Inside Track

Risks, Both Known and Unknown

Risks, Both Known and Unknown

By Eric P. Harding

During my tenure at the Academy, I’ve come to understand much more about risk than I did when I first walked through the doors. The time I spent in financial media had me well acquainted with certain concepts of personal, corporate, and systemic financial risk, but I’ve enjoyed working with the Academy’s dedicated cadre of volunteers on matters across all practice areas—and I get to see firsthand that what may seem like the wonkiest minutiae to an outsider can have a real-world impact on the lives of everyday Americans.

But my experience with the Academy doesn’t make me an expert on risks and probability—far from it. I often overestimate the likelihood of vanishingly rare events; see my previous guilty admission regarding Powerball tickets for an example. At the same time, my diet frequently features more cheeseburgers and onion rings than my cardiologist might prefer—it’s just that I decide the short-term pleasure is worth the longer-term risk (or, more precisely, I don’t consider the risks in the moment at all). And it’s probably best that we don’t discuss the risk of leaving my house for work 15 minutes later than usual—the downstream effect of that delay on my commute into the District would definitely give my cardiologist cause for concern.

But if my human tendencies and myopia sometimes make it difficult to accurately assess and mitigate risk in my day-to-day life, companies that operate in the insurance space need to have as clear a picture as practical of all possible risks. And that’s where actuaries come in. To that end, this issue’s feature articles all discuss risks, both known and unknown, in some capacity.

In our cover feature this month, “The On-Demand Conundrum,” authors Chris Logan and Srivathsan Karanai Margan examine a fast-growing area of the personal lines business—on-­demand insurance products. Though similar policies have been around for some time (think travel insurance), the new ever-connected world allows customers to decide when and where they need coverage—and it lets companies target segments of the population that previously had been slow to take up personal coverage. But these products carry risks for the providers, in terms of profitability and opportunity cost. Is this new wave bound to be a beneficial venture for all involved, or a misadventure?

Our second feature, “Managing Catastrophe,” explores recent changes in the health insurance marketplace, especially their impact on the reinsurance world. The rapid rise of accountable care organizations—in which doctors, hospitals, and other providers form networks to coordinate care in an effort to provide better patient outcomes at lower costs—have been touted for years as a way to bring down the costs of health care across the board. In the case of catastrophic events, though, does this assertion stand up to scrutiny? Debbie Hoffer and Mark Troutman look at the data and identify some trends to watch—and some risks to be aware of.

In our final feature, “Applicant Nondisclosure of Obesity and HIV and Hepatitis C Infection in the Life Insurance Marketplace,” authors James Palmier and Brian Lanzrath take a look at recent data regarding information asymmetry when would-be policyholders apply for life insurance. Specifically, applicants were asked in a telephone interview about their HIV and hepatitis C status, as well as their height and weight; their answers were checked against the results of a follow-up paramedical exam. Life insurers—especially in an era of simplified issue and accelerated underwriting—are at considerable risk if applicants intentionally withhold vital medical information, and this article’s findings should be required reading for any life actuary.

Thank you, as always, for reading this issue. I hope the biggest risk you face is some slight frustration caused by one of our puzzles (pages 43, 44, and 46) … or perhaps a paper cut.

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