Cat Losses to Rise

Swiss Re has warned insurers to prepare for much higher catastrophe losses in future – more than the record $120 billion set in 2005 – despite a below average year in 2009 due to a calm U.S. hurricane season. Natcat losses in 2010 could be three to five times what they were in 2009, given their volatility, Thomas Hess, chief economist at Swiss Re observed. Already, 2010 has seen significant events with winter storm Xynthia in Europe and earthquakes in Chile and Haiti. The warning came as Swiss Re’s latest sigma study showed that natural catastrophes and man-made disasters worldwide claimed around 15,000 lives and cost insurers just $26 billion in 2009. While the overall cost to society was $62 billion, insured losses were below average due to the calm U.S. hurricane season. Insured losses were highest in North America where they cost insurers over $12.7 billion, Swiss Re noted. The death toll was highest in Asia, where nearly 9,400 of the world’s 15,000 catastrophe victims lived. Insured losses in the region were approximately $2.4 billion. Overall, 133 natural catastrophes and 155 man-made disasters occurred in 2009. Six events each triggered insured losses in excess of $1 billion. The costliest event was the European winter storm Klaus which struck France and Spain in January and led to insured losses of nearly $3.4 billion. Check out I.I.I. facts and stats on global catastrophes.

Financial Services Reform and Insurers

Introduction of the Restoring American Financial Stability Act of 2010 by Senate Banking Committee chairman Christopher Dodd (D-CT) yesterday has prompted a slew of headlines on financial services reform and the pros and cons of giving enhanced powers to the Federal Reserve Board. Apart from the establishment of an Office of National Insurance within the Treasury, there are a couple of key takeaways from the insurance industry perspective. On systemic risk: the proposed legislation would establish a Financial Stability Oversight Council that would subject to Fed oversight any nonbank financial companies that pose risks  to the financial stability of the United States. The plan would also create a $50 billion fund, financed by assessments on the largest financial firms, including insurers. Check out the following articles in the New York Times, Business Insurance and Insurance Networking News for more on this story. The American Insurance Association issued the following statement, here,  in response to the legislation. Check out I.I.I. information on regulation modernization.

Bellwether Drywall Trial Gets Underway

A New Orleans federal courtroom will begin hearing an early test case in the Chinese-manufactured drywall products liability litigation today. In the case  Ã¢â‚¬“ Hernandez v. Knauf Gips KG – a New Orleans family contends that Knauf Plasterboard Tianjin Co. Ltd. produced drywall in their home that was “unsafe, defective and inherently dangerous.† The test trial will be heard by U.S. District Judge Eldon Fallon and its focus will be limited to property damage only. The Bradenton Herald notes that the case is among several hundred Chinese drywall lawsuits that have been consolidated into a single proceeding before a federal judge. It says the trial is likely to provide guidance on remediation that will make it easier to resolve future cases. As of February 17, 2010, the U.S. Consumer Product Safety Commission (CPSC) had received 2,941 incident reports related to drywall from 37 states, the District of Columbia, and Puerto Rico. More than 90 percent of reports are from Florida (59 percent), Louisiana (21 percent), Mississippi (6 percent), Alabama (5 percent) and Virginia (4 percent). Last November, the CPSC said it had found “a strong association† between homes with the problem drywall and the levels of hydrogen sulfide and metal corrosion in those homes. However, the findings on possible health effects are less definitive. Check out the I.I.I. fact sheet on Chinese Drywall for more info on what homeowners should do if faced with this problem.

Prepare for Earthquakes

California residents are the weakest link in earthquake preparedness and more than 60 percent have not done enough to make their homes safer and guard their personal finances, according to a newly released study. The California Earthquake Preparedness Survey conducted by the University of California Los Angeles School of Public Health for the state Emergency Management Agency found that many California residents have taken the easy route to prepare for a large-scale quake, by collecting supplies and making back-up copies of important documents. However, they have not taken additional steps to prepare such as securing the contents of their home or purchasing earthquake insurance. Key takeaways of the study include: fewer than 20 percent of households have structurally reinforced their homes or had their homes inspected for earthquake resistance; fewer than 20 percent of Californians have purchased earthquake insurance; only 40 percent keep the recommended minimum of three gallons of water stored per person; only 40 percent of Californians have made family disaster plans. A press release quotes Secretary Matthew Bettenhausen of the California EMA: “The recent earthquakes in Chile and Haiti are unwelcome reminders of the devastating impact earthquakes can have on people and communities. It calls attention to the need for Californians to do even more to prepare for the big one.† Check out a March 8 article in the Sacramento Business Journal for more on this story. An I.I.I.  brief explains how California residents can purchase earthquake insurance from the California Earthquake Authority (CEA). Check out the I.I.I. online publication Firm Foundation to see how insurers support the California economy and I.I.I. facts and stats on earthquakes.

Tornado Watch

It looks as if spring will bring increased tornado and severe storm activity for property/casualty insurers due to the wet El Nià ±o winter, at least that’s what the weather experts believe. Greg Forbes, severe weather expert at The Weather Channel is quoted in USA Today saying that comparable past winters suggest there could be an above-average number of tornadoes this year – potentially 9 percent more tornadoes on average than a typical year. Forbes is not the only one predicting an above-average 2010 tornado season for the United States. Tony Lupo, chair of the Department of Atmospheric Science at the University of Missouri, tells BusinessWeek.com that the storm season, which in the Midwest runs from mid-March to June, probably will bring more hailstorms, lightning, high winds and tornadoes than normal. The weather pattern resembles the spring of 2003 when as many as 109 tornadoes swept across Missouri, according to Lupo.

Our research suggests the season has a way to go if it is to live up to the above-average predictions. Preliminary data from the National Weather Service’s Storm Prediction Center (SPC) show that so far in 2010 there have been just 44 tornado reports and zero deaths, significantly down on comparable 2009 data. Accuweather.com points out that there was only one tornado report in February – the least amount of tornadoes ever recorded in that month. There are typically 22 tornadoes on average during February, based on reports dating back to 1950 from the SPC, so it was incredibly rare not to have one, according to Accuweather’s Jon Auciello. Annual totals show there were 1156 tornadoes in 2009, down from 1691 in 2008. The number of tornado-related fatalities also dropped to 21, compared to 126 in 2008, according to SPC. However, 2008 was the worst year for catastrophe losses from tornadoes and related weather events and among the worst years on record for the number of tornadoes. According to A.M. Best, tornadoes and weather events have caused nearly 57 percent on average of all U.S. insured catastrophe losses in any given year since 1953 – no small number. Check out I.I.I. facts and stats on tornadoes.

Soft Market Continues With One Exception

Online insurance exchange MarketScout says coastal property rates in select geographic locations are firming, bucking the trend of ongoing rate reductions in the property/casualty market. The comments came as MarketScout reported the average property/casualty rate decrease was 5 percent in February, compared to 8 percent a year ago. “While property rates were down 5 percent on a national basis, rates for wind capacity in the Gulf Coast, Florida and the East Coast up to and including North Carolina are moderating or increasing,† said Richard Kerr, CEO of MarketScout. Kerr went on to note that admitted insurers in some coastal states are restricted from raising rates beyond a certain point and that some of these insurers are choosing to reduce their exposure because they cannot achieve rate adequacy. In addition, several large non-admitted insurers who traditionally offer coastal property capacity are simply choosing to sit on the sideline as they wait for rates to increase. Meanwhile, rumors persist there will be two new entrants in the coastal property market before July 2010 according to MarketScout. However, this new capacity will not result in rate reductions because these insurers are entering the market at a time where they hope to catch rates on the upswing. “It’s a pretty good bet coastal property rates are going to increase soon,† Kerr added. By the way, business interruption, D&O liability, EPLI, fiduciary and crime were the coverage classes experiencing the smallest decreases in February with an average rate reduction of 1 percent. Commercial property, general liability and workers’ compensation experienced the largest rate decreases at 5 percent. Check out I.I.I. info on the property/casualty insurance cycle  and catastrophes and insurance issues.

Airline Insurance Market: Slow Ascent

Hull and liability premium prices in the airline insurance market are likely to continue to rise in 2010, but the rate of increase could slow as a result of the high level of capacity that is still available, according to Aon’s Airline Insurance Market Outlook 2010. Aon says there are a number of reasons why the price rises are not likely to continue at the same rate in 2010. Firstly, while average lead hull and liability premium in the airline insurance market rose by 20 percent during 2009, taking total lead hull and liability to $1.9 billion, average annual claims over 10 years came to $1.8 billion. This means the airline insurance market’s current level is now enough to comfortably cover claims in an ordinary year, according Aon. Still as 2009 has proved, there is always the potential that there will be an extraordinary level of claims in a given year (total estimated claims for 2009 came to $2.3 billion), but overall the hard markets have now served their purpose and prices have risen to the point they need to be to ensure that total premium and average claims are roughly in balance. Proof that the markets have reached the equilibrium point comes from the fact that some underwriters that were holding back capacity in 2008 and 2009 are now being encouraged to participate on airline insurance programs, Aon notes. New capacity is also being attracted to the sector, a fairly sure sign that prices have reached the appropriate level. Equally, while 2009 was, hopefully, an exceptional year in terms of airline claims, the fact that the actual number of losses was relatively limited should mean that a smaller number of airline underwriters will have taken a hit on their airline books of business, Aon believes. Check out I.I.I. aviation facts and stats.

Oscar Time

Forget the category for Best Picture. With the Academy Awards just two days away, it’s the riskiest films of the year that insurers are thinking about. And, the awards go to “2012,† “Crazy Heart,† “Inglorious Basterds,† and “Nine,† according to Fireman’s Fund Insurance Company, the leading insurer of major Hollywood films for more than 85 years. Over to Wendy Diaz, entertainment underwriting director at Fireman’s Fund: “While people enjoyed watching these movies, most weren’t aware of the risk challenges involved when filming complex sequences that included air and watercraft stunts, strenuous dance sequences, air balloon explosions, and simulated natural disasters.† She notes that these types of scenes contribute appreciably to a film’s overall risk and Fireman’s Fund helps by creating solutions to cover specific exposures. Take Best Picture nominee “Inglorious Basterds.† Filmed in Germany and the UK, this period piece is based in World War II and includes many stunts, fight scenes and pyrotechnics. International locations also pose a wide variety of challenges for filmmakers, including the set, transportation of film, equipment and costumes, and the potential of dealing with illness in a foreign country. During the filming process movie studios must protect themselves from a variety of insurance risks and liabilities to their cast members, crew and the production process. Tailored insurance solutions, such as those provided by Fireman’s Fund, can help producers and studios attain the artistic results they are seeking, while also ensuring the movie is filmed safely, on-time and within budget.

Maritime Terrorism Threat

The Singapore navy has warned that a terrorist group may be planning attacks on oil tankers in the Strait of Malacca, one of the world’s busiest shipping lanes, according to CNN and Reuters reports. They cite an advisory issued by the Singapore Navy Information Fusion Centre (IFC) recommending that ships should “strengthen their on-board security measures and adopt community reporting to increase awareness and strengthen the safety of all seafarers.† They also note that the terrorists’ intent is probably to achieve widespread publicity and showcase that it remains a viable group. The advisory did not name a particular terrorist group, according to the reports. The maritime terrorist threat is a rising concern for ship owners and their insurers. The World Economic Forum’s Global Risks 2010 report recently warned that a major terrorist attack that closed a port for weeks would have severe economic consequences on world trade because it would inflict major disruptions in complex just-in-time supply chains that comprise the global economy. There have been several Al-Qaeda-led attacks on maritime targets over the course of the past decade. The 2002 bombing of the French supertanker Limburg off Yemen spilled 90,000 barrels of oil into the Gulf of Aden and left one crewmember dead. Just two years earlier, the suicide bombing of U.S. Navy destroyer USS Cole in 2000 while it was refueling in the Yemeni port of Aden killed 17 American sailors and left 39 injured. Check out I.I.I. info on terrorism risk and insurance.

No Systemic Risk from Insurance

Systemic risk continues to be the buzz word of the financial services regulatory reform debate, so a couple of recently released reports are helpful in underscoring the point that insurers are not usually systemically risky and did not cause the financial crisis. First up a special report from the international insurance think tank, the Geneva Association which says the core activities of insurers and reinsurers do not pose systemic risks. This is because the insurance business model has the following specific features that make it a source of stability in the financial system:

  1. Insurance is funded by upfront premiums, giving insurers strong operating cash flow without requiring wholesale funding.
  2. Insurance policies are generally long-term, with controlled outflows, enabling insurers to act as stabilizers to the financial system.
  3. During the hard test of the financial crisis, insurers maintained relatively steady capacity, business volumes and prices.

The Geneva Association’s observations follow the recent release of a report by the Property Casualty Insurers Association of America (PCIAA) and NERA Economic Consulting  that concludes  that a financial institution’s asset size should not be the primary determinant of systemic risk. In fact PCIAA/NERA’s study found that using size alone can have major negative economic consequences, cost jobs and increase systemic risk if used in financial services reform legislation. Meanwhile, an online article by Business Insurance’s Mark Hofmann reports that a coalition of property/casualty insurers has sent a letter to the chairman of the Senate Banking, Housing and Urban Affairs Committee asking that the p/c industry not be subject to “bank-centric† financial services regulation. Check out I.I.I. information on regulation modernization.