vers un court article qu’on avait écrit il y a quelques mois Rapport Langreney : lutter contre le désengagement des assureurs dans la couverture des risques climatiques

Continue reading Assurance des catastrophes : les routes de l’enfer sont pavées de bonnes intentions

Le dernier numéro de l’Actuariel est paru

Tout nouveau tout chaud, le dernier numéro de l’Actuariel est paru, avec en particulier un article Open finance : Big bang annoncé dans l’assurance pour lequel j’avais eu long entretien. Au delà de quelques idées qu’on retrouve ici ou là, je peux mentionner une petite phrase, qui semble avoir retenu l’attention…

« Le débat est posé de manière sournoise en faisant croire aux citoyens qu’ils bénéficieront de produits plus personnalisés, sans rappeler que l’assurance est bien souvent un jeu à somme nulle et que si certains paient moins cher, cela signifie que d’autres paient plus » indique Arthur Charpentier, professeur à l’Université du Québec à Montréal et actuaire agrégé.