Insurers and the Economy


It’s Election Day and as you head to the polls the insurance issue that remains at the top of mind for most is the future of the Terrorism Risk Insurance Act (TRIA).

In a new paper the Insurance Information Institute (I.I.I.) says the question of what happens if the federal act is not renewed by Congress is no longer a theoretical one:

Since insurance policies negotiated during 2014 extend beyond the imminent December 31 expiration date of the program, the negative consequences of non-renewal are already being experienced by businesses across America and their insurers.”

The private sector simply does not have the capacity to provide insurance or reinsurance for terrorism risk to the extent currently provided by the federal program, the I.I.I. says. As a result, in the absence of the act, terrorism risk insurance would be less available and less affordable.

Over at WGA InsureBlog, David Bardelli, senior vice president and casualty practice leader for William Gallagher Associates, notes that with Congress not back in session until mid-November, the clock is ticking for lawmakers to come up with a solution before the end of the year.

Bardelli writes:

A lame duck Congressional session could pass an extension, which has been the case with previous versions of the bill. With House Democrats and Republicans at odds over the latest version of the House Committee’s proposal, it looks like the November elections will have the biggest impact on what happens with TRIA.”

Insurers are not alone in their concerns over the future of terrorism risk insurance. Just on Friday, the Real Estate Roundtable reported that while senior commercial real estate executives see a continuing recovery in the markets, they remain concerned about the lack of clear direction in many federal policies, primarily terrorism risk insurance.

Roundtable President and CEO Jeffrey D. DeBoer, said:

Without a long-term reauthorization of TRIA when policymakers return in November, financing for CRE projects will be directly threatened, job creation will suffer as it did after 9-11, and businesses can expect a general slowdown as many financing contracts will be found to be in technical default without terrorism insurance.”

Congress will return November 12 for the “lame duck” session.

Some 25 years after the Loma Prieta earthquake, the San Francisco Bay area faces increased risk of a major quake, two separate studies suggest.

A study published online in the Bulletin of the Seismological Society of America says that sections of the San Andreas fault system—the Hayward, Rodgers Creek and Green Valley faults—are nearing or past their average earthquake recurrence intervals.

It says the faults ‘are locked and loaded’ and estimates a 70 percent chance that one of them will rupture within the next 30 years. This would trigger an earthquake of magnitude 6.7 or larger, the study’s authors say.

A second study by catastrophe modeler RMS says the next major quake could be financially devastating to the Bay Area economy in part because of low earthquake insurance penetration.

RMS warns that a worst-case 7.9 magnitude earthquake on the San Andreas fault could cause over $200 billion in commercial and residential property losses, yet only 10 percent of households currently have earthquake insurance.

Dr. Patricia Grossi, earthquake expert at RMS says:

The Bay Area has made significant progress in terms of infrastructure preparedness and retrofitting, but without significant earthquake insurance penetration to facilitate rebuilding, the recovery from a major earthquake will be considerably harder.”

Without insurance, homeowners may walk away after a quake if the residual value of their property is less than the outstanding value of their mortgage, RMS notes. Even those with insurance are likely to struggle to meet high deductibles, potentially leading to significant blight and disrepair in badly damaged neighborhoods.

Despite low earthquake insurance penetration, a magnitude 7.0 earthquake rupturing on the Hayward fault could produce $25 billion in insured loss across residential and commercial lines of business, RMS concludes.

BayAreaEarthquakeRisk

A glance at the economic context shows that since the 1989 Loma Prieta earthquake, population in the Bay Area has increased 25 percent, while the value of residential property has jumped by 50 percent, reaching $1.2 trillion.

The Bay Area is also the most productive economy in the U.S. with a gross domestic product of $535 billion, ranking 19th in the world compared to national economies, RMS says.

Check out I.I.I. facts and stats on earthquakes.

While low interest rates are likely to continue to present a challenge well into 2015, a stronger economy presents the property/casualty insurance industry’s best opportunity for growth, according to I.I.I. president Dr. Robert Hartwig.

Dr. Hartwig shared his thoughts on the industry’s growth outlook in his Commentary on 2014 First Half Results.

There are two principal drivers of premium growth in the P/C insurance industry he noted: exposure growth and rate activity.

Exposure growth—basically an increase in the number and/or value of insurable interests (such as property and liability risks)—is being fueled primarily by economic growth and development.

Although the nation’s real (inflation-adjusted) GDP in the first quarter of 2014 actually declined at an annual rate of -2.1 percent, economic growth snapped back in the second quarter, as real GDP surged by 4.6 percent.

Dr. Hartwig says:

Growth in key areas of the economy such as new vehicle sales, multi-unit residential construction, and consistent employment and payroll growth are clearly benefitting the P/C insurance industry. For the remainder of 2014 and into 2015, the consensus forecasts call for real GDP growth to hold steady at about 3 percent.”

The other important determinant in industry growth is rate activity. Rates tend to be driven by trends in claims costs, conditions in the reinsurance market, marketing and distribution costs, and investments in technology, among other factors.

Although it’s challenging to foresee the interplay of all of these and macroeconomic factors, Dr. Hartwig says it is certainly possible that overall industry growth in net written premiums could keep pace with overall economic growth in 2014.

In the first half of 2014 the industry’s net written premium growth actually decelerated slightly to 4.0 percent in the first half of 2014, compared to 4.3 percent in the first half of 2013.

But, as Dr. Hartwig concludes:

Premium growth, while still modest, is now experiencing its longest sustained period of gains in a decade.”

Workers compensation is likely to remain the fastest growing major P/C line of insurance in 2014 if economic growth and hiring behave as projected.

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.

A report just released by the National Highway Transportation Safety Administration (NHTSA) puts a $277 billion price tag on the economic costs of traffic crashes in the United States in 2010, a 20 percent increase over its 2000 data.

The economic costs are equivalent to approximately $897 for every person living in the U.S. and 1.9 percent of U.S. Gross Domestic Product, the NHTSA says, and based on the 32,999 fatalities, 3.9 million non-fatal injuries, and 24 million damaged vehicles that took place in 2010.

Included in these economic costs are lost productivity, medical costs, legal and court costs, emergency service costs (EMS), insurance administration costs, congestion costs, property damage and workplace losses.

When you add in the $594 billion societal cost of crashes, such as harm from the loss of life and pain and decreased quality of life due to injuries, the total impact of crashes is $877 billion.

The following chart breaks out the economic costs:

It’s interesting to note that the most significant components were property damage and lost market productivity. In dollar terms, property damage losses were responsible for $76.1 billion and lost productivity (both market and household) for $93.1 billion.

The NHTSA explains that for lost productivity, these high costs are a function of the level of disability that has been documented for crashes involving injury and death. For property damage, costs are mainly a function of the very high incidence of minor crashes in which injury does not occur or is negligible.

Another takeaway from the survey is the impact of congestion, which accounts for some $28 billion, or 10 percent of total economic costs. This includes travel delay, added fuel consumption, and pollution impacts caused by congestion at the crash site.

There’s a separate chapter of the NHTSA report devoted to congestion impacts that includes some fascinating data.

For additional data on motor vehicle crashes, check out I.I.I. facts and statistics on highway safety.

Global insurance markets are seeing stronger growth, thanks to the economic upswing in many industrialized countries, according to an annual study by Munich Re.

Munich Re’s Insurance Market Outlook 2014 finds that rate increases in a number of high volume markets are also having a positive effect on premium growth.

At the global level, Munich Re expects real overall growth in primary insurance premiums at 2.8 percent this year and 3.2 percent in 2015, influenced mainly by stronger growth again in life insurance.

[In 2013, global insurance markets saw restrained growth of 2.1 percent in real terms, with primary insurance premiums in the life insurance segment growing by just 1.8 percent, due to a number of regulatory one-off effects.]

While in recent years dynamic growth in emerging countries has served as the decisive growth driver of global premium volumes, especially in property/casualty insurance, Munich Re notes that it is the industrial countries whose contribution to growth is currently increasing.

Many emerging countries are currently experiencing a cooling of their economies, and this is expected to have a dampening effect on premium growth in 2014 and 2015.

In the long-term however, Munich Re expects that emerging countries will continue to become more important for the global insurance markets.

The emerging Asian countries will see the highest increases, with their share of global premium volume expected to rise by 5 percentage points, from 9 percent in 2013 to 14 percent in 2020.

The Chinese market, already the fourth-largest primary insurance market with premium volume of over €210 billion in 2013, will more than double by 2020 to become the third-largest market worldwide, according to Munich Re.

Images of wildfires burning in suburban neighborhoods in Southern California are a reminder of the risk faced by many homeowners.

Nearly 2 million, or 14.5 percent, of the 13.7 million homes in California face severe wildfire risk, according to the most recent FireLine State Risk Report by Verisk Underwriting Solutions.

Some 417,500 of these high-risk homes are located in Los Angeles County, while 239,400 are located in San Diego County.

Check out this snapshot from the Verisk report illustrating California’s wildfire risk:

For the latest information on the wildfires burning in the state go to the CAL FIRE (California Department of Forestry and Fire Protection) site.

I.I.I. facts and statistics on wildfires are available here.

Good news for insurers. Latest data points to a promising decline in the national problem of metal theft, according to the National Insurance Crime Bureau (NICB).

In a new report, the NICB notes that in just three years the number of metal theft insurance claims has declined by over 26 percent from 14,676 in 2011 to 10,807 in 2013.

The report reviews metal theft claims from January 1, 2011, through December 31, 2013.

During this period, 41,138 insurance claims for the theft of copper, bronze, brass or aluminum were handled – of which 39,976 (97 percent) were for copper alone.

The NICB notes that when the number of metal theft insurance claims per month and monthly average copper prices are compared, the number of claims filed is found to have a statistically significant correlation with the price of copper.

Tightening controls on the sale of scrap metal have had a positive impact in local communities, the NICB says.

Ohio still ranks first of all states generating 4,144 metal theft claims in 2013, followed by Texas (2,827), California (2,489), Pennsylvania (2,345) and Georgia (2,067).

New York-Newark-Jersey City, NY-NJ-PA (1,725 claims) was the leading statistical area generating the most metal theft claims.

More on the link between copper prices and incidents of metal theft in this NICB video.

If you haven’t read it already, the April edition of the Global Catastrophe Recap Report by Aon Benfield’s Impact Forecasting puts some numbers around the thunderstorm events that devastated parts of the United States last month.

According to the report, severe weather and flash flooding that caused extensive damage across more than 20 states in April will likely be the first billion-dollar economic loss event of 2014 attributed to convective thunderstorms.

At least 39 people were killed and 250 injured amid nearly 70 confirmed tornado touch-downs, which occurred across more than 20 states in the Plains, Mississippi Valley, Southeast, Midwest, and Mid-Atlantic.

Economic losses are set to exceed $1 billion, with insured losses minimally in the hundreds of millions of dollars, Impact Forecasting reports.

Another U.S. severe weather outbreak in April led to major damage in parts of the Plains, Midwest and the Mississippi Valley. The most significant damage was due to hail, as hailstones the size of softballs struck the Denton, Texas metro region.

Total economic losses were estimated at $950 million, with insured losses in excess of $650 million, according to the report.

In a press release Adama Podlaha, head of Impact Forecasting, says:

The recent outbreaks of tornadoes, large hail and damaging straight-line winds in the United States have emphasized the importance of historical data analysis for insurers and reinsurers when trying to forecast future losses.”

If you’re wondering how many convective thunderstorm events made the list of significant natural catastrophes in 2013, take a look at this slide from a presentation made by I.I.I. president Dr. Robert Hartwig at the National Tornado Summit in February.

It shows that thunderstorms accounted for six of the nine significant natural catastrophe events with $1 billion economic loss and/or 50 fatalities in 2013.

Allowing the terrorism risk insurance program to expire could increase federal spending by billions of dollars in the event of a future terrorist attack, according to a new study by RAND Corporation.

RAND reports that for terrorist attacks with losses up to about $50 billion, not having the Terrorism Risk Insurance Act (TRIA) in place would result in higher federal spending.

For terrorist attacks with losses ranging from $14 billion to $26 billion, RAND predicts the federal government would spend $1.5 billion to $7 billion more without TRIA than with the program in place.

The greater federal spending without TRIA would result from less insurance coverage, leading to greater uninsured loss and hence greater demand for federal disaster assistance.

RAND’s analysis comes as a bipartisan agreement was introduced in the Senate last week that would extend TRIA for seven years, with changes in the insurer co-pay and mandatory recoupment threshold.

An excerpt from the RAND report reads:

If allowing TRIA to expire causes terrorism insurance coverage to revert to pre-TRIA levels, a greater fraction of loss in a terrorist attack would go uninsured than would be the case with TRIA in place. More loss going uninsured would increase demand for other forms of compensation, which could, in turn, lead to an increase in other (non-TRIA) forms of federal disaster assistance.”

The study makes the point that the federal government currently makes no net expenditures under TRIA until the commercial insurance industry has paid at least $27.5 billion in claims in TRIA-eligible lines.

As the size of the attack increases and the insured loss increases beyond the $27.5 billion industry retention amount, the federal liability through TRIA kicks in.

Based on current take-up rates, a 9/11 type attack would result in an insured loss of about $33 billion, RAND notes. Therefore, taxpayers would contribute through TRIA only in an attack comparable in magnitude to 9/11, which remains the second most costly insurance event in U.S. history, exceeded only by Hurricane Katrina.

For attacks with greater losses, in excess of $50 billion, the increase in disaster assistance after an attack without TRIA begins to be countered by the elimination of federal payments through the TRIA program, eventually leading to a net decrease in federal spending should TRIA expire.

RAND concludes:

From the perspective of federal spending, TRIA therefore appears to be a reasonable federal policy: In the absence of a terrorist attack, it costs taxpayers relatively little, and in the event of a terrorist attack comparable to any experienced before, it is expected to save taxpayers money.”

Claims Journal reports on the study findings here.

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