Insurance Industry Blog

For the second year in a row a State Farm study of annual deer claims has found that the vehicles most likely to collide with deer are in West Virginia. State Farm estimates the chance of a West Virginia vehicle colliding with a deer in the next 12 months at 1 in 45. That’s roughly two times greater than the possibility that you will be audited by the Internal Revenue Service in 2009 and 1,100 times greater than your chance of winning a state lottery grand prize if you buy one ticket per day for the next year, according to State Farm. Michigan (1 in 78) remains second on the list of states where deer-vehicle collisions are most frequent, followed by Pennsylvania (1 in 97), Iowa (1 in 105) and Arkansas (1 in 108). The state in which deer-vehicle collisions are least likely is still Hawaii (1 in 10,962). The average property damage cost of these incidents was just over $2,950, up 2.5 percent from a year ago. State Farm used its deer claims data from the last half of 2007 and the first half of 2008 and motor vehicle registration counts by state from the Federal Highway Administration. The Insurance Information Institute estimates that there are more than 1.6 million deer-vehicle collisions each year, resulting in over $3.6 billion in vehicle damage. Check out I.I.I. tips for avoiding deer-related collisions. 

How the 2008 hurricane season has affected insurers is an ongoing question, albeit a less audible one amid the focus on the current global financial crisis. A live chat hosted by ISO next Wednesday (October 15) and featuring Gary Kerney, assistant vice president of ISO’s PCS unit, should be able to provide some of the answers. Preliminary analysis by PCS indicates both the number of catastrophes and insured property damage incurred in the second quarter of the year were nearly double that of the first quarter. And in the first half of 2008 insured catastrophe losses as noted by ISO reached $10.3 billion – higher than the 12-month totals for both 2006 and 2007 ($9.2 billion and $6.2 billion respectively).

The 2008 hurricane season then brought several major storms, including Hurricane Ike and Hurricane Gustav. So far Hurricane Ike is on track to become the fourth most costly hurricane in United States history, with an estimated insured loss of around $9.8 billion. Coastal states were not the only ones affected by Ike. This week the Ohio Insurance Institute said that Ike caused at least $553.1 million in insured losses in the state, rivaling Ohio’s largest natural disaster in recent history, the Xenia tornado of 1974. Other inland states to suffer Ike-related damage include Kentucky, Indiana and Pennsylvania. Check out I.I.I. hurricane facts and stats. 

Alternative risk financing and risk transfer has proven increasingly attractive to our industry over the years. Insurers and reinsurers have looked to the capital markets more and more to diversify their risks and expand capacity. So it’s not surprising that Allianz, Deloitte, State Farm, Swiss Re and Zurich Financial Services are among the co-sponsors of a new report published today by the World Economic Forum, titled Convergence of Insurance and Capital Markets. The report explores the growth of the market for insurance linked securities (ILS) and highlights potential next steps needed to continue its development and to further encourage investors’ strong appetite for catastrophe bonds and other forms of ILS products.

According to the report, the ILS market has seen strong growth since its inception in the mid 1990s. Issuance of ILS totaled $14.4 billion in 2007, up 40 percent from $10.3 billion in 2006. At the end of 2007, the notional value of outstanding ILS stood at $39 billion, a 50 percent increase from $26 billion at the end of 2006. Certain experts predict robust growth over the next several years. The report also notes that to accelerate the convergence of insurance with the capital markets, risk instruments must be made simpler and more attractive, and a wider investor audience must be courted. Check out background I.I.I. information on Captives and Other Risk Financing Options.   

A couple of climate change initiatives announced this week remind us that financial risks are not the sole focus for our industry. In the first of these the National Center for Atmospheric Research (NCAR) working with federal agencies and universities as well as the insurance and energy industries has launched a study to examine how global warming will influence hurricanes in the next few decades. The project will use a combination of global climate and regional weather models, run on one of the world’s most powerful supercomputers, to look at future hurricane activity. Researchers are targeting the hurricane-prone Gulf of Mexico and the Caribbean Sea and will examine three decades in detail: 1995-2005, 2020-2030, and 2045-2055. The project includes support from the Willis Research Network. 

In another initiative Munich Re is collaborating with the London School of Economics (LSE) to advance research into the economic consequences of climate change. The five-year cooperation agreement is with the LSE’s newly established Centre for Climate Change Economics and Policy, of which Munich Re is a founding corporate partner. Research will focus on a range of issues, including: analyzing the risks and opportunities for the insurance industry; the economics of climate change and product trends in the finance industry; improving models to quantify the cost of a climate-related increase in natural catastrophes and economically efficient responses to this. Check out a new I.I.I. issues update on Climate Change. 

The gap in customer satisfaction between homeowners and auto insurance providers has steadily widened during the past five years. The J.D. Power and Associates 2008 Homeowners Insurance Study reports that satisfaction with auto insurers has increased to an average score of 787 on a 1,000 point scale in 2008 up 25 points from 2004. Meanwhile, customer satisfaction with homeowners insurance during the past five years has basically held steady, with a score of 752 in 2008, down one point from 753 in 2004. The study measures customer satisfaction by examining five key factors: policy offerings; price; billing and payment; interaction; and claims. In particular, satisfaction with pricing has driven the steady improvement in satisfaction with auto insurance providers. While claims and pricing factors were key factors in the lack of improvement in customer satisfaction with homeowners insurance, some improvements were noted in policy offerings. Some key practices appreciated by customers? Bundling – satisfaction levels are particularly high among policyholders who bundle multiple policies with their homeowners insurer. Annual policy reviews also raised satisfaction and nearly 50 percent of homeowners policyholders report being offered one. Check out I.I.I. tips on homeowners and auto insurance. 

Ratings agency A.M. Best has issued a revised year-end 2008 forecast for the U.S. property/casualty industry’s underwriting results. Due to continued price softening, challenging market conditions, unusually high catastrophe losses in the first half and significant underwriting losses reported by mortgage and financial guaranty insurers, A.M. Best now believes the overall industry’s combined ratio will increase to 103.2, up from its initial projection of 98.6 published in January 2008. The agency explains that in the first six months of 2008, catastrophe and storm losses added approximately five points to the industry’s overall combined ratio, while losses linked to mortgage and financial guaranty insurers added an estimated two points. The revised outlook also estimates that net premiums written (NPW) will decrease 0.7 percent, relatively unchanged from the initial projection of a 0.6 percent decrease. Check out further I.I.I. commentary on industry financials. 

The current financial crisis has senior finance executives more likely to be concerned about their firms’ risk management practices (72 percent) than they are about their access to capital. A CFO Research Services study in conjunction with Towers Perrin, found that respondents were less concerned about issues such as accessing long-term debt financing (65 percent) and short-term financing (61 percent), in comparison to risk management. The companies surveyed also acknowledged they will need to retool their risk management practices, with 55 percent saying their risk management practices are likely to change at either the board or employee level.

When asked which items contributed to the current financial crisis, respondents as a whole blame risk management practices at banks (62 percent), followed by the increased complexity of financial instruments (59 percent) and financial market speculators (57 percent). Additionally, 24 percent said that fair-value accounting requirements were a major contributor to the crisis. While the majority of respondents (62 percent) acknowledged that the financial crisis would dampen profit expectations and leave a potentially lasting dent on the world economy, only 4 percent said they feared a major negative impact on their financial results.

If you thought hurricane season was over, think again. Colorado State University’s Tropical Meteorology Project team has warned that October will see well above average activity. The forecast calls for three named storms, one of which is expected to become a major hurricane (Category 3-4-5) as well as two hurricanes. An active October is in line with the well above-average activity that has occurred so far during the 2008 Atlantic hurricane season, the team noted. Bear in mind that even before this year’s hurricane season got underway, insured catastrophe losses as noted by ISO reached $10.3 billion during the first half of the year. This is higher than the 12-month totals for both 2006 and 2007, at $9.2 billion and $6.2 billion, respectively. Hurricane Ike – with an estimated insured loss of around $9.8 billion – is on track to become the fourth most costly hurricane in United States history and it was not the only major hurricane of the year. Hurricane Gustav caused $1.9 billion in insured losses, according to ISO’s PCS unit. The 2008 catastrophe loss bill for insurers is adding up. Check out I.I.I. facts and stats on catastrophes. 

The p/c industry yesterday reported a 57.4 percent drop in net income after taxes to $13.9 billion in the first half of 2008, down from $32.7 billion in first half 2007. The industry’s annualized statutory rate of return on average surplus fell to 5.4 percent in first half 2008 from 13.1 percent in first half 2007. The sharp decline in profitability is partially attributable to a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the p/c industry.

Despite the deterioration in profitability, in his commentary on the results I.I.I. president Dr. Robert Hartwig says a case can be made that the p/c industry is a pillar of strength in the financial services sector. Why? Dr. Hartwig explains that insurer investment portfolios are generally conservatively managed and insurers have avoided some of the problems of the investment banks and many other financial institutions because of their superior risk management model. He goes on: “The reality is that throughout its nearly 200-year history in the United States, the p/c insurance industry has endured every conceivable economic circumstance and crisis and managed to persevere.”

Amid the fallout from the credit crisis and the growing economic storm, it’s inevitable that litigation will follow. What started with subprime has become potentially a much bigger litigation net for enterprising attorneys. Fellow blogger Kevin LaCroix over at the D&O Diary addresses this issue in a recent posting titled “Litigation Wave Inflection Point?” In it he notes that shareholder lawsuits have already been filed against the directors and officers of some of the most prominent companies affected by recent events. He then points to additional developments that suggest a possible new wave of credit crisis lawsuits where the defendant companies are not themselves directly affected by the credit crisis fallout, but instead suffer from exposure to other companies that have been directly affected. The ultimate wildcard in all of this, according to LaCroix, is the impact that the current proposed federal bailout will have on litigation going forward. Insurers will be closely monitoring all these developments. Check out further I.I.I. information on the liability system.