Archive for December, 2008

Before we head off to ring in 2009, consider an analysis from the Insurance Institute for Highway Safety (IIHS) and reported by the New York Times earlier this week. Motor vehicle crashes in the United States result in more than 100 deaths per day, but certain days stand out as particularly risky, according to the IIHS. Its study of accident data from 1986 to 2002 reveals that July 4 (Independence Day) averaged the highest number of crash deaths (161) than any other day of the year. July 3 averaged the second highest number of deaths (149), while New Year’s Day ranked joint fourth with 142 deaths. However, New Year’s Day had the most deaths among pedestrians – 410 on average – compared with 401 total pedestrian fatalities on Halloween. Increasing travel around the holidays and alcohol impairment are contributing factors. Check out I.I.I. facts & stats on highway safety. Have a safe and happy New Year!

Anyone who questions the impact natural catastrophes can have on insurers should take a look at Munich Re’s latest global catastrophe review. The report indicates that despite a drop in the number of loss-producing events in 2008 compared with 2007 (to 750 from 960), individual catastrophes pushed up the numbers of victims and losses appreciably. From insurers’ perspective two key takeaways from the report are: insured losses in 2008 rose to $45 billion, an increase of about 50 percent on 2007; and in terms of insured losses, Hurricane Ike was the most expensive individual event in 2008. On the latter event, Munich Re makes the point that as Ike progressed over the mainland, extreme precipitation caused more and more damage, resulting in an insured loss estimated at $15 billion (not including claims covered under the National Flood Insurance Program (NFIP)). The number of tropical cyclones in the North Atlantic in 2008 was much higher than the long-term average and also higher than the average of the current warm phase since 1995, which is more pronounced as a result of climate change, Munich Re said. Check out I.I.I. facts and stats on global catastrophes. 

The Federal Trade Commission (FTC) decision to order nine homeowners insurers to provide information on the use and effect of credit-based insurance scores in homeowners insurance is a reminder of the continuing need for insurers to explain why they use credit information in personal lines underwriting and exactly how it works. The FTC is seeking the data to complete a study of credit-based insurance scores and homeowners insurance, as required by the Fair and Accurate Credit Transactions Act of 2003. Insurance Information Institute (I.I.I.) background information on credit scoring is available online. The following responses to the FTC have been issued by the American Insurance Association (AIA), the Property Casualty Insurers Association of America (PCI) and the National Association of Mutual Insurance Companies (NAMIC). 

Securities class action litigation surged to a six-year high in 2008 amid the ongoing credit crisis and turmoil in the financial sector. According to a just released report by NERA Economic Consulting as of 14 December 2008, 255 cases were filed of which 43 percent, or 110, were related to the credit crisis. While filings have steadily increased from 2006 through 2008, NERA reports that median settlement values have remained relatively stable. The 2008 median settlement resolved for $7.5 million, below the 2007 median of $9.4 million, but above the 2006 median settlement of $7 million. While it is too early to tell what impact the surge in credit crisis filings may have on future settlement values, the authors note that two outcomes are possible: either average and median settlement sizes will grow in the future as credit crisis cases begin to be resolved, or the financial distress faced by defendant companies could pull median settlement values down. More analysis of the NERA findings can be found at The D&O Diary, a blog focused on D&O liability issues.

A perennial issue for insurers is how to retain customers. A new study from J.D. Power and Associates says that identifying at-risk customers is critical for insurers in minimizing defection rates and increasing loyalty. The 2008 Insurance Retention/Defection Study found that although 85 percent of auto insurance customers indicate they are loyal to their carrier, more than one-third shopped for a new insurance provider. According to the study, some 15 percent of policyholders defected to another insurance carrier in 2008 and an additional 20 percent were at risk of leaving their current carrier. Among the 15 percent of customers who defected, only one-third intended to switch carriers when they first started to shop, suggesting that carriers have an opportunity to retain up to two-thirds of all defectors. However, only 30 percent of defectors report that their previous insurer made any attempt to keep their business. Not surprisingly, the study also found that price is a key driver among both defecting and loyal customers. But while offering competitive pricing and discounts is one way to persuade customers at risk of defecting, J.D. Power and Associates says that educating them about their policies and providing thorough policy reviews on a regular basis are also key tactics in persuading them to stay on board.

More than 238,000 people lost their lives to natural catastrophes and man-made disasters worldwide in 2008 – the fourth largest number of deaths since 1970. Initial estimates from Swiss Re also indicate that insurers paid out more than $50 billion in property losses arising from these events – the second costliest year ever, while the total cost to society was $225 billion. Of the total amount paid by insurers, natural catastrophes accounted for $43 billion, with storms costing insurers $39 billion. Swiss Re noted that hurricanes in the U.S. and the Caribbean triggered record losses, with Hurricane Ike resulting in claims of $20 billion, followed by Hurricane Gustav at $4 billion. An important note is that insured losses defined by Swiss Re include property, motor, offshore damage and flood losses covered by the National Flood Insurance Program (NFIP). Man-made disasters also continued to be costly for the insurance industry in 2008, with explosions and major fires resulting in losses of $4.8 billion. Damages to industry and industrial warehouses accounted for some $2.1 billion of this amount, while oil and gas-related incidents – excluding offshore damage from hurricanes – cost insurers another $1.5 billion. Check out I.I.I. facts & stats on global catastrophes. 

In the waning days of 2008, best/worst of the year reports are plentiful and one not to be missed is the American Tort Reform Association’s (ATRA) Judicial Hellholes 2008/2009 report that names and shames some of the nation’s most unfair civil court jurisdictions. This year’s list includes perennial hellholes West Virginia, South Florida and Cook County, Illinois; relative newcomers Clark County, Nevada, and Atlantic County, New Jersey; as well as Los Angeles County, California, and Alabama’s Macon and Montgomery counties – both returning to the spotlight after respective absences. A new section in this year’s report is the aptly titled “Rogues’ Gallery” which ATRA says is designed to remind policymakers, particularly those in Congress that “just like professional athletes who use performance-enhancing drugs and corporate accountants who take ill-advised shortcuts, there are influential plaintiffs’ lawyers who unscrupulously and sometimes illegally work to corrupt the nation’s civil justice system and they, too, warrant aggressive oversight.” Definitely worth checking out, as is an I.I.I. update on the liability system. 

Just one impact of the continuing financial crisis on the property/casualty insurance industry is that the financial cushion that protects policyholders is declining. The p/c industry’s third quarter 2008 results released yesterday by ISO and the Property Casualty Insurers Association of America (PCI) indicate that the downward trend in industry policyholder surplus continues. As the industry reported its second lowest annualized nine-month rate of return since the start of ISO’s quarterly data in 1986 (1.1 percent, down from 13.1 percent in the first nine months of 2007), its policyholder surplus (insurers’ net worth) dropped $39.4 billion to $478.5 billion at September 30, 2008 from $517.9 billion at year-end 2007.

In his commentary on the results, I.I.I. president Dr. Robert Hartwig notes the decline is the fourth consecutive quarterly drop in policyholder surplus, which peaked a year earlier at $521.8 billion during the third quarter of 2007. Following on the heels of five years of surplus increases (2003-2007), the return to negative capital accumulation is attributable to several factors, the largest and most obvious being declining prices for financial assets. Dr Hartwig explains that the diminution of capital, combined with reduced investment earnings, implies that insurers will need to be very disciplined in their underwriting if they hope to earn risk appropriate rates of return. This, he suggests, involves a return to the way p/c insurers were managed for decades before the era of high interest began in the mid-1970s. In other words: insurers managed their operations with the intent of earning underwriting profits every year and investment earnings were considered helpful, but were certainly not viewed as a reliable source of significant earnings.    

In a decision that opens the door to a new wave of lawsuits against tobacco companies the U.S. Supreme Court yesterday ruled that consumers can sue Altria Group’s Philip Morris unit under state unfair-trade laws even though cigarette labeling is regulated by the Federal Trade Commission (FTC). According to reports, the decision (Altria Group Inc. v. Good) could affect some 40 lawsuits around the country seeking billions of dollars. In a 5-4 ruling the Supreme Court held that the Federal Cigarette Labeling and Advertising Act does not bar or preempt state court lawsuits. The class action lawsuit claimed that Philip Morris engaged in unfair and deceptive practices in its representations that certain brands of cigarettes are light or have lowered-tar and nicotine. The case sets the preemption pendulum swinging once more. You will recall at the core of the Wyeth v. Levine case (arguments heard in November) is whether federal law preempts state product liability law. For more on preemption, check out the Wall Street Journal law blog.

Meanwhile, if you’re trying to pick out the 10 most significant insurance coverage decisions of 2008, attorney Randy Maniloff, of law firm White and Williams LLP has done just that in his 8th Annual Insurance Coverage Best in Show. Maniloff has also put together a special report Coverage for Dummies: The Top Ten – that looks at the 10 best decisions from 2008 demonstrating that people sometimes do dumb things and then seek insurance coverage for the consequences. An entertaining read.

A report from the National Research Council has pointed to serious weaknesses in the United States government’s plan for research on the potential health and environmental risks posed by nanomaterials. The report criticizes the research plan developed by the National Nanotechnology Initiative, which it says misses elements crucial for progress in understanding nanomaterials’ health and safety impacts. While the National Research Council report did not evaluate whether current uses of nanomaterials represent unreasonable risks to the public, it did focus on what would constitute an effective national research strategy. The upshot is that it recommends a new national strategic plan that goes beyond federal research to incorporate research from academia, industry, consumer and environmental groups as well as other stakeholders. The findings follow a recent report by the United Kingdom’s Royal Commission on the challenges and benefits arising from nanotechnology. Food, drugs, medical devices and cosmetics are just some of the products that may incorporate nanomaterials.