For insurers today, emerging risks are like comets were to the ancients: harbingers of doom of mysterious origin.
Executive SummaryPraedicat CEO Robert T. Reville discusses the genesis of his company and its focus on liability catastrophes. He also describes how the company approaches innovation as it works to release a cloud-based liability catastrophe portfolio modeling platform, Oortfolio.
The Romans thought the gods sent a comet to mark the passing of Julius Caesar. Today, scientists have revolutionized our understanding of comets, and we now know they are ice balls that originate in the outer reaches of our solar system. Not so scary anymore.
The revolution in knowledge about comets has come so far that venture capitalists recently funded a company to mine passing comets for rare minerals. Like the study of comets, Praedicat is dedicated to transforming emerging risks from a source of dread and exclusions into a driver of business opportunity for our insurance and reinsurance clients.
Planetary Resources is the asteroid mining company referred to in the accompanying article, which seeks to mine minerals from comets. Investors include Google CEO Larry Page, Virgin CEO Richard Branson, Google Executive Chair Eric Schmidt and a host of venture capitalists.
The Praedicat idea came about as a result of a collaboration between two companies after the Sept. 11, 2001 terrorist attacks. RAND, a nonprofit public policy think tank, teamed up with Risk Management Solutions (RMS), a property-catastrophe modeling company, to write several influential public policy reports about terrorism insurance. During the same years (2002-2007), RAND published a study on asbestos mass litigation. Asbestos is estimated to have cost liability insurers $85 billion, which is more than any property catastrophe.
RMS and RAND connected the dots: We should work together to solve the problem of “the next asbestos.” This is the emerging risk problem that the industry had been struggling with for years, which we have reframed as the problem of liability catastrophe.
In 2008, the new RAND and RMS collaboration brought together a team of economists, lawyers and catastrophe modelers, but we didn’t yet have all the necessary ingredients. We knew we needed a data-driven solution, but emerging risk, by its very definition, has very little data. To brainstorm further, we brought in a larger group of collaborators from within RAND and learned of cutting-edge technologies being developed to search and mine text-based data, which is part of the toolkit of technologies we now call “big data” (before that label was in vogue). With this larger group, we began to craft a solution that involved searching through the peer-reviewed biomedical literature to find new scientific hypotheses that commercial products or practices led to bodily injury, property damage or environmental damage. We realized that with new data technologies, we could build a solution that made the world’s scientific community our emerging risk group.
One final ingredient was needed: clients. Obviously, clients are needed in any business, but we really weren’t even sure we were building a business yet. We began to work with insurers and reinsurers that deeply understood the problem we were trying to solve and how any solution could be applied, and that brought their own perspective to our ongoing efforts.
We worked with five companies at first that provided us with extensive feedback and assistance. With their help, we began to design a set of analytics that they could apply in underwriting and risk management. After we launched as an independent company in 2012, these analytics became embodied in the software that we built. We called the software CoMeta, which is Latin for “comet,” in honor of our celestial mascot.
How We Approach Innovation
The genesis story of Praedicat has shaped our general approach as a company. At the core, we believe that collaboration drives innovation. In particular, we emphasize cross-disciplinary collaboration every day at Praedicat for two reasons:
1. Commercial liability emerging risk is a uniquely multidisciplinary problem. It is driven by new technologies and products, new business practices, and new science establishing that these products and technologies cause damage and that there is some way to establish causation for this damage in a court of law. To take a forward-looking, or emerging, perspective on this risk requires a deep, multidisciplinary perspective from engineering, law, science and economics.
2. Innovation through multidisciplinary interaction is transformative.Many of us at Praedicat have Ph.D. degrees, and we learned in our disciplinary training that the progress of science happens through incremental advances, often theoretical, by scientists working, often alone, at the frontier of the discipline. A very different kind of innovation happens when people from different disciplines collaborate on the applied problems of businesses. Instead of incremental change, you can stimulate transformative change. On every project at Praedicat, multidisciplinary teams examine all angles of the problem to facilitate an innovative solution.
On a day-to-day basis at Praedicat, we try to approach our work to maximize the opportunities for multidisciplinary collaboration. Our staff is multidisciplinary and diverse. Our office is in a converted factory and is a completely open space, without walls. We approach all of our development in teams designed to include members from multiple disciplines. We have companywide lunches a couple times a week to encourage dialogue.
For the very same reasons, we like to work closely with our clients on development projects, and the more frequent the interaction the better. Besides providing another essential discipline for understanding the problem and deliberating on the solution, working closely with our clients serves another purpose, which is a third reason we love collaboration:
3. Innovation at Praedicat alone is not enough.We are trying to help our clients see risk in a new way, but unless this leads our clients to develop innovative new products, or innovate in the way products are priced or accumulations managed, we won’t achieve our mission. By working together on our development, the innovation can be end-to-end, from the data to our clients’ businesses.
About Robert Reville
Robert T. Reville is the president and chief executive officer of Praedicat.
Before the launch of Praedicat, Reville was senior economist at RAND Corp. and a professor at the Pardee RAND Graduate School. At RAND, he conceived and led the liability catastrophe R&D project that provided the foundation for Praedicat.
From 2002-2008, he was the director of the RAND Institute for Civil Justice, a research center dedicated to improving public policy related to liability, compensation and insurance.
He was also founder and co-director of the RAND Center for Terrorism Risk Management Policy, a policy research center at RAND, which published research on terrorism insurance that was influential in congressional debates over the Terrorism Risk Insurance Act.
Reville has published extensively on compensation for occupationally disabled workers. He served for two terms on the Board of Scientific Counselors of the National Institute for Occupational Safety and Health, Centers for Disease Control and Prevention.
Reville has a Ph.D. in economics from Brown University.
Realizing the Vision
In coming months, Praedicat will be rolling out its second product, which will be truly groundbreaking. It is the first fully quantitative and probabilistic liability catastrophe portfolio modeling tool.
It will allow our clients to rigorously manage and underwrite more than 100 emerging risks from nanomaterials to fracking. They will also be able to run hundreds of deterministic casualty catastrophe scenarios against their portfolios. Clients will be able to investigate the impact of attachment points and triggers and then combine companies into portfolios and estimate probable maximum loss, tail value at risk and a range of other portfolio-level statistics, including measures of how potential losses could play out over time.
We believe that this modeling technology has the potential to improve underwriting, drive new methods of managing capital, facilitate the development of new risk-transfer products and enhance our technology-driven economy’s incentive to innovate in a forward-looking, sustainable manner. We are working with our clients now to help make this happen.
Since liability accumulation stemming from emerging risk is not measured today, liability insurers don’t know how much of their risk is in the form of liability catastrophe risk. Some of our clients have told us they think it could be a quarter or it could be more than half. In other words, emerging risk is the “dark matter” of liability risk.
Astronomers today have determined that most of the mass of the universe cannot be seen with a telescope. The missing matter is called “dark matter” and accounts for much of the structure of the universe and the motion of galaxies.
The first person to hypothesize the existence of dark matter was Jan Oort, who, incidentally, also discovered the Oort Cloud, from which most comets originate. In honor of these discoveries, when we thought about what to name our cloud-based liability catastrophe portfolio modeling platform, the answer was obvious: Oortfolio.