Insurers and the Economy


Insurance Information Institute (I.I.I.) chief actuary James Lynch is on the road.

Spring is heavy conference season. I type this from an Orlando hotel room on May 14, after day one of the Annual Issues Symposium put on by the National Council on Compensation Insurance (NCCI). Ahead are trips to Colorado, Philadelphia and Atlanta, as well as two meetings close to home, in New York.

The NCCI conference is perhaps best known for president and chief executive officer Steve Klingel’s summary of the workers compensation line in a single word or phrase. This year: Calm now . . . but turbulence ahead. With premium up 4.6 percent and the combined ratio (98) at its lowest since 2006, workers comp results have been good, but outside pressures could make the ride bumpy.

One pressure is low interest rates. Years can pass from the time an insurer collects premium and injury claims get paid, and insurers in the meantime invest that premium, with the proceeds helping pay for claims and bolstering profits.

Interest rates have been so low for so long that the industry can’t rely on interest rates to deliver results anymore.

Another is the sharing economy. As Dr. Robert Hartwig, president of the I.I.I. and an economist, noted later that day, the smartphone has made it easy to summon people to do ad hoc jobs, with the best known being Uber’s ride-sharing battalion.

Those workers are independent contractors (though that has been challenged) and as such don’t get traditional benefits, including workers comp coverage. As the sharing economy grows, workers comp could shrink.

The third is a series of attacks on the basic principles of workers compensation. News reports suggest workers comp doesn’t compensate injuries equitably; lawsuits suggest the line has violated the Grand Bargain that gives up a big tort payoff in exchange for a steady flow of benefits; and a nascent movement would let employers opt out of the workers compensation system altogether.

But workers comp has survived a lot in the century since it took hold in the United States and seems well-equipped to handle the, well, turbulence.

“While I am confident that we will work our way through these challenges,” Klingel said, “it is important to be realistic about current conditions and to recognize that the current positive results may not last.”

The I.I.I. has more workers comp facts and statistics available here.

It’s always heartening to read about insurance being made available to a market or sector that for whatever reason has not been able to benefit from risk transfer in the face of natural disaster.

So the news that countries of Central America will now be able to access affordable catastrophe cover by joining the former Caribbean Catastrophe Risk Insurance Facility—now the CCRIF SPC—is a positive.

A memorandum of understanding signed by the Council of Ministers of Finance of Central America, Panama and the Dominican Republic (COSEFIN) and CCRIF SPC will allow Central American countries to join the sovereign catastrophe risk insurance pool.

Nicaragua has signed a participation agreement to become the first Central American country to join the pool. Other member nations of COSEFIN are expected to join later this year and in 2016.

A press release puts some context around the need:

Nine countries in Central America and the Caribbean experienced at least one disaster with an economic impact of more than 50 percent of their annual gross domestic product (GDP) since 1980.

The impact of Haiti’s earthquake was estimated at 120 percent of GDP. That same year, tropical cyclone Agatha, in Guatemala, had devastating consequences and poverty rates increased by 5.5 percent.

Climate change also represents a significant development challenge, with average economic losses due to weather-related disasters amounting to 1 percent or more of GDP in 10 Caribbean countries and four Central American nations, including Nicaragua.”

As Artemis blog reports here, some 16 Caribbean countries are now members of the 2007-established CCRIF SPC, benefiting from parametric insurance products covering tropical storm and hurricane risks, earthquake risks or excess rainfall risks.

The risk pooling facility helps its members to access post-event risk financing, based on the actual event parameters, with a rapid payout and disbursement of as little as two weeks possible. This enables countries to access financing for recovery from natural catastrophes, while benefiting from cheaper premiums due to the risk pooling nature.”

The newly-expanded 23-nation partnership is a win-win for both existing and new CCRIF members, providing low prices due to more efficient use of capital and insurance market instruments. New members will be able to take advantage of CCRIF’s low premium costs and existing members could realize premium reductions due to the increased size of the CCRIF portfolio.

Consider this example: the CCRIF made a $7.75 million payout to the Haitian government some two weeks after the January 2010 earthquake hit close to Port-au-Prince. The value represented approximately 20 times the premium of $385,500 based on Haiti’s catastrophe insurance policy for earthquakes for the 2009/2010 policy year.

A major hurricane or earthquake hitting a densely populated metropolitan area like Miami or Los Angeles will leave insurers facing losses that far exceed their estimated 100 year probable maximum loss (PML) due to highly concentrated property values, a new report suggests.

In its analysis, Karen Clark & Company (KCC) notes that the PMLs that the insurance industry has been using to manage risk and rating agencies and regulators have been using to monitor solvency can give a false sense of security.

For example, it says the 100 year hurricane making a direct hit on downtown Miami will cause over $250 billion insured losses today, twice the estimated 100 year PML.

Insurers typically manage their potential catastrophe losses to the 100 year PMLs, but because of increasingly concentrated property values in several major metropolitan areas, the losses insurers will suffer from the 100 year event will greatly exceed their estimated 100 year PMLs.”

Instead, the report suggests new risk metrics—Characteristic Events (CEs)—could help insurers better understand their catastrophe loss potential and avoid surprise solvency-impairing events.

The CE approach defines the probabilities of a mega-catastrophe event based on the hazard rather than the loss and gives a more complete picture of catastrophe loss potential.

Rather than simulating many thousands of random events, the CE approach creates events using all of the scientific knowledge about the events in specific regions.

This information is then used to develop events with characteristics reflecting various return periods of interest, such as 100 and 250 year, which are then floated to estimate losses at specific locations.

To protect against solvency-impairing events, the report suggests insurers should monitor their exposure concentrations with additional metrics, such as the CEs and the CE to PML ratio.

KCC estimates that overall U.S. insured property values increased by 9 percent from 2012 to 2014, faster than the general economy.

The state with the most property value is California, followed by New York and Texas. The top 10 states account for over 50 percent of the U.S. total.

U.S. vulnerability to hurricanes and other coastal hazards continues to rise because of increasing concentrations of property values along the coast.

Of the $90 trillion in total U.S. property exposure, over $16 trillion is in the first tier of Gulf and Atlantic coastal counties, up from $14.5 trillion in 2012, KCC estimates.

 

Nearly 37 percent of the United States and more than 98 percent of the state of California is in some form of drought, according to the latest U.S. Drought Monitor.

Its weekly update shows that more than 44 percent of California is now in a state of exceptional drought, with little relief in sight.

The report says:

Continued dryness resulted in an expansion of Exceptional Drought (D4) in northwest California. Statewide snowpack remains at 5 percent as of April 6, 2015.”

Here’s the visual on that:

20150407_usdm_home

What could this mean for wildfire season?

The April 1 Outlook issued by the National Interagency Fire Center warned that parts of California will likely see increased wildfire activity earlier than usual thanks to the effects of the long-term drought.

Here’s what the significant wildfire potential looks like by June and July:

extended_outlook

Meanwhile, the National Oceanic and Atmospheric Administration’s (NOAA) recently issued Spring Outlook calls for drought conditions to persist in California, Nevada and Oregon through June with the onset of the dry season in April.

In its Outlook, NOAA said:

If the drought persists as predicted in the Far West, it will likely result in an active wildfire season, continued stress on crops due to low reservoir levels, and an expansion of water conservation measures.”

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

 

The April 2013 Boston bombing may have marked the first successful terrorist attack on U.S. soil since the September 11, 2001 tragedy, but terrorism on a global scale is increasing.

Yesterday’s attack by the Al-Shabaab terror group at a university in Kenya and a recent attack by gunmen targeting foreign tourists at the Bardo museum in Tunisia point to the persistent nature of the terrorist threat.

Groups connected with Al Qaeda and the Islamic State committed close to 200 attacks per year between 2007 and 2010, a number that grew by more than 200 percent, to about 600 attacks in 2013, according to the Global Terrorism Database at the University of Maryland.

Latest threats to U.S. targets include calls by Al-Shabaab for attacks on shopping malls.

And a recent intelligence assessment circulated by the Department of Homeland Security focused on the domestic terror threat from right-wing sovereign citizen extremists.

On January 12, 2015, President Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015.

A new I.I.I. white paper, Terrorism Risk Insurance Program: Renewed and Restructured, takes us through each of more than eight distinct layers of taxpayer protection provided under TRIA’s renewed structure.

While TRIA from its inception was designed as a terrorism risk sharing mechanism between the public and private sector, an overwhelming share of the risk is borne by private insurers, a share which has increased steadily over time.

Today, all but the very largest (and least likely) terrorist attacks would be financed entirely within the private sector.

Enactment of the 2015 reauthorization legislation has brought clarity and stability to policyholders and the insurance marketplace once again, the I.I.I. notes.

In the week before Christmas when Congress adjourned without renewing the Terrorism Risk Insurance Act (TRIA), Jeffrey DeBoer, president and CEO of The Real Estate Roundtable, a trade group representing real estate industry leaders, said:

This law does not stop terrorist attacks. But it does disrupt terrorists’ goals of damaging our economy.”

The I.I.I. paper makes a similar point:

Since its creation in 2002, the federal Terrorism Risk Insurance Act, and its successors, have been critical components of America’s national economic security infrastructure. TRIA has cost taxpayers virtually nothing, yet the law continues to provide tangible benefits to the U.S. economy in the form of terrorism insurance market stability, affordability and availability.”

For a federally backed program, that is quite a success story.

The amount of financial loss caused by catastrophes not covered by insurance is growing, according to the latest Swiss Re sigma report.

This so-called global insurance protection or funding gap totaled $75 billion in 2014.

The rate of growth of total losses has outpaced the growth of insured losses over the course of the last three decades, Swiss Re notes:

In terms of the 10-year moving average, insured losses grew at 10.7 percent between 1979 and 2014, and total losses by 11.4 percent.”

Here’s the Swiss Re visual showing global insured vs. uninsured losses from natural catastrophes and man-made disasters from 1970 to 2014:

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Lack of insurance cover clearly remains an issue in many countries.

Swiss Re gives the example of low pressure system Yvette last May which brought very heavy rain in Europe to Serbia, Bosnia and Croatia – in some areas the heaviest downpour in 120 years. Yvette resulted in 82 fatalities, the largest loss of life from a natural catastrophe in Europe in 2014, and total losses were estimated to be $3 billion – mostly uninsured.

Areas of the United States are also underinsured, sigma reports. Last August’s South Napa earthquake caused structural and inventory damage of $0.7 billion, particularly in the numerous local wine barrel storage facilities. However, the insured loss was just $0.16 billion.

As Lucia Bevere, co-author of the sigma study, notes:

In spite of high exposure to seismic risk, insurance take-up in San Francisco County and California state generally is still very low, even for commercial properties. That’s why insured losses, in certain areas, can be surprisingly low when disaster events happen.”

Meanwhile, the economic cost of natural disasters continues to rise due to economic development, population growth, a higher concentration of assets in exposed areas and a changing climate.

Without a commensurate increase in insurance penetration, the above will likely result in a widening protection gap over the long term, sigma concludes.

I.I.I. has more facts and statistics on global catastrophes available here.

A protracted labor dispute that continues to disrupt operations at U.S. West coast ports underscores the supply chain risk facing global businesses.

Disruptions have steadily worsened since October, culminating in a partial shutdown of all 29 West coast ports over the holiday weekend.

The Wall Street Journal reports that operations to load and unload cargo vessels resumed Tuesday as Labor Secretary Tom Perez met with both sides in the labor dispute in an attempt to broker a settlement amid growing concerns over the impact on the economy.

More than 40 percent of all cargo shipped into the U.S. comes through these ports, so the dispute has potential knock on effects for many businesses.

A number of companies have already taken steps to mitigate the supply chain threat, according to reports. For example, Japanese car manufacturer Honda Motor Co, among others, has been using air freighters to transport some key parts from Asia to their U.S. factories – at significant extra expense.

On Sunday Honda also said it would have to slow production for a week at U.S.-based plants in Ohio, Indiana, and Ontario, Canada, as parts it ships from Asia have been held up by the dispute.

Toyota Motor Corp. has also reduced overtime at some U.S. manufacturing plants as a result of the dispute.

A brief published by Marsh last year noted that a West Coast port strike or shutdown could have broad consequences for global trade, business and economic conditions.

Organizations with effective risk management and insurance strategies in place will be best prepared to manage and respond to situations that hamper their flow of goods and finances, Marsh noted.

In 2002, a similar labor dispute ultimately led to the shutdown of ports along the West coast costing the U.S. economy around $1 billion each day, and creating a backlog that took six months to clear.

Many businesses purchase marine cargo insurance to protect against physical loss or damage to cargo during transit. This type of insurance generally will not respond in the event that a strike or other disruption at a port delays the arrival of insured cargo, unless there is actual physical damage to the cargo, according to Marsh.

However, some policyholders may have obtained endorsements to their insurance policies, or purchased additional coverage to protect themselves from the effects of port disruption.

Trade disruption insurance (TDI), supply chain insurance, and specialty business interruption insurance may also provide coverage for the financial consequences of a port disruption, Marsh wrote.

A study by FM Global of more than 600 financial executives found that supply chain risk, more than any other, was regarded as having the greatest potential to disrupt their top revenue driver. FM Global’s Resilience Index can help executives evaluate and manage supply chain risk.

Natural catastrophes and man-made disasters cost insurers $34 billion in 2014, down 24 percent from $45 billion in 2013, according to just-released Swiss Re sigma preliminary estimates.

Of the $34 billion tab for insurers, some $29 billion was triggered by natural catastrophe events (compared with $37 billion in 2013), while man-made disasters generated the additional $5 billion in insured losses in 2014.

Despite total losses coming in at below annual averages, the United States still accounted for three of the most costly insured catastrophe losses for the year, with two thunderstorm events and one winter storm event causing just shy of $6 billion in insured losses (see chart below).

sigma_prel_cat_estimates_fig1

In mid-May, a spate of strong storms with large hail stones hit many parts of the U.S. over a five-day period resulting in insured losses of $2.9 billion – the highest of the year.

Extreme winter storms at the beginning of 2014 caused insured losses of $1.7 billion, above the average full-year winter storm loss number of $1.1 billion of the previous 10 years, sigma said.

Total economic losses from disaster events in 2014 reached $113 billion worldwide, according to sigma estimates, and around 11,000 people lost their lives in those events.

Ongoing events and revisions to estimates for previous ones may further change the 2014 loss outcomes, sigma noted, as this data includes updates to source data made by 28 November 2014 only.

More on global catastrophe losses from the I.I.I. here.

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.

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