Archive for April, 2007

The news that tentative settlement has been reached in the Katrina case between Senator Trent Lott and State Farm Fire & Casualty Co is good not just for State Farm, but for the industry as a whole. Litigation remains one of the top risks facing our industry and imposes billions of dollars of costs annually on the broader economy, so to the extent that it can be avoided, curtailed or mitigated, everyone benefits. Last week the U.S. Chamber Institute for Legal Reform (ILR) released a study ranking the best and worst state liability systems across the country. For the second year running, West Virginia came in last place. Other states at the bottom of the list included Mississippi, Louisiana, Alabama, Illinois and California. A broader analysis of the survey data revealed an overall improvement in state legal climates and in a number of states this trend correlates with legal reforms enacted over the same period. However, as U.S. Chamber of Commerce president and CEO Tom Donohue said: “Even though we’re seeing some improvements, from the perspective of global competitiveness, we’re only as good as our worst states. So we need to keep working.” I.I.I. has further information on the liability system online. 

We’re going west today to Sacramento, California, where the results of the Sacramento Area Flood Control Agency’s (SAFCA) special assessment election are due. Ballots were mailed in March to approximately 140,000 property owners in Sacramento and Sutter counties asking whether they would be willing to pay a higher assessment tax to finance municipal flood protection initiatives. Why is this important? In our Feb 1 posting we cited the list from the Army Corp of Engineers showing that 127 levees across the U.S. are at risk of failing. Well, of those 127, some 36 are located in the district of Sacramento – that’s nearly one third. If voted in, the assessment would raise $326 million over 30 years and help pay for $2.7 billion in flood improvements, including raising and strengthening levees on the Sacramento and American rivers. The improvements would bring the region up to 200-year flood protection. Check out further information from the I.I.I. on flood risk and flood insurance, and also from the Insurance Information Network of California (IINC).  

 

The 45th annual Risk and Insurance Management Society (RIMS) conference opens in New Orleans this weekend so it’s no surprise that a rash of risk management surveys are being released this week. Two of the highlights are from leading brokers Marsh and Aon. A study by Marsh reveals that the majority of national oil companies do not fully understand the emerging risks they face and how to manage them. Among the top five risks identified by the oil companies one in particular stands out: environmental impact of operations. At last it appears the climate change issue is on the radar screen. Meanwhile, Aon’s first Global Risk Management Survey reveals that damage to reputation is the number one risk faced by multinationals today. Business interruption is cited as the second key risk, with 30 percent of survey respondents reporting they are unprepared. Third party liability risk comes in at number three, as the U.S. compensation culture spreads. For more information on insurance and risk management for businesses, check out I.I.I.’s insuring your business website. 

It’s well-documented that the health consequences of overweight and obesity are serious. For example, individuals who are obese have a significantly increased risk of premature death and chronic conditions like heart disease and type 2 diabetes. The growing economic and social costs of obesity also have direct consequences for insurers. A study out of Duke University this week focuses on the impact on workers comp insurers. It notes that obese employees lost many more workdays and filed twice as many workers comp claims as other workers. Even more concerning, the claims filed by obese workers cost nearly seven times as much as those filed by other workers. The average workers comp medical claims cost per 100 employees was $51,019 for obese workers, compared with $7,503 for other workers. Check out further information from the I.I.I. on obesity and workers comp. 

A plan aimed at improving New York City’s environment has been unveiled by Mayor Michael Bloomberg. Among the proposals, the idea to charge an $8 congestion fee to drivers entering Manhattan at peak hours during the week. A series of cameras would capture license plates, either charging the car’s commuter account or generating a bill. Modeled after a similar congestion charge introduced across the pond in London in 2003, the plan may have significant implications for auto insurers and their policyholders. It’s easy to identify a few potential benefits right away. As the risk of auto accidents increases in areas of high traffic density, a reduction in the number of vehicles on the road could have a positive effect on auto claims. For drivers who decide to leave their car at home and take the train instead, the lower average miles per year driven could reduce the price they pay for auto insurance. What is not so certain and perhaps up for debate is how the new technology under such a scheme might intersect with the auto insurance underwriting process. What are your thoughts? 

Policy options for extending the Terrorism Risk Insurance Act (TRIA) beyond the end of 2007 will be the subject of debate at a hearing before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises scheduled for next Tuesday. We’ve said it before, and we’ll say it again, but a continuing federal role is key to ensuring that terrorism risk insurance remains available to those businesses that want and need the coverage. A study by the American Academy of Actuaries notes that incidents involving chemical, nuclear, biological and radiological (CNBR) incidents in four U.S. cities could result in insured losses in the hundreds of billions of dollars. For example, in New York, a large CNBR event could cost as much as $778.1 billion, with insured losses for commercial property at $158.3 billion and for workers compensation at $483.7 billion. I.I.I. has additional information on terrorism risk online. 

Today, as expected, saw the property/casualty industry report record financial results for 2006. Here are the headline stats: the industry turned in its best underwriting performance since 1949, with a combined ratio of 92.4; profits (net income after taxes) increased by $19.5 billion, or 44.3 percent, to $63.7 billion from $44.2 billion in 2005; the industry’s rate of return on average surplus rose to 14.0 percent in 2006, up from 10.8 percent in 2005 and the best result since 1987. While applauding what is generally an excellent set of results, it’s important to look at our industry’s financial performance in 2006 in a broader context. As Dr. Robert Hartwig, I.I.I.’s president and chief economist, notes in his analysis the sharp decline in catastrophe losses from $61.9 billion in 2005 to $9.2 billion last year is too often cited as the primary reason for the surge in profits. Other key factors played a role and the industry’s extraordinary performance during 2006 is unlikely to be repeated for decades.  

In our February 8 posting we cited a RIMS Benchmark Survey showing that the Directors and Officers (D&O) line saw some of the largest decreases in premium rates in the fourth quarter of 2006. Now a Towers Perrin survey confirms this trend, noting that the average D&O premium dropped by 18 percent in 2006, after declines of 9 percent in 2005 and 10 percent in 2004. Both reports attribute the softening market to the sharp drop in the number of securities class action suits filed in 2006. While the moderation in prices is good news for D&O insureds and their agents and brokers, the Towers Perrin survey offers this note of caution: “We do not believe that the current improved risk profile will support prolonged soft market premium decreases if underwriters want to write this line profitability.” Indeed, in a speech to the Professional Liability Underwriting Society (PLUS) D&O Symposium earlier this year, John Degnan, vice chairman of Chubb, pointed out that if shareholder derivative claims are included, it appears that overall D&O claim frequency was up, not down, in 2006. Degnan went on to urge D&O insurers to be vigilant, lest the “perfect calm” turn out to be merely the eye of a larger storm. Wise words.

There are 45 days to go until the start of the 2007 hurricane season, but just so we’re clear, nor’easters are not like hurricanes. This is not to say that nor’easters do not have the capacity to cause substantial damage to property and life. In fact, nor’easters get their names from the continuously strong northeasterly winds blowing in from the ocean ahead of the storm and over coastal areas. The National Weather Service defines a nor’easter as a strong low pressure system that affects the Mid Atlantic and New England states and can form over land or over coastal waters. It points out that these winter weather (mid-April?!) events are notorious for producing heavy snow, rain, and tremendous waves that crash onto Atlantic beaches, often causing beach erosion and structural damage. Interestingly, it also notes that wind gusts associated with these storms can exceed hurricane force intensity. After spending the last 24 hours mopping water, I for one, will be asking my agent about flood insurance at this year’s renewal. For more information see the I.I.I.’s flood facts and catastrophe statistics.

In a week in which the availability and affordability of coverage offered by our industry was called into question once again, it’s perhaps time to remind people of the major contribution made by insurers to state, local and national economies. The Insurance Information Institute’s online publication “A Firm Foundation” shows the myriad ways in which insurance supports the economy. State-specific editions also highlight the insurance industry’s role as a key player in the Alabama, California, Florida, Maryland, New York, South Carolina, Texas and Wisconsin economies. From defraying the costs of catastrophes, to providing employment, to fueling the capital markets, the industry’s contribution goes way beyond its core function of helping to manage risk. A story worth telling.