Category Archives: Insurers and the Economy

Tianjin: A Reminder of Insurance Need in Developing Countries

The explosions at the Port of Tianjin, China could ultimately become one of the largest man-made insurance loss events worldwide ever recorded, according to Swiss Re sigma.

Based on Swiss Re’s latest estimates, the total insured property loss of the Tianjin explosions is likely to be around USD 2.5 billion to USD 3.5 billion, making it the largest man-made insured loss event in Asia ever recorded.

Tianjin currently ranks as the third largest man-made insured global loss (in 2015 dollars), behind the September 11, 2001, terrorist attacks in New York, Washington and Pennsylvania and the 1988 Piper Alpha oil rig disaster.

Screen Shot 2016-03-30 at 10.09.19 AM

The Tianjin experience highlights the new potential risks facing developing countries with rapidly-developing economies, according to the latest sigma study.

2015 was the third year in a row that the biggest man-made loss globally originated from an emerging market, a reminder of the importance of insurance for developing countries, sigma says.

“The event shows the large loss potential in a country like China, with a fast-growing economy. If further evidence is needed, in 2013 a fire at a major high-tech semiconductor plant in Wuxi, also in China, caused insured losses of USD 0.9 billion.”

Financial protection through insurance is key to restoring business operations and recouping losses, sigma notes.

Accurate assessment of exposures, appropriate coverage terms and adequate pricing are likewise crucial:

“For re/insurers, they need to actively identify monitor and manage exposures in hazard zones and in areas with high asset-value concentrations.”

The complexities of the Tianjin loss have challenged re/insurers, and highlighted the accumulation of risks that can arise from a single large-scale industrial catastrophe event.

While destroyed and damaged vehicles account for most of the Tianjin losses, uncertainties remain as to the types of insurance policies involved.

Property and cargo present major risk accumulation factors in ports, especially in big centers like Tianjin, sigma observes.

The Insurance Information Institute has useful facts and statistics on man-made disasters here.

How Falling Oil Prices Affect Energy Losses

Is there a connection between falling oil prices and insurance claims?

This question is tackled by broker Marsh in a just-released research report: Can Energy Firms Break the Historical Nexus Between Oil Price Falls and Large Losses?

According to Marsh, insured losses in the global upstream energy sector reached a peak in the 1980s, shortly after the price of Brent crude oil fell from $35 to $15 per barrel.

In the late 1990s, this cycle occurred again when the price fell below $10 per barrel and again in the years following the 2008 slump, when the price fell from more than $100 to $32 per barrel.

When oil prices fall, companies face less revenue and more strain on budgets. Already, Marsh notes that oil and gas companies have been canceling projects and making staffing reductions.

But there are other potential cuts that are harder to quantify such as cuts in maintenance, health and safety measures, and employee training.

Cost-cutting decisions such as these appear to have led to increased losses in the past, according to the Marsh report:

Based on past experience, when this pullback in funding occurs, if it hasn’t already, we would expect to see an increase in losses soon after.”

Here’s the chart showing the link between oil prices and insurance claims:

Screen Shot 2016-03-27 at 10.22.07 PM

Despite falling revenues, Marsh urges energy firms to maintain their investment in risk management to reduce the potential for future major incidents and insurance claims.

Marsh also suggests that now is the time for energy firms to take advantage of lower prices in a benign insurance market to push for increased protection in uncertain times.

With the cost of insurance capital at historic lows, the opportunity clearly exists for companies to access cheap sources of capital from the insurance markets, reduce overall insurance premium costs, purchase insurance in areas that were previously omitted due to cost, and renegotiate coverage terms.”

Latest on Commercial P/C Insurance Pricing in 2016

Two separate market surveys point to a continuing decline in commercial property/casualty insurance rates.

Online insurance exchange MarketScout reported that the composite rate for p/c  business placed in the United States declined by 4 percent in January 2016.

Richard Kerr, CEO of MarketScout, noted that commercial property rates dropped from minus 2 percent in December 2015 to minus 5 percent in January 2016.

Commercial property insurers are getting ready to scratch each other’s eyes out as they fight for market share. We see nothing to prevent commercial property rates from dropping further.”

Business interruption, BOPs, professional liability and D&O coverages were also more competitively priced in January 2016 versus December 2015, MarketScout said.

By account size, large and jumbo accounts (over $250,001) were assessed rates slightly higher in January 2016 than in the prior month–bucking the usual trend, while rates for small and medium sized accounts (all under $250,000) were more competitive.

Meanwhile, the Council of Insurance Agents & Brokers’ (The Council) fourth quarter Commercial P/C Market Index Survey showed that 2015 closed as it began–with continued decreases in commercial p/c rates.

All size accounts experienced decreases in the fourth quarter of 2015, consistent with the downward trend seen in the prior three quarters. Large accounts saw the biggest decrease at 3.7 percent, followed by medium-sized accounts at 3 percent, and small accounts at 1.5 percent, The Council said.

By line, the largest decreases were seen in commercial property, down 3.5 percent, and general liability, down 3.4 percent. Umbrella policy rates declined an average of 2.8 percent while workers compensation rates were down an average of 2.6 percent.

Ken A. Crerar, president/CEO of The Council noted:

This soft market presents both challenges and opportunities for brokers. Lower rates meant less revenue but as the economy improved, policyholders were seeking increased limits and additional lines of coverage. This gave our members a chance to be creative and provide added value to their clients beyond just negotiating lower rates.”

The Council will continue to monitor how trends and advancements like industry consolidation, the burgeoning cyber insurance market and the use of technology in modeling and underwriting impact rates and capacity in the insurance market in 2016.

Insurance Information Institute  commentary on the p/c industry financial results can be found here.

Modernizing Regulation Key To Insuring Sharing Economy

How free are insurers to provide the insurance products consumers want?

That’s a key question that the R Street Institute’s Insurance Regulation Report Card seeks to answer.

And it’s a very good question.

In the fourth and latest edition of the report R Street observes that regulation, in some cases, may hinder the speed with which new products are brought to market:

We believe innovative new products could be more widespread if more states were to free their insurance markets by embracing regulatory modernization.”

R Street says the most recent illustration of this challenge is seen in the different approaches individual states have taken to enable the timely introduction of commercial and personal insurance policies to cover ridesharing.

A compromise model bill to govern insurance requirements for ridesharing was announced by major representatives of the insurance industry and the burgeoning transportation network companies in March 2015.

The legislation alleviated what had been a major source of interindustry friction, R Street notes.

The model requires that:

– liability insurance with limits of $1 million be in-force any time a driver either is actively transporting a customer or en route to pick up a fare.

– any other time the driver is logged in to the TNC service, he or she must have coverage with minimum liability limits of $50,000 per passenger, $100,000 per incident and $25,000 for physical damage liability.

R Street writes:

The model would permit coverage to be procured either by the driver or the TNC,   expressly stipulates that it may be provided by the surplus lines market, preserves insurers’ right to exclude coverage and encourages states to approve new products to cover this emerging risk.”

Signatories to the compromise include Allstate, the American Insurance Association, Farmers Insurance, Lyft, the National Association of Mutual Insurance Companies, the Property Casualty Insurers Association of America, State Farm, Uber Technologies and USAA.

The report notes that in April 2015, Georgia became the first state to pass the compromise model ridesharing bill. The measure, H.B. 190, took effect January 1, 2016.

Have more questions? Check out the Insurance Information Institute’s (I.I.I.) Q&A on Ridesharing and Insurance.

An I.I.I. issues update on regulation modernization is available here.

U.S. Elections Add to Growing Political Risks Businesses Face

The 2016 U.S. presidential election is one of the rising political risks facing businesses and investors in the year ahead, according to Marsh’s Political Risk Map 2016.

Terrorism and struggling emerging economies, such as China and Russia, are also among the growing political risks businesses face.

Marsh notes that the recent terrorist attacks in Paris and San Bernardino, California have intensified political rhetoric and brought foreign relations and defense policy topics to the forefront.

With polls showing national security to be a major concern for voters, foreign policy will remain a key theme on the campaign trail in 2016 – and will be top of mind for the next presidential administration.”

Marsh observes that in the last decade multinational organizations have undertaken unprecedented international expansion, leaving them exposed to global credit and political risks like never before.

And those risks–including terrorism and political violence, armed conflicts, increasingly powerful anti-establishment political movements, and persistently low commodity prices–continue to grow.

Against this backdrop, it’s critical for businesses to be prepared for the possibility that political violence, unrest, or other large- scale crises will quickly develop in virtually any part of the world – including those countries that were historically seen as safe or stable, Marsh says.

Companies can prepare for these risks by managing their credit risk, building resilient supply chains, protecting their people and by protecting their assets through insurance.

Marsh notes:

Credit and political risk insurance can protect against a variety of risks, including expropriation, political violence, currency inconvertibility, non-payment, and contract frustration.”

Marsh’s Political Risk Map 2016, with data and insight from BMI Research, presents country risk scores for more than 200 countries and territories, helping businesses and investors make smarter decisions about where and how to deploy financial resources–including risk capital–globally in 2016 and beyond.

Winter Weather Tops Billion Dollar Insured Cat Losses in 2015

Five of the seven individual billion-dollar insured loss natural disaster events in 2015 were recorded in the United States, according to Aon Benfield’s Annual Global Climate and Catastrophe Report.

The other two billion dollar events were recorded in Europe.

All of the events were weather-related and below the average of eight. The five events in the U.S. were equal to the 2000-2014 average.

Italy’s May 2012 earthquake was the last non-weather billion-dollar insured loss event.

The all-time record of 17 billion-dollar weather events was set in 2011.

The costliest individual insured loss event of the year was a prolonged stretch of heavy snow, freezing rain, ice, and frigid cold that impacted much of the eastern United States in February 2015. That event prompted an estimated $2.1 billion insured loss.

Other billion-dollar insured loss events in the U.S. included a severe thunderstorm outbreak in the U.S. in May and severe thunderstorms and flooding in December. Each of these events cost an estimated $1.4 billion in insured losses.

Another thunderstorm event in the U.S. in April cost $1.2 billion, while the yearlong drought in the West was another $1 billion insured loss event.

The two non-U.S. billion dollar insured loss events of 2015 consisted of the catastrophic December flooding in the UK that cost an estimated $1.3 billion, and European windstorms Mike and Niklas in March and April which resulted in an estimated insured loss of $1 billion.

CostliestInsuredCatLosses2015

Aon Benfield noted that on a global scale disasters caused insured losses of $35 billion in 2015, below the 15-year mean of $51 billion and 14 percent lower than the median ($40 billion).

This was the fourth consecutive year with declining catastrophe losses since the record-setting year in 2011.

The U.S. accounted for 60 percent of global insured disaster losses in 2015, reflecting the high rate of insurance penetration in the country, according to the report.

I.I.I. facts and statistics on U.S. catastrophes are available here.

Man-made Disaster Losses Increase in 2015

Natural catastrophes made up the lion’s share of global insured disaster losses in 2015, but a man-made loss was the year’s costliest.

Preliminary estimates from Swiss Re sigma put insured losses from disaster events at $32 billion in 2015, of which $23 billion were triggered by natural catastrophes and $9 billion by man-made disasters.

The explosions at the Port of Tianjin, China in August are expected to lead to claims of at least $2 billion, making it the costliest event of the year and the biggest man-made insured loss in Asia ever, sigma said.

Some 173 people were killed and many more injured in the Tianjin explosions, which damaged and destroyed vehicles, shipping containers, production facilities and surrounding property.

The insured loss estimate is subject to a high degree of uncertainty due to the many different lines of business and coverage impacted, including potentially contingent business interruption,  sigma noted.

An  earlier  report by Guy Carpenter has suggested potential losses of up to $3.3 billion resulting from the Tianjin explosions.

figure_1_2015prel

Insured losses from man-made disasters were up 30 percent in 2015 at $9 billion, from $7 billion in 2014, according to sigma.

However, at $23 billion natural catastrophe insured losses were below the annual average of $55 billion for the previous 10 years.

Losses were caused by various severe natural catastrophes across different perils in 2015, including windstorms, hurricanes, earthquakes, flooding and wildfires.

A February winter storm in the United States was the costliest natural disaster of the year, resulting in insured losses of more than $2 billion.

Low activity during the North Atlantic hurricane season kept the total global insured loss low, sigma noted.

Sadly, approximately 26,000 people lost their lives in disasters this year, double the amount in 2014.

Large disasters in other parts of the world contributed to the high level of fatalities.

The magnitude 7.8 earthquake that struck Nepal and neighboring countries in April triggered a humanitarian catastrophe, killing around 9,000 people.

More than 5,000 people also died in waves of extreme temperatures during the summer season in India, Pakistan, Europe, North Africa and the Middle East.

And more lives were lost due to capsizing of many boats carrying migrants from conflict zones in northern Africa to Europe, often in unseaworthy vessels, sigma noted.

More facts and statistics on man-made  disasters available from the I.I.I. here.

Business Interruption: Risks and Losses On the Rise

Economic impact from business interruption (BI) is often much higher than the cost of physical damage in a disaster and is a growing risk to companies worldwide, according to a new report from Allianz Global Corporate & Specialty (AGCS).

Its analysis of more than 1,800 large BI claims from 68 countries between 2010 and 2014 found that business interruption now typically accounts for a much higher proportion of the overall loss than was the case 10 years ago.

Both severity and frequency of BI claims is increasing, AGCS warns.

The average large BI property insurance claim is now in excess of €2 million (€2.2 million: $2.4 million), some 36 percent higher than the corresponding average property damage claim of just over €1.6 million ($1.8 million), the global claims  review found.

The vast majority of BI losses are not caused by natural catastrophes, with non-natural hazard events such as human error or technical failure accounting for 88 percent of BI losses by value.

Reported loss estimates from the largest non-natural catastrophe BI events across the insurance industry during 2015 total more than $7 billion so far, with the Tianjin loss potentially accounting for almost half this total.

GlobalLossAtlas_471x150

Fire and explosion is the top cause of BI loss around the globe by value (2010-2014), with each incident analyzed averaging €1.7m ($1.9 million) in BI costs alone, but there are some major differences regionally.

Storm and flood related losses are notable in Asia, highlighting the region’s continuing economic development and increasing exposure to natural hazards.

Storm is also the top cause of BI loss in the Caribbean and Central America region, accounting for one-third of insurance claims by value.

As Chris Fischer Hirs, CEO of AGCS, says:

The growth in BI claims is fueled by increasing interdependencies between companies, the global supply chain and lean production processes.

Whereas in the past a large fire or explosion may have only affected one or two companies, today losses increasingly impact a number of companies and can even threaten whole sectors globally.”

Check out Insurance Information Institute resources on business interruption insurance here.

Disruptive Change to Continue in 2016

U.S. property-casualty insurers face another year of disruptive change in 2016, according to a new report by Ernst & Young.

In its 2016 U.S. Property-Casualty Insurance Outlook, EY says that digital technologies such as social media, analytics and telematics will continue to transform the market landscape, recalibrating customer expectations and opening new ways to reach and acquire clients.

The rise of the sharing economy, in which assets like cars and homes can be shared, is requiring carriers to rethink traditional insurance models.

An outlook for slower economic growth, along with increased M&A and greater regulatory uncertainty, will set the stage for innovative firms to capitalize on an industry in flux in 2016.

EY’s take:

Insurers that stay ahead of these shifts should reap substantial benefits, while laggards risk falling behind, or even out of the race.”

EY reports that competitive pressures in the insurance industry are building as digital technology erodes the advantages of scale enjoyed by established insurers and empowers smaller players to compete for market share through more flexible pricing models and new distribution channels.

It cites the recent launch of Google Compare, which allows customers to comparison shop for insurance, as the start of a larger wave of insurance tech activity in 2016.

Along with this, customer expectations and behaviors are evolving at a rapid pace, often faster than traditional mechanisms can react.

EY observes:

Driven by their interactions in other digitally enabled industries, such as retail and banking, property-casualty customers are increasingly demanding a more sophisticated and personalized experience–including digital distribution, anytime access, premiums accurately reflecting usage and individual risk and higher levels of product customization and advice.”

Policyholders are also seeking coverage of a broader range of risks, such as cybersecurity and under-protected property exposure, according to EY’s outlook.

Hat tip to Insurance Journal which reported on this story here.

Check out a recent presentation by I.I.I. president Dr. Robert Hartwig titled Insurance, the Sharing Economy, Millennials and More.

Hurricane Season: It’s A Wrap

As the 2015 Atlantic hurricane season draws to a close, there’s a lot of talk about how the hurricane forecasters got it right this year, due to a strong El Niño.

Over at the Capital Weather Gang blog, Phil Klotzbach, lead author of the Colorado State University (CSU) hurricane forecasting team, writes that all of the forecasting groups predicted a moderate to strong El Niño event this year, and this turned out to be correct.

Klotzbach observes:

In general, seasonal forecasts did a good job anticipating a below-average Atlantic hurricane season in 2015 due to a strong El Niño event. Most seasonal forecasts predicted a bit less activity than was observed, due to a surprising warming of the tropical Atlantic during the peak of hurricane season this year.”

So what are the key takeaways?

The final tally for the 2015 season was 11 named storms, four hurricanes and two major hurricanes.

No major hurricanes made U.S. landfall in 2015, which means the U.S. has now gone 10 years without a major hurricane landfall. Hurricane Wilma (2005) was the last, according to CSU’s report on the 2015 season.

Still, it’s important to point out that moisture from Hurricane Joaquin–the first Category 4-5 hurricane to impact the Bahamas during October since 1866–contributed to a weather system that led to catastrophic floods across much of South Carolina resulting in more than $2 billion in total economic losses.

The CSU team of Klotzbach and William Gray also reminds us that while the Atlantic has seen a large increase in major hurricanes during the recent period of 1995-2015 (average 3.4 per year) compared with the prior 25-year period of 1970-1994 (average 1.5 per year), the U.S. has been fortunate that few major hurricanes have made U.S. landfall–except during the two very damaging years of 2004-2005.

Consider this lucky statistic:

The Atlantic basin has had 27 major hurricanes since Wilma, with no major hurricane landfalls. The 20th-century average is that approximately 30 percent of all major hurricanes forming in the Atlantic make U.S. landfall.”

Check out I.I.I. facts and statistics on hurricanes here.