Growth in U.S. liability claims could accelerate to 5-6 percent in the near future, according to a just-released report by Swiss Re sigma.

The slowdown in U.S. liability claims paid after 2008, primarily due to economic drivers such as the recession and weak recovery, is expected to reverse.

Why the change?

Cyber risk and the liability from emerging technologies including hydrofracking and autonomous cars, combined with stronger economic growth will drive liability claims costs higher, sigma says.

Interestingly the report suggests that the effects of tort reform, which contributed to a slowdown in claims growth in the mid-2000s in the U.S., were a one-off benefit and will no longer suppress claims growth to the same degree.

It notes:

Often these types of reform have only a temporary effect on claims growth, which fades as the rules eventually soften again or the legal profession learns how to optimize the pursuit of claims in the new framework.”

Tort reform in the U.S. has focused on medical malpractice and class action claims, the report says.

Many early studies concluded that medical malpractice reforms such as limits on lawyers’ fees and non-economic compensation were effective in reducing medical malpractice liability. However, some of these caps were later overturned by state supreme courts.

Despite passage of the Class Action Fairness Act in 2005, empirical evidence on the effects of federal class action reform in the U.S. remains inconclusive, sigma adds.

The report also warns that litigation funding, in which a third-party funding company pays the costs of litigation and is paid only if the litigation is successful, is still in its infancy in the U.S. but developing.

There are fears it will grow, driving up litigation and future claims costs for insurers.”

Check out this I.I.I. backgrounder on the U.S. liability system here.

Drought continues to make the headlines, with the latest U.S. Drought Monitor showing moderate to exceptional drought covers 30.6 percent of the contiguous United States.

Its weekly update also shows that 82 percent of the state of California is in a state of extreme or exceptional drought. Reservoir levels in the state continued to decline, and groundwater wells continued to go dry, the U.S. Drought Monitor says.

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The LA Times reports that California’s historic drought has 14 communities on the brink of waterlessness. It quotes Tim Quinn, executive director of the Association of California Water Agencies, saying that communities that have made the list are often small and isolated and have relied on a single source of water without backup sources.

However, Quinn also tells the LA Times that if the drought continues, larger communities could face their own significant problems.

A recent article at CFO.com by Lauren Kelley Koopman, a director in PwC’s Sustainable Business Solutions practice, makes the point that when water-related disruptions affect operations, companies can suffer significant profit and losses and pay higher prices for goods in the supply chain.

Water management issues pose significant operational, regulatory and reputational risks to companies, the article noted.

And a recent report from the University of California found that farmers had spent an extra $500m in pumping extra water to cope with the state’s drought, while the total economic cost to the state’s agricultural industry reached $2.2bn.

For insurers, droughts can be costly. Drought, wildfires and heat waves caused 29 deaths and $385 million in insured losses in the U.S. in 2013, according to Munich Re.

In 2012, drought in various parts of the U.S. caused $15 billion to $17 billion in insured losses, making it the second costliest disaster after Hurricane Sandy.

As world leaders gather to discuss climate change at the United Nations this week, a new report from the Global Reinsurance Forum (GRF) says risk prevention and mitigation measures as well as risk transfer are the key to managing this threat.

According to the report, up to 65 percent of climate risks can be averted by adaptation measures including infrastructure development, technology advancements, shifts in systems and behaviors such as improved building codes and land use management, and financial measures.

The global re/insurance industry plays a vital role in planning and implementation of such measures. As the GRF says:

Future insurability will depend on well-planned adaptation: without it, property insurance will become less affordable and less accessible.

The world cannot simply insure its way out of the effects of climate change, but adaptation allows the global burden of potential loss to be reduced and shared, helping to keep the most vulnerable from being overwhelmed.”

The report points out that the reinsurance industry is particularly exposed to the impact of climate change given its role as an ultimate destination of risk:

The industry identified climate change as an emerging risk more than twenty years ago; it has since become a key component of every company’s long-term risk management strategy.”

Citing a 2012 IPCC report, the GRF notes that extreme weather events, such as storms, floods, droughts, heat waves as well as rising sea levels, crop failures and water shortages have become more numerous and severe.

Reinsurers can make an important contribution by developing protection and mitigation-finance solutions to address the specific challenges that climate change presents.

At the same time, the GRF says reinsurers are advancing understanding of climate change-related risk through the development of natural catastrophe models and via collaboration with universities and scientific institutions. They are also monitoring relevant phenomena such as urbanization, population concentration, property and commercial activity in high-risk areas along the coasts and flood plains.

Check out a great I.I.I. backgrounder on climate change and insurance issues here.

I.I.I. chief actuary James Lynch digs into the data in an informative piece on loss trend factors:

Actuaries can be buggy about numbers, to say the least, and my article in this month’s Actuarial Review – a publication of the Casualty Actuarial Society (CAS) - looks at a couple of sources of loss trends that can act as useful benchmarks.

One looks at workers compensation medical costs in 25 states. It is produced by the Workers Compensation Research Institute (WCRI), an organization I work closely with in my role as I.I.I. chief actuary.

The other looks at comp loss trends plus those of about a dozen other lines of business and has information going back to the 1930s, if you do a little digging. Older actuaries remember it as the Masterson Index, named after a Stevens Point, Wisconsin, actuary who created it and maintained it until relatively recently. Now Towers Watson actuaries have taken over the calculation.

As a sidebar, I also looked at the way the federal government measures auto inflation, including how it handles the introduction of predictive models and other overhauls to rating plans.

The recent disclosure of a major data breach at retailer Home Depot has once again put the spotlight on the increasing vulnerability of businesses to cyber threats and the need for cyber insurance.

But companies are uncertain of how much insurance coverage to acquire and whether their current policies provide them with protection, according to a new report by Guy Carpenter.

It speculates that one of the roots of the uncertainty stems from the difficulty in quantifying potential losses because of the dearth of historical data for actuaries and underwriters to model cyber-related losses.

Furthermore, traditional general liability policies do not always cover cyber risk, Guy Carpenter says.

It notes that in the United States, ISO’s revisions to its general liability policy form consist primarily of a mandatory exclusion of coverage for personal and advertising injury claims arising from the access or disclosure of confidential information.

Though still in its infancy the cyber insurance market potential is vast, Guy Carpenter reports. It cites Marsh statistics estimating that the U.S. cyber insurance market was worth $1 billion in gross written premiums in 2013 and could reach as much as $2 billion this year.

The European market is currently a fraction of that, at approximately $150 million, but could reach as high as EUR900 million by 2018, according to some estimates.

Guy Carpenter also warns that cyber attacks are now top of mind for governments, utilities, individuals, medical and academic institutions and companies of all sizes, noting:

Because of increasing global interconnectedness and explosive use of mobile devices and social media, the risk of cyber attacks and data breaches have increased exponentially.”

Cyber attacks also present a set of aggregations/accumulations of risk that spread beyond the corporation to affiliates, counterparties and supply chains, it adds.

Check out the I.I.I. paper on this topic: Cyber Threats: The Growing Risk.

Just in time for the peak of hurricane season, our updated paper on the residual property market is hot off the press.

At first glance the numbers on the property insurance provided by the nation’s FAIR and Beach and Windstorm plans indicate that attempts by certain states to reduce the size of their plans appear to be paying off.

As you’ll see, the exposure value of the residual property market in hurricane-exposed states has declined significantly from the peak levels seen in 2011. In fact between 2011 and 2013, total exposure to loss in the plans fell by almost 30 percent – from $885 billion to $639 billion.

Why such a drop?

Florida Citizens, a plan that accounts for more than half (51 percent) of the total FAIR Plans’ exposure to loss, saw its exposure drop by nearly 50 percent from $429.4 billion in 2012 to $228.9 billion in 2013, as Citizens took much-needed steps to reduce its size.

This accounted for the overall reduction in total exposure under the FAIR plans. In 2013 total exposure to loss in the FAIR Plans was $445.6 billion, a 38 percent drop from its 2011 peak of $715.3 billion.

But what of the Beach and Windstorm plans?

Latest data show that between 2011 and 2013 exposure to loss in the Beach and Windstorm Plans actually grew by 14 percent.

Five state Beach and Windstorm plans are covered in our report: Alabama, Mississippi, North Carolina, South Carolina and Texas.

Over a longer time period, 2005 to 2013, the I.I.I. finds that some of the Beach and Windstorm plans saw accelerating growth. For example, total exposure to loss in the Texas Beach Plan (the Texas Windstorm Insurance Association (TWIA)) increased by 230 percent during this period.

A plan that would move TWIA’s policies over to private insurers and depopulate its book of business (much like Florida Citizens has done) is in the works, but so far nothing definite.

An ongoing and arguably more pressing concern is the fact that many of the residual market plans charge rates that are not actuarially sound and do not accurately reflect the risk of loss.

What does this mean? The I.I.I. warns that a major hurricane could expose residents in certain states to billions of dollars in post-storm assessments:

While hurricane activity in the most exposed states may have been lower in recent years, there is no question that over the long-term major hurricanes will cause extensive damage in future. This highlights how important it is for the rates charged by these plans to be actuarially sound.”

While the composite rate for U.S. commercial property and casualty insurance remains positive, at plus 1 percent in August, it is closing in on flat or no increases and rate reductions are coming, according to online insurance exchange MarketScout.

Richard Kerr, CEO of MarketScout commented:

Insurers really don’t want to enter another era of rate declines; but in order to hold business, most of the market is being forced to moderate pricing. If this trend continues, we should see annual rate declines very soon.”

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The key takeaways from MarketScout’s latest analysis:

– Property rates were actually up slightly at plus 3 percent in August.

– Business interruption was down one percent to flat, as were fiduciary and crime.

– Business owners’ policies and commercial auto moderated from plus 3 percent to plus 2 percent.

– Umbrella liability coverage moderated from plus 2 percent to plus 1 percent.

– Workers compensation rates were up from plus 1 percent to plus 2 percent.

– Rates as measured by account size and industry classification remained the same as in July 2014.

Bear in mind that August is traditionally a slower month for insurance placements so the volume of premium measured is less than normal.

Still, the findings tie in with the latest quarterly Commercial P/C Market Index Survey from the Council of Insurance Agents & Brokers released in July. It found prices for commercial p/c insurance continued to slide in the second quarter of 2014. On average, prices for small, medium and large accounts eased by a modest -0.5 percent during the second quarter, compared with 1.5 percent in the first quarter.

 

I.I.I. chief actuary James Lynch brings us a grim story on drug abuse and how it affects insurers:

This week Contingencies magazine published my article tracing how America’s latest drug epidemic has affected workers compensation insurance.

The epidemic comes from 20 years of gradually increasing use (and abuse) of opioids, a special class of prescription drugs that mimic many of the effects of heroin. Some you may have heard of, like Vicodin or OxyContin. Prescribed legally but highly addictive, they have become the most commonly abused class of drugs in America.

More people die from drug overdoses in America than from car accidents, and opioids lead the tragic parade. In 2010, for example, 16,652 people died from opioid overdoses, more than from heroin and cocaine combined. Opioids toll has tripled since the late 1990s.

My article shows how the growing epidemic played out in workers comp. Narcotics make up 25 percent of workers comp drug costs, and more than 45 percent of narcotics dollars pay for drugs containing oxycodone, according to the National Council on Compensation Insurance.

Insurers have acted as the crisis emerged, and now they as well as federal, state and local officials may be making headway against the problem.

Last week, after my article went to press, AIG’s new chief executive, Peter Hancock, noted his company had teamed with Johns Hopkins University to study opioid abuse among the company’s 23 million workers compensation claims.

“It is a terrible cost to the industry, a terrible cost to employers, and it’s a terrible cost to society,” Hancock told The Wall Street Journal. AIG has medical professionals working with doctors to find ways to alleviate pain without turning to opioids.

The most recent federal action reclassifies any drug containing the opioid hydrocodone as a Schedule II drug, meaning its prescriptions are more tightly controlled than before.

Unfortunately, these actions may be too late to prevent many opioid addicts from switching to heroin. Opioids tantalize the same brain receptors as heroin, and there are signs that addicts deprived of their Oxys switch.

Earthquake exposure is one of the biggest risks to workers compensation insurers, so it’s interesting to read that the California State Compensation Insurance Fund (SCIF) is once again looking to the capital markets to provide reinsurance protection for workers comp losses resulting from earthquakes.

This is a repeat of the first catastrophe bond sponsored by the SCIF in 2011 – Golden State Re Ltd sized at $200 million — which is due to expire in January 2015.

Artemis blog says:

The unique transaction, which has not been repeated by anyone else until now, links earthquake severity to workers compensation loss amounts demonstrating a new use of the catastrophe bond structure.”

The Golden State Re II catastrophe bond issuance is expected to be sized at $150 million or more, and will cover the SCIF until January 2019.

While the covered area is for earthquakes events across the United States, Artemis notes that as with the 2011 deal as much as 99.99 percent of the SCIF’s insurance portfolio is focused on California, so the risk is primarily focused on California-area earthquakes.

The new deal apparently carries a similar modeled loss trigger to the 2001 transaction, using the exposures of a notional portfolio of workers compensation risks in the SCIF portfolio, earthquake severity factors (ground motion), geographic distribution of the covered portfolio, types of buildings covered, time of day and the day of week an event occurs as some of the weighting factors.

An earthquake has to be magnitude 5.5 or greater to trigger the catastrophe bond, according to Artemis, and losses after an event will be modeled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters. This will be modeled against the notional portfolio using day/time weighting to determine an index value and notional modeled loss amount.

A 2007 report by EQECAT for the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) estimated California workers compensation insurers would pay annual losses of $180 million caused by earthquakes.

The report suggested that the losses would affect 15.6 million employees working during a major earthquake.

Check out I.I.I. facts and stats on workers compensation insurance.

Natural catastrophe events in the United States accounted for three of the five most costly insured catastrophe losses in the first half of 2014, according to just-released Swiss Re sigma estimates.

In mid-May, a spate of severe storms and hail hit many parts of the U.S.  over a five-day period, generating insured losses of $2.6 billion. Harsh spring weather also triggered thunderstorms and tornadoes, some of which caused insured claims of $1.1 billion.

The Polar Vortex in the U.S. in January also led to a long period of heavy snowfall and very cold temperatures in the east and southern states such as Mississippi and Georgia, resulting in combined insured losses of $1.7 billion.

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These three events contributed $5.4 billion of the $19 billion in natural catastrophe-related insured losses covered by the global insurance industry in the first half of 2014, according to sigma estimates.

The $19 billion was 10 percent down from the $21 billion covered by insurers for natural catastrophe events in the first half of 2013. It was also below the average first-half year loss of the previous 10 years ($23 billion). Man-made disasters added $2 billion in insured losses in the first half of 2014, sigma reports.

The $21 billion in insured losses from disaster events in the first half of 2014 was 16 percent lower than the $25 billion generated in the first half of 2013, and lower than the average first-half year loss of the previous 10 years ($27 billion).

Total economic losses from natural catastrophes and man-made disasters reached $44 billion in the first half of 2014, according to sigma estimates.

More than 4,700 lives were lost as a result of natural catastrophes and man-made disasters in the first half of 2014.

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