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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance explores the challenges presented by today's business and economic upheaval, as well as the hardening insurance market, and what it means for the captive insurance industry.

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How Numerate Is Your Board? The Case for Captive Board Numeracy

Human Head Wearing Glasses with Numbers in Lenses and Surrounded by Numbers
June 03, 2020

How numerate is your board? This question may cause some readers to reach for a dictionary and others to ask, "Why does it matter?" The kernel for this article came from "Innumeracy and Hyperbole Also Are Rampant in the Pandemic," a commentary published May 15, 2020, in the Charleston, South Carolina, Post and Courier and written by Cory Franklin, a Chicago-area physician.

First, let's define "numeracy" and its opposite, "innumeracy." "Numeracy" is the ability to use numbers and a mathematical approach to solve problems in real life. Its counterpart, "innumeracy," was coined by cognitive scientist Douglas Hofstadter and later used by mathematician John Allen Paulos, who authored Innumeracy: Mathematical Illiteracy and Its Consequences, which was published in 1988.

Bob Sullivan, a journalist who writes about personal finance and consumer fairness and protection issues, stated in "Is Innumeracy America's Biggest Hidden Problem?" a November 18, 2016, blog post on the Self website, "You've probably heard that America has a hidden illiteracy problem; millions of Americans can't read at all, while millions more can only read at an elementary school level. But there's another knowledge problem that faces America—innumeracy, illiteracy when it comes to understanding numbers." Mr. Sullivan cites a 2003 US Department of Education National Center for Education Statistics study in the article that found about 55 percent of all Americans may be innumerate. And, unlike illiteracy, where most people would be ashamed of being unable to read, there is no such stigma attached to innumeracy.

How many times have you heard someone say, "I've never been good at math"? A primary difference between illiteracy and innumeracy is education. While illiteracy is primarily a problem that affects mostly uneducated individuals, innumeracy is common among intelligent and educated people. A March 26, 2020, article by Mark Caleb Smith titled "COVID-19 and the Costs of Innumeracy," appearing on the Bereans at the Gate website, stated, "Most Americans, including media members and politicians, have no real grasp of data collection, measurement, or analysis."

So why is it important that the members of your captive board are numerate? Let's take a look at a number of recent examples that show where this attribute is lacking.

  • A March 6, 2020, BuzzFeed News article by Clarissa-Jan Lim, titled "Brian Williams and an MSNBC Guest Did Some Very Bad Math on the Bloomberg Campaign," reports that a guest on Mr. Williams's cable TV news show and Mr. Williams commented on a writer's tweet that stated, "[Michael] Bloomberg spent $500 million on ads. The US population is 327 million. He could have given each American $1 million and still have money left over."
  • In "Numb and Number: Is Trillion the New Billion?" a February 4, 2009, CNN article by Christine Romans, Senator Mitch McConnell is quoted as saying, "To put a trillion dollars in context, if you spend a million dollars every day since Jesus was born, you still wouldn't have spent a trillion." According to the article, CNN decided to fact check this analysis with Mr. Paulos, Temple University math professor and author mentioned earlier, who responded, "A million dollars a day for 2,000 years is only three-quarters of a trillion dollars. It's a big number no matter how you slice it." Mr. Paulos is quoted as saying, "A million seconds is about 11½ days. A billion seconds is about 32 years, and a trillion seconds is 32,000 years. People tend to lump them together, perhaps because they rhyme, but if you think of it in terms of a jail sentence, do you want to go to jail for 11½ days or 32 years or maybe 32,000 years? So, they're vastly different, and people generally don't really have a real visceral grasp of the differences among them."
  • Mr. Smith's Bereans at the Gate article, mentioned earlier, states as follows: "First, raw numbers are almost useless. As I write now, Ohio has 704 reported 'cases' (cases are a problematic measurement, which I will get to in a moment) of the coronavirus and 11 deaths attributed to it. In terms of cases, Ohio is nestled between Wisconsin (638) and Connecticut (875). Ohio is 16th out of the 50 American states, at least according to the total number of cases, which must mean Ohio is worse off than most other American states. Right? No, not at all. These numbers need to be put in context by examining the RATE of contamination in light of state populations. Let's look at a few states using contamination rates. These states are initially sorted by the total number of cases, with New York at the top of this list and Wisconsin at the bottom. Using this crude measurement, New York's case numbers are still eye-popping, with 10 times the cases of the next state on the list. But even this is misleading. The situation in New York is far worse. California's total number of cases (3,169) are within a population that is nearly double New York's. Once we take this into account, by dividing the number of cases by the population, and multiplying that result by 1,000 (to yield a rate of contamination per 1,000 people in the state), New York's situation is TWENTY times worse than California's. While 1.69 people/1,000 in New York have tested positive, only 0.08/1,000 people in California have."

Back to the original question—why does it matter if your captive board members are numerate?—let's start with the basics. The insurance industry is based on the law of large numbers, which in turn stems from probability theory in statistics. The theory states that as the number of events increases, the average of those events draws closer to the expected value of the event. Stated in insurance terms, as the number of exposure units increases, the probability increases that the actual loss per exposure unit will equal the expected loss per exposure unit.

Insurance, therefore, is very reliant on actuarial science. Insurance actuaries analyze the financial consequences of risk using mathematics and statistics. It is the models they develop that allow insurance companies to price various lines of business, to determine adequate reserves and to estimate the future value of losses from the business being underwritten. A captive board member who is uncomfortable with numbers will struggle to understand the nuances of the business as described by the actuaries. While they may be a perfectly adequate director in all other regards, they will always be dependent on the other members of the board as to whether the actuarial analysis makes sense.

Does that mean every one of your board members should be numerate? Probably not, but assuming the statistics from Mr. Sullivan are accurate, an insurance board comprised of a majority of members who are innumerate would not make a very good governing group.

So, at least in this writer's opinion, one of the things a captive board should look for in new members is numeracy. There numerous online tests available; in fact, National Numeracy is a nonprofit organization based in the United Kingdom that is dedicated to this endeavor. But I suspect most boards will be unwilling to ask members to take a test; therefore, it is imperative that they develop other ways of determining this quality.
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