Insurers and the Economy

Suicide-armed assaults and bomb attacks may become an even more attractive tactic for terrorist groups to replicate following the November 13, 2015 attack in Paris, France, according to catastrophe modeling firm RMS.

In a blog post, RMS writes that the Paris attacks—which killed more than 125 people and left 350 injured—are the deadliest in Europe since the 2004 train bombings in Madrid, Spain, where 191 people were killed and over 1,800 injured.

The attacks have exposed France’s vulnerability to political armed violence and alerted the rest of Europe to the threat of salafi-jihadists within their domain, according to RMS.

RMS also notes that the chosen strategy in last Friday’s attacks offers greatest impact. For example, the suicide armed attacks or sieges witnessed at the Bataclan Theater involved a group opening fire on a gathering of people in order to kill as many as possible.

Similar to the Mumbai attacks in 2008, the ability to roam around and sustain the attack, while being willing to kill themselves in the onslaught makes such terrorist attacks more difficult to combat.

From the terrorist’s perspective, these assaults offer a number of advantages, such as greater target discrimination, flexibility during the operation, and the opportunity to cause large numbers of casualties and generate extensive worldwide media exposure.”

Such attacks typically will target people in crowded areas that lay outside any security perimeter checks such as those of an airport or at a national stadium. Probable targets for such attacks are landmark buildings with a large civilian presence, RMS suggests.

Business Insurance reports that victims of the Paris attacks—whether French national or not—can claim compensation for personal injury from Le Fonds de Garantie des Victimes des Actes de Terrorismes et d’Autres Infractions (FGTI), as detailed by France’s insurance industry association Fédération Française des Sociétés d’Assurances on its website here.

France also has a state-backed reinsurer for property losses caused by terrorism, known as GAREAT (Gestion de l’Assurance et de la Réassurance des Risques Attentats et Actes de Terrorisme), which will likely cover any insured property losses resulting from the attacks.

Check out I.I.I. facts and statistics on global terrorism losses here and the latest I.I.I. paper on the renewed and restructured Terrorism Risk and Insurance Program in the U.S.

The expected $2 billion minimum economic cost of the South Carolina and eastern U.S. floods in early October will place the event as one of the top 10 costliest non-tropical cyclone flood events in the country since 1980.

Aon Benfield’s latest Global Catastrophe Recap report, which evaluates the impact of natural disaster events occurring worldwide during October 2015, reveals that already public and private insurers have reported more than $400 million in payouts from the event.

Days of relentless record-setting rainfall caused by a complex atmospheric set-up brought tremendous flooding across much of South Carolina, leaving at least 19 dead, Aon reported.

The event caused considerable flood inundation damage to residential and commercial properties, vehicles, and infrastructure after more than two feet (610 millimeters) of rain fell from October 1 to 5.

Aon noted that the minimum $2 billion in total economic losses from the event includes infrastructure and $300 million in crop damage.

Preliminary reports from insurers suggest roughly $350 million in claims.

However, additional insured losses of at least $100 million are expected via the federal National Flood Insurance Program (NFIP) and the USDA RMA crop insurance program.

A recent article by Insurance Journal noted that the potential exposure home insurers in South Carolina face from the early October event is estimated at $18 billion. That’s according to figures by catastrophe modeling firm CoreLogic.

According to the Insurance Information Institute (I.I.I.), none of the 10 largest floods as ranked by NFIP payouts occurred in South Carolina (see below).

However, the state was affected by three of the most costly U.S. hurricanes: Hurricanes Charley and Frances in 2004 and Hurricane Hugo in 1989.

The list includes events from 1978 to June 30, 2015, as of August 21, 2015.


Those of us in the Northeast still thawing out from the last two winters will be relieved to hear that this year’s winter is likely to bring warmer and wetter conditions thanks to El Niño.

NOAA’s just-released 2015 U.S. Winter Outlook (December through February) calls for cooler and wetter weather in the South, and above-average temperatures in the West and across most of the Northern tier states.



That’s not to say there won’t be snow.

NOAA says this year’s El Niño, among the strongest on record, is expected to influence weather and climate patterns this winter by impacting the position of the Pacific jet stream.

In the words of Mike Halpert, deputy director, NOAA’s Climate Prediction Center:

A strong El Niño is in place and should exert a strong influence over our weather this winter. While temperature and precipitation impacts associated with El Niño are favored, El Niño is not the only player. Cold-air outbreaks and snow storms will likely occur at times this winter. However, the frequency, number and intensity of these events cannot be predicted on a seasonal timescale.”

Other factors that can play a role in the winter weather NOAA says include the Arctic Oscillation, which influences the number of arctic air masses that penetrate into the South and nor’easters on the East Coast, and the Madden-Julian Oscillation, which can impact the number of heavy rain storms in the Pacific Northwest.

Winter storms are historically very expensive for insurers, and the third-largest cause of catastrophe losses, behind hurricanes and tornadoes. Check out the I.I.I.’s insurance-related facts and statistics on winter storms here.



Wildfires in 2015 have already caused more damage and financial loss in the United States than in any other year since 2007.

Aon Benfield’s latest Global Catastrophe Recap report reveals that California wildfires during September destroyed more than 2,000 homes and resulted in estimated insured losses of at least $1.1 billion—the costliest since 2007.

The Valley Fire, northwest of San Francisco, and the Butte Fire, southeast of Sacramento, were the most destructive of the fires.

In its report, Aon notes that the Valley Fire left four people dead, destroyed 1,958 residential and commercial structures and damaged 93 others. It is the third-most damaging wildfire in state history.

Total economic losses were estimated beyond $1.5 billion, while preliminary insured losses were put at in excess of $925 million, Aon reports.

The Butte Fire left two people dead and destroyed 475 homes, 343 outbuildings and damaged 45 other structures. It is the seventh most damaging wildfire in state history.

Total economic losses were estimated at $450 million while preliminary estimated insured losses are in excess of $225 million.

With the peak of California wildfire season just beginning, the severity of the September events serves as a reminder of how costly the peril can be for the insurance industry, Aon Benfield said.

Elsewhere around the world, wildfires continued to pose problems in parts of Indonesia as officials declared 2015 the worst year for wildfires since 1997.

One study reported that Indonesia would endure $4 billion in direct and secondary economic losses from the fires in the regions of Sumatra and Kalimantan, Aon said.

The Insurance Information Institute (I.I.I.) provides some useful facts and statistics on wildfires here.

A recent I.I.I. media advisory notes that seven of the 10 costliest wildfires in U.S. history in terms of insured losses have occurred in California. The costliest of these was the 1991 Oakland fire which produced $2.7 billion in claims (in 2014 dollars).

For more on the California wildfires, Janet Ruiz, I.I.I.’s Northern California-based representative can be reached at or (707) 490-9375.

The explosions at the Port of Tianjin, China are set to become one of the largest insured manmade losses in Asia to-date with potential losses of up to $3.3 billion, according to a new report by Guy Carpenter.

The event, which blasted shipping containers, incinerated vehicles in the port and on an adjacent highway overpass, destroyed warehouses, production facilities and dormitories, and impacted a nearby railway station and residential structures, will also be considered one of the most complex insurance and reinsurance losses in recent history.

Many classes of insurance were impacted by the loss, including: containers; cargo in containers; property; auto; and general aviation.

While access to the site is limited, Guy Carpenter said its satellite-based catastrophe evaluation service known as CAT-VIEW was able to utilize high resolution pre- and post-event satellite imagery to understand what exposures were present at the time of the blast and therefore could contribute to the loss.

The findings come as a new study published by Lloyd’s says that manmade risks are having an increasingly significant impact on economic output at risk (GDP).

In its analysis, Lloyd’s City Risk Index finds a total of $4.6 trillion of projected GDP is at risk from 18 manmade and natural disasters in 301 major cities around the world—out of a total projected GDP between 2015 and 2025 of $373 trillion.

However, manmade threats such as market crash, power outages and nuclear accidents are associated with almost half the total GDP at risk.

A market crash is the greatest economic vulnerability—representing nearly one quarter ($1.05 trillion) of all cities’ potential losses, Lloyd’s says.

New and emerging threats such as cyber attack, human pandemic, plant epidemic and solar storm are also having a growing impact, representing more than one fifth of total GDP at risk, Lloyd’s reports.

Governments, businesses and insurers must work together to ensure that this exposure—and the potential for losses—is reduced, according to Lloyd’s CEO Inga Beale.

Lloyd’s research shows that a 1 percent rise in insurance penetration translates into a 13 percent reduction in uninsured losses—a 22 percent reduction in taxpayers’ contribution following a disaster.

Insurance also improves the sustainability of an economy and leads to greater rates of growth. A 1 percent rise in insurance penetration leads to increased investment equivalent to 2 percent of national GDP, Lloyd’s notes.

Check out the I.I.I. publication A Firm Foundation: How Insurance Supports the Economy.

A New York Times article over the weekend takes a behind-the-scenes look at the recent deadly blasts at the port city of Tianjin in China.

The series of explosions and fire that began at a hazardous chemicals storage warehouse in the Binhai New Area of Tianjin August 12, leveled a large industrial area, leaving at least 150 dead and more than 700 injured.

As reported by the NYT, the lack of safety and oversight at the third largest port worldwide is shocking.

Here’s an excerpt:

As recently as 2013, Chinese academics had warned of many unacceptable environmental risks in the district, citing the growing chance of accidents from the storage of dangerous materials so close to residential neighborhoods and singling out the area where the Rui Hai facility was located. That warning, and others like it dating to at least 2008, were ignored.”

The Tianjin catastrophe points to the fact that man-made disasters can have a major impact on a global scale. Warehouses, buildings, thousands of containers and new vehicles were destroyed in the blasts, according to reports.

An initial estimate from analysts put the potential insurance loss at up to $1.5 billion. Some claims are likely to hit reinsurers, rating agencies say.

The incident also highlights the growth of accumulation risks, particularly in highly industrialized areas, according to Dieter Berg, head of department business development, marine global partnership at Munich Re.

In a recent online post for Munich Re’s publication Topics Online, Berg noted:

We as reinsurers have observed again and again over the past years how such individual events can have regional, or even global impact.”

He gave examples such as the destruction of a power plant on Cyprus in 2011 that impacted the national economy, as well as floods in Thailand in 2011 that brought conveyor belts to a halt worldwide.

While insurers and reinsurers are focused on the large loss potential arising from natural hazards, such as flooding or hail, losses are often caused by human beings, particularly around industrial facilities, Berg added.

Such losses (from explosion) are difficult to model, but are comparable to modeling terrorism losses. For large port facilities, we thus analyze not only natural hazards such as flooding, earthquake or hail, but also this type of scenario.”

Insurers and reinsurers need to fully understand the value of goods in ports and all potential exposures in order to calculate adequate premiums, he advised.

The Insurance Information Institute (I.I.I.) has facts and statistics on man-made disasters here.


While total economic losses from natural catastrophes and man-made disaster events remain far below-average in the first half of 2015, the global insurance and reinsurance industry is covering a higher than average percentage of those losses.

That’s the key takeaway from preliminary sigma estimates of global catastrophe losses for the first half of 2015, just released by Swiss Re.

Of the $37 billion in total economic losses from disaster events in the first half of 2015, the global insurance and reinsurance industry covered nearly 45 percent, or $16.5 billion, of these losses.

This is higher than the previous 10-year average of 27 percent covered by the global re/insurance industry.

Of the overall insured losses in the first half of 2015, $12.9 billion came from natural disasters, down from nearly $20 billion in first half 2014, and again below the average first-half year loss of the previous 10 years ($25 billion).

Man-made disasters triggered an additional $3.6 billion in insured losses in the first half of 2015, sigma said.

So why did insurance and reinsurance cover a higher proportion of global catastrophe losses in the first half?

The answer lies in the location of the most costly insured natural catastrophes losses for the insurance industry in the first half of 2015—thunderstorms in the United States and winter storm losses in Europe.

These larger loss events, as well as the severe winter weather in North America, all contributed to the lower percentage of uninsured losses through the first half of the year.

Here’s the Swiss Re chart showing the dollar breakout of insured and uninsured catastrophe-related losses from 2005 through 2015:


Note: insured losses + uninsured losses= total economic losses

But, as Artemis blog reports here, sadly the lower proportion of uninsured losses is not related to any major increase in insurance penetration.

The Nepal earthquakes provide a striking example. While economic losses from the quakes are estimated at $5 billion, only around $160 million were insured.

In the words of Kurt Karl, chief economist at Swiss Re:

The tragic events in Nepal are a reminder of the utility of insurance. Insurance cover does not lessen the emotional trauma that natural catastrophes inflict, but it can help people better manage the financial fallout from disasters so they can start to rebuild their lives.”

Check out Insurance Information Institute (I.I.I.) facts and statistics on global catastrophes.

The percentage of businesses purchasing commercial insurance increased in the second quarter of 2015, according to the latest Commercial P/C Market Index survey from the Council of Insurance Agents & Brokers (CIAB).

An overwhelming 90 percent of brokers responding to the survey said that take-up rates had increased, in part as premium savings drove interest in new lines of coverage and/or higher limits.

Cyber liability continues to gain traction, brokers noted, and this trend is expected to continue as the cyber insurance market matures, new insurers, products and capacity come to market and as companies realize the true extent of their cyber exposure.

Broker comments came as The Council’s analysis shows that rates declined across all commercial lines in the second quarter, continuing the downward trend from the first three months of 2015.

Premium rates across all size accounts fell by an average of 3.3 percent compared with a 2.3 percent decrease in the first quarter of 2015.

Large accounts once again saw the steepest drop in prices of 5.2 percent, while medium sized accounts fell 3.5 percent and small accounts fell 1.3 percent.

Commercial property, general liability and workers’ compensation premiums were most frequently reported down across all regions, with a slight uptick in commercial auto.

Ken Crerar, president and CEO of The Council said:

As the soft market continues in 2015, carriers are competing for good risks and are willing to work with brokers on price and terms.”

Meanwhile, average flood insurance rates saw an uptick across all regions, most frequently in the Southeast and Southwest regions, the Council noted.

This increase is likely due to premium increases, assessments, and surcharges, mandated by both the Biggert Waters Act and the Homeowner Flood Insurance Affordability Act (HFIAA), which went into effect April 1.

Find out more about business insurance from the Insurance Information Institute (I.I.I.).

Despite a rather quiet first half of 2015 for global catastrophes, insurers endured at least five separate billion-dollar insured loss events (all weather-related), according to Aon Benfield’s just-released Global Catastrophe Recap: First Half of 2015.

None of the events crossed the multi-billion dollar loss threshold ($2 billion or greater) and four of the five were recorded in the United States, Aon Benfield said.

The costliest event for the insurance industry was an extended period of snow and frigid temperatures in the U.S. during February ($1.8 billion in insured losses). (See our earlier post on first half winter storm losses here).

Other billion-dollar insured loss events in the U.S. included an early April severe thunderstorm outbreak ($1 billion), a severe thunderstorm and flash flood event at the end of May ($1.2 billion), and projected losses arising from the ongoing drought across the West ($1 billion and counting).

The sole billion-dollar insured loss event to be recorded outside the U.S. during the first half of 2015 was Windstorms Mike and Niklas in Western and Central Europe at the end of March/early April. Niklas became the first billion-dollar insured loss windstorm event in Europe since Xaver in December 2013, Aon Benfield said.

Note: the loss totals, which include those sustained by public and private insurance entities, are preliminary and subject to change.

If you’re wondering about the difference between economic and insured loss totals, the 7.8 magnitude earthquake that hit Nepal on April 25 (and subsequent aftershocks) is a good example.

From an economic loss standpoint, the Nepal earthquake ranks as the costliest global natural disaster during the first half of 2015, Aon Benfield reports.

Total damage and reconstruction costs throughout the impacted areas were estimated as high as $10 billion (subject to change), with reconstruction costs in Nepal alone put at nearly $7 billion.

Despite having a multi-billion-dollar economic cost to Nepal with overall economic effects poised to equal more than one-third of the country’s entire GDP, only a very small fraction of those losses – about 2 percent – was covered by insurance.

Check out Insurance Information Institute (I.I.I.) facts and statistics on global catastrophes here.

Insurance Information Institute (I.I.I.) chief actuary James Lynch explains how insurance float works and the impact it has on insurance rates. 

Asked for the secret to his success, famed Berkshire Hathaway CEO Warren Buffett often points to insurance float, “money that doesn’t belong to us but that we can invest for Berkshire’s benefit.”

He is talking about premium and loss reserves, the funds that any insurer holds while waiting for claims to settle. That money gets invested, and the investment income is an important revenue source for insurers. It also lowers insurance premiums, since actuaries take investment income into account when setting prices.

But these days float isn’t so buoyant, as you can see from the accompanying chart, which shows the net new money yield – what insurers typically obtain when they invest the float, adjusted for inflation. The National Council on Compensation Insurance (NCCI) estimates the yield, and we at I.I.I. made the inflation adjustment.


The chart goes back decades, and it is easy to see the steady decline in yields. Thirty years ago the float yielded 5 percentage points above the inflation rate.

Yields have fallen inexorably. In recent years, the float has struggled to beat inflation. The post-recession peak has been 2009, when new money yields beat inflation by 2.6 percentage points, but in four of the past six years the net new money yield was negative.

Insurers differ in their investment strategy, but taken as a whole, the industry has suffered from the loss in yield. As a result, insurers have had to deliver better underwriting results in order to be as profitable as they were 10, 20 or 30 years ago.

Last year the property/casualty industry wrote a combined ratio of 97, and delivered an 8.2 percent return on equity.  The industry had a similar ROE in 1983 – 8.3 percent — but ran a combined ratio of 112, thanks in no small part to the tailwind provided by investment yields nearly 8 percentage points above inflation.

Put another way, rates have to be about 15 percent higher today to achieve the same return as a generation ago, and that’s before considering inflation or any other changes in the marketplace.

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