Archive for April, 2008

An article by reporter Greg Ip in today’s Wall Street Journal highlights a timely new report from the Paris-based Organization for Economic Cooperation and Development (OECD) on the subprime crisis. In its analysis, the OECD now puts the total estimated loss range from the crisis at between $352 billion to $422 billion. In addition to the headline figures, the OECD also notes that the world is moving to a situation in which individuals bear more and more risks, without necessarily being able to cope with them. This concerns not only credit, including sub-prime mortgages, but also insurance or pensions. According to the OECD, this situation calls for a new culture of risk awareness and financial education mechanisms. What do you make of this warning? 

A global survey of insurance equity analysts by Accenture reveals that climate change is the most widely cited industry challenge among P/C insurers. Perhaps surprisingly, the issue came in ahead of a range of other topics including aging systems and IT modernization (85 percent), new regulations and reforms (76 percent), cross-border competition (69 percent), terrorism and geopolitical instability (61 percent) and growing risk to investment portfolios (59 percent). Among the other findings, analysts expect a significant increase in P/C mergers and acquisitions this year and say that life insurers who expand into emerging markets over the next three years are likely to be rewarded with superior ratings. The survey queried more than 100 leading insurance equity analysts in 14 of the world’s largest insurance markets. What do you make of the findings?

A decline in profitability in 2007 primarily due to a marginal deterioration in underwriting performance is one of the takeaways of the P/C insurance industry’s full-year 2007 results just released. Despite the decline, the industry posted a full-year combined ratio of 95.6, up from 92.4 in 2006, but still one of the best combined ratios in the past 80 years. I.I.I. president Dr. Robert Hartwig notes that while profits remained reasonably strong, industry margins did fall short of those realized by the Fortune 500 group of companies, which turned in an estimated average return on equity (ROE) in the 13 to 14 percent range in 2007. He also points out that net written premium growth was down 0.6 percent in 2007, the first such decline since 1943, noting: “One major cause for concern is the fact that negative premium growth in 2007 means that industry growth has come to a screeching halt and is, in fact, severely negative on an inflation-adjusted basis.” Check out Dr. Hartwig’s full commentary at: http://www.iii.org/media/industry/financials/2007yearend/

Colorado State University’s (CSU) Tropical Meteorology Project has upped its forecast for the 2008 Atlantic hurricane season. The team now estimates there will be 15 named storms, eight hurricanes and four intense hurricanes in the season starting June 1. The probability for at least one major (Category 3-4-5) hurricane making landfall in the U.S. is put at 69 percent, compared with an average of 52 percent over the last century. The likelihood of an East coast landfall, including the Florida peninsula, is 45 percent, while there is a 44 percent chance of a Gulf Coast landfall, including the Florida Panhandle westward to Brownsville, Texas. There is also an above-average major hurricane landfall risk in the Caribbean. For further hurricane resources, check out the I.I.I. disaster information site. 

The first of the April forecasts for the 2008 Atlantic hurricane season is in, with the London-based consortium Tropical Storm Risk (TSR) estimating that there is a 63 percent chance that hurricane activity will be in the top one-third of years historically. The forecast points to an above-average season in 2008, with a 62 percent above-average probability of a storm striking the U.S. Four tropical storms are forecast to strike the U.S., of which two are expected to be hurricanes. TSR’s forecast does come with a warning: “Users should be aware that the skill of TSR’s April forecasts for Atlantic hurricane activity over the last 20 years, while positive, is fairly low.” Look for our coverage of Colorado State University’s hurricane forecast tomorrow. Check out further I.I.I. hurricane facts & stats. 

As the 2008 hurricane season approaches, we’re seeing the launch of a number of Web-based initiatives designed to enhance flood monitoring and assessment for forecasters, emergency managers, scientists and the general public. For example, a new online map that tracks flood conditions has been developed by the U.S. Geological Survey (USGS). The new system incorporates real-time water data collected by USGS crews out in the field and is part of the USGS WaterWatch suite of Web-based streamflow products. It can be accessed at the map of flood and high flow conditions Web site. In another development, just a couple of weeks ago, the National Hurricane Center said that it is working with Google to develop a tool that will allow residents in hurricane danger zones to enter their location and see their exposure to storm surge resulting from various hurricanes. We expect to hear more on these initiatives as the hurricane season gets underway. Presumably these tools may help people make a better-informed decision about whether to purchase flood insurance. Check out further I.I.I. info on flood risk.

For those of you who read us regularly, you may remember last August we outlined a detailed rebuttal from I.I.I. president Dr. Robert Hartwig to the September 2007 Bloomberg Markets cover story “The Insurance Hoax” that had claimed insurers use secret tactics to avoid paying claims (see our August 30, 2007, posting). Since then, we’ve noted many times that the article’s premise and facts were unsound and that the insurance industry has an excellent claims-paying track record. The I.I.I. is therefore dismayed to learn that the same Bloomberg Markets article has been named a finalist for the Deadline Club Daniel Pearl Award for Investigative Reporting sponsored by the New York City chapter of The Society for Professional Journalists. It seems unfitting for an article replete with so many factual and arithmetic errors to be up for an award named after a courageous journalist. The I.I.I. has written a letter to the Deadline Club expressing its concerns. Fellow insurance blogger Sam Friedman of National Underwriter takes a similar view. 

Of all businesses that close down following a disaster, more than 25 percent never open their doors again. Having adequate insurance and a disaster plan is therefore key. For businessowners trying to decide what kinds of insurance they need for their business, the I.I.I. has just published the print version of Insuring Your Business: A Small Businessowners’ Guide to Insurance. Whether it’s property insurance, liability protection, life insurance for key employees or workers compensation, the book has a wealth of information for small businessowners. There are also chapters focused on insurance for specific types of business such as construction contractors, food service businesses, home-based businesses, nonprofit organizations and small retail stores. To purchase a copy of Insuring Your Business check out the I.I.I. online bookstore. 

With just two months to go until the start of the 2008 hurricane season, insurers are being warned to make preparations. EMB, a global actuarial consulting firm, has issued a reminder that hurricanes pose the greatest ‘act of nature’ risk to the U.S. insurance industry for 2008. Despite the relative calm of the past two years, EMB cautions insurers not to be lulled into a false sense of security. While 2006 and 2007 saw a drop in land-falling hurricanes, it notes that both years experienced higher-than-average hurricane activity in the North Atlantic. Further, even though hurricanes top the list of property/casualty insurance risk, EMB says that other ‘acts of nature,’ including tornadoes, earthquakes, winter storms, fire and hail must also be accounted for when insurers assess pricing strategies. Check out the I.I.I.’s U.S. catastrophe facts for more information. For hurricane preparedness tips check out the I.I.I. disaster information site. 

Despite a rise in the number of securities class action cases settled last year, the total value of those settlements plummeted 60 percent from the all-time high of $17.2 billion reported in 2006, to $7 billion in 2007. That’s the latest analysis from Cornerstone Research in its 2007 Securities Class Action Settlements Report. More than 70 percent of this drop was due to the largest settlement in history, the $7.2 billion Enron settlement, the majority of which was approved in 2006. Cited in the Cornerstone press release, Stanford Law School professor Joseph Grundfest, director of the Securities Class Action Clearinghouse (sponsored in cooperation with Cornerstone Research), says: “It seems clear that the aggregate dollar value of settlements over the next two or three years is likely to decline significantly because the inventory of large cases in the pipeline just isn’t there. The interesting open question is whether the subprime crisis will cause an uptick in securities fraud settlement activity that might, given settlement cycles in the litigation industry, only become apparent three to five years from now.” Further commentary on the Cornerstone Research study can be found at The D&O Diary, a blog focused on D&O liability issues.