Archive for September, 2007

A number of insurers have earned top marks in the sixth annual Corporate Equality Index published by the Human Rights Campaign Foundation (HRC). The Index rates employers on a scale from 0 to 100 percent on their treatment of gay, lesbian, bisexual and transgender (GLBT) employees, consumers and investors. Ratings are based on factors including nondiscrimination policies, diversity training and benefits for domestic partners and transgender employees. A few standouts: Allstate, Aon, Esurance, Hartford Financial Services and Massachusetts Mutual Life received the 100 percent rating for the first time. Chubb and Nationwide each received the 100 percent rating for the fourth year in a row. Overall, some 195 U.S. businesses employing more than 8.3 million workers earned the top rating of 100 percent in this year’s survey, a 41 percent increase on last year. Pause for thought: when the index was first released in 2002, only 13 companies employing 690,000 workers received the top rating. 

Business leaders do not fully understand their dependencies on the Internet, even as their reliance on the Internet for fundamental business applications increases. That’s the warning from Business Roundtable, an association of 160 chief executive officers of U.S. companies, in a new report on Internet security. The group cites estimates from the World Economic Forum (WEF) that there is a 10 to 20 percent probability of a breakdown of the critical information infrastructure (CII) in the next 10 years, at a cost of approximately $250 billion to the global economy. No small number, and more than costly than two-thirds of the 23 global risks examined in the WEF report. Potential threats include malicious code written by individuals, accidental disruptions caused by coding error, natural disasters that have major impacts on vital Internet hubs, and attacks by terrorists or other adversaries. The Business Roundtable urges CEOs to address the risks of a virtual attack by assessing company Internet dependencies and interdependencies based on their business operations, and addressing these in corporate continuity and recovery plans. As Ed Rust, chairman and CEO of State Farm and co-chairman of the Business Roundtable states in the press release announcing the report: “Similar to physical threats, the risks of attack through the Internet intended on impacting our businesses, economy and national security present new challenges and must be addressed.” What do you think? 

The P/C industry’s profits may still be reasonably strong, but industry margins are virtually guaranteed to fall well short of those realized by the Fortune 500 group of companies which is expected to turn in an average return on equity in the 14 to 15 percent range this year. That’s the view of I.I.I. president Dr. Robert Hartwig in his commentary on the industry’s first-half 2007 financial results. A decline in overall profitability due to a marginal deterioration in underwriting performance are the low notes of what was otherwise a strong first half performance that bodes well for the rest of the year. The headline numbers: the industry’s annualized statutory rate of return on average surplus declined to 13.1 percent during the first half of 2007, down from 13.5 percent in last year’s first half; the industry’s combined ratio deteriorated slightly to 92.7, compared with 92.0 during the first half of 2006. Point of interest: ISO estimates that the combined ratio would have had to improve to 91.5 percent in order for insurers to have earned the 13.9 percent long-term average rate of return for the Fortune 500. Nevertheless, the industry is on track to record what could be its seventh best combined ratio since 1920. But, intensifying competition is taking its toll on insurers with premium growth at just 0.1 percent in the first half of 2007. If maintained through the rest of the year, this would represent the lowest growth rate for the industry during the past 40 years. Check out Dr. Hartwig’s full commentary at http://www.iii.org/media/industry/financials/2007firsthalf/ 

We’re often asked how much insurance fraud costs the industry (the answer is an estimated $30 billion annually), so a new global survey on corporate fraud commissioned by risk consulting firm Kroll and conducted by the Economist Intelligence Unit makes for interesting reading. According to its findings, new technologies, new investors and expansion into overseas markets are opening the door to different forms of fraud and four out of five companies have suffered from corporate fraud in the past three years. As you might expect the associated costs are substantial. The survey shows the average cost due to fraud to large companies (those with annual revenues of more than $5 billion) was more than $20 million, with about one in 10 losing more than $100 million. In some sectors, more than one-fifth of all companies have lost more than $1 million – these sectors include financial services and healthcare. Looking to future risks, companies cite theft, loss of or attack on information as their biggest concerns, with 20 percent of respondents describing themselves as highly vulnerable. More than 30 percent believe that IT complexity has increased their exposure to fraud. For those companies, the good news is that there are some innovative insurance covers out there to help protect against cyber risks. See our paper on information security and liability for further information.

Top officials from more than 150 countries gather at United Nations HQ in New York City today, to address the leadership challenge of climate change. The event, billed as the largest meeting ever of world leaders on climate change, takes place on the eve of the opening of the UN General Assembly’s annual General Debate. The discussion is intended to build momentum for the UN Climate Change conference in Bali this December where negotiations about a new international climate agreement should start. Sessions will cover adaptation, mitigation, technology, and financing. For our industry’s part, Jacques Aigrain, chief executive officer and member of the executive board committee of Swiss Re, will be speaking. 

The overall trend of lower securities class action filings has continued through the first six months of 2007, but that trend may be reversing. That’s the upshot of a recent study from NERA Economic Consulting. The report notes that from 1998 through 2005 there were well over 200 federal class action filings each year, but filings dropped to 136 in 2006. While this general pattern has continued through June 30, 2007, NERA projects there will be 152 filings in 2007, a 12 percent increase on 2006. In the first half of 2007 there have been 76 filings, a 47 percent increase on the second half of 2006. A few other points of interest: the probability of a corporation facing at least one shareholder class action suit over a five-year period has declined to 6.4 percent; for the first time, all of the top 10 shareholder class action settlements exceeded $1 billion; eight of the top 10 settlements of all time were resolved in 2006/07, with Enron’s $7.2 billion settlement top of the list; excluding the top 10 settlements, average settlement values doubled to $23.2 million in the 2002-2007 period. As for future trends, NERA notes that recent turmoil in the subprime market has led to seven claims in the first half of 2007. For our take on the subprime issue, check out a new paper authored by Dr. Steven Weisbart, I.I.I. vice president and chief economist. Further commentary on the NERA study can be found at The D&O Diary, a blog focused on D&O liability issues.

For anyone who missed the news, the Terrorism Risk Insurance Revision and Extension Act of 2007 (H.R. 2761) passed the House yesterday afternoon, by a final vote of 312-110. Key elements of the House bill are that it would extend the program for an additional 15 years (until December 31, 2022), and expand coverage under the program to include domestic acts of terrorism, group life losses and chemical, nuclear, biological and radiological (CNBR) terrorism. We hasten to add that the general consensus among insurers that a continuing federal role is essential to ensuring that terrorism risk insurance remains available to businesses is not a view shared by all. Earlier this week the Administration said TRIA should be phased out in favor of a private market for terrorism insurance. That said, the Administration did say it is willing to work with Congress as the bill moves through the legislative process so that H.R. 2761 meets the critical elements of an acceptable extension. As the clock counts down to TRIA expiration on December 31, 2007, we’ll be watching this issue closely, so let us know your views. Check out I.I.I. information on terrorism risk online.

Bird hazard may not be the first risk that comes to mind when stepping aboard an aircraft today, but bird strikes (i.e. aircraft collisions with birds and other wildlife) are a major risk exposure for airlines and their insurers. Consider the following: flying is an increasingly popular mode of transportation; air traffic worldwide is increasing and natural habitats around airports tend to be home to wildlife. According to the Federal Aviation Administration (FAA), some 72,526 strikes were reported to civil aircraft in the U.S. from 1990 to 2006. Birds were involved in 97.5 percent of the strikes, terrestrial mammals in 2.2 percent, bats in 0.2 percent, and reptiles in 0.1 percent. The number of strikes annually has quadrupled from 1,743 in 1990 to 7,089 in 2006. Further, the annual cost of wildlife strikes to the U.S. civil aviation industry is estimated at in excess of $603 million and experts say the risk is growing. The Bird Strike Committee annual meeting features a wide variety of presentations on how to mitigate the bird strike hazard. Check out further I.I.I. facts on aviation. 

The next step following the landmark February 2006 Rhode Island lawsuit against three former lead paint manufacturers unfolded Friday with the release of a state proposal detailing cleanup and related costs. In short, the RI Lead Nuisance Abatement Plan would require the paint manufacturers to pay out $2.4 billion to clean up 240,000 housing units. It is, however, subject to court approval. Wherever this plan takes the lead paint issue in RI, it’s worth remembering that recent court decisions in other states, including New Jersey, Missouri and Ohio, have rejected the public nuisance legal theory on which the RI lead paint suit was based. Time will tell how future lead paint litigation will develop, but clearly this issue has emerging consequences for a number of industries, including ours. Check out more I.I.I. info on products liability emerging exposures.

We bring the week to a close by noting that a number of leading insurers and industry organizations (38 at last count) have signed on to a U.K. initiative aimed at addressing climate change. Known as the ClimateWise Principles, the initiative has been launched by the Association of British Insurers (ABI). It was developed following discussions between insurers and HRH the Prince of Wales. The principles commit insurers that sign up to: lead the way in analyzing and reducing risks; support climate awareness among their customers; incorporate climate change into their investment strategies; inform and engage in public policy debate; and reduce the environmental impact of their businesses. Specifically, insurers will be required to incorporate climate risk into their business strategy and planning, and to publish a statement as part of their annual report detailing the actions that have been taken in support of the principles. Check out more on this at: http://www.climatewise.org.uk/