Archive for March, 2009

As part of its review of the impact of federal assistance on the property/casualty insurance market the Government Accountability Office (GAO) has found no evidence to suggest that American International Group’s (AIG) commercial insurance companies are charging a price that is inadequate for the risk involved to gain a competitive advantage in the market. The GAO report was released as part of testimony given during last week’s hearing before the House Financial Services Committee. Some of AIG’s competitors have suggested that federal assistance has allowed AIG’s commercial insurance companies to offer coverage at prices that are out of line with its risks, according to GAO. However, while state insurance regulators, insurance brokers and buyers said AIG may be pricing somewhat more aggressively than in the past in order to retain business due to the parent company’s reputation, they have seen no indications that pricing was inadequate or out of line with previous pricing practices. Moreover, some have noted that AIG has lost business because of the problems encountered by its parent company. GAO observed that there are a number of challenges to determining the adequacy of commercial p/c premium rates, especially in the short-term. These challenges include the unique, negotiated nature of many insurance policies, the subjective assumptions involved in determining premiums, and the fact that for some lines of commercial insurance it can take several years to determine if premiums charged were adequate for the related losses. Check out I.I.I. facts and stats on the property/casualty insurance cycle. 

Today we cast an eye across the pond to the much anticipated Group of 20 meeting of heads of government. One point of discussion will be greater international coordination on financial regulation. The question is what is the likely impact for the global insurance sector? The Geneva Association has just released a letter signed by the CEOs of 49 major global insurers. In it the CEOs call for any future sector regulation to take into account the specific characteristics of the insurance business model, avoid pro-cyclical effects and to strike an appropriate balance between financial stability, consumer protection and a level competitive playing field. Specifically, they make the point that regulatory frameworks need to reflect the differences between insurers and banks. The CEOs also note the vital role insurers and reinsurers play in the global economy, accounting for 9 percent of GDP and with assets under management equaling 11 percent of the world total. Despite the financial crisis, insurance and reinsurance markets continue to operate normally, and their robust business model and risk management systems have enabled them to weather the crisis. Well said. Check out I.I.I. information on insurers’ contribution to the U.S. economy.

A volcano warning and ash fall advisory remains in effect for Mt. Redoubt in Alaska which has been erupting since Sunday. Several airlines cancelled flights in and out of Anchorage yesterday, due to the risk of significant emission of volcanic ash into the atmosphere. For Alaska residents the good news is that volcanic eruption is a covered cause of loss under homeowners and business insurance policies in the United States. Even though many volcanoes with the potential to erupt are located where they can cause major damage and losses, interest in the volcanic threat remains low. The 2008 Hazard and Risk Science Review from Benfield and Partner Re points to the risk posed by the plumes of volcanic ash, aerosols and gases that enter the atmosphere during moderately to highly explosive eruptions. “Not only do these plumes interfere with air transport routes and damage aircraft, but as they settle out of the atmosphere they may also blanket large areas, affecting business, power supply, the built environment, transport and health.” It also notes that volcanic eruptions, like other low frequency hazardous events are difficult to forecast because development of sound statistical eruption models has been significantly limited by the lack of detailed eruption data that span several thousand years. The May 1980 eruption of Mt. St. Helens was the most catastrophic in U.S. history. Check out I.I.I. volcano facts and stats.

Agent satisfaction can have a major impact on policy growth for an insurance company according to a new study from J.D. Power and Associates. It found that as agent satisfaction increases, the likelihood of agents increasing their premium business with an insurer also rises. In 2009, nearly 70 percent of agents with satisfaction scores averaging more than 800 points on a 1,000 point scale indicate they tend to increase business with the insurance company. In contrast, only 28 percent of agents with scores averaging 600 points or less indicate the same. So what makes for a satisfied agent? Interestingly J.D. Powers found that compensation is not the primary driver of agent satisfaction. “Insurers that provide helpful and knowledgeable business contacts and provide a variety of policy offerings help to better meet the needs of consumers, which leads to greater levels of satisfaction among agents,” said Jeremy Bowler, senior director of the insurance practice at J.D. Power and Associates in a press release. The most important factors contributing to agent satisfaction are: key carrier contacts (32 percent); policy offering (23 percent); claims (16 percent); technology (13 percent); price (10 percent); and compensation (5 percent). The 2009 Insurance Agency Satisfaction Study is based on responses from 1,589 insurance agents evaluating more than 10 insurance companies across the industry. Check out I.I.I. information on evolving distribution channels. 

Addressing the need for comprehensive regulatory reform is the topic of a hearing tomorrow before the U.S. House Financial Services Committee. Treasury Secretary Timothy Geithner will testify for the second time this week and is expected to provide details on the administration’s plans for financial regulatory reform. At yesterday’s Congressional hearing to examine oversight of the Federal government’s intervention at American International Group (AIG) Geithner said: “The financial crisis has revealed systemic gaps in the regulatory structure governing our financial markets. The lack of an appropriate regulatory regime and resolution authority for large non-bank financial institutions contributed to this crisis and will continue to constrain our capacity to address future crises.” For more on this story check out an online article at National Underwriter. The I.I.I. Financial Services Fact Book offers latest facts and stats on the financial services sector. 

Such is our focus on insured losses arising from natural catastrophes like hurricanes and tornadoes, it’s easy to skim over the losses arising from man-made catastrophes. A report from Guy Carpenter reminds us of their impact. It reports that man-made and technological catastrophes hit $7 billion in insured losses in 2008 – some 46 percent higher than the annual average of $4.8 billion, according to data from Swiss Re. A total of 19 known events occurred in 11 countries resulting in insured losses of more than $50 million each. Nearly half of 2008’s man-made cat losses were caused by two events in Australia: an explosion and fire at an Apache Energy offshore gas plant ($1.8 billion) and BHP Billiton’s business interruption losses ($1.5 billion). Two events in the United States caused losses of more than $400 million each: an explosion at an Alon oil refinery ($525 million) and a fire at Universal Studios ($400 million-plus). The terrorist attacks in Mumbai, India, could trigger insurance claims of up to $600 million, according to Guy Carpenter. Check out I.I.I. facts and stats on global catastrophes.

Legislation proposed in the House (H.R. 1583) last week would remove the insurance industry’s limited antitrust exemption under the McCarran-Ferguson Act but maintain state regulation of insurance. The proposed legislation introduced by Rep. Gene Taylor (D.MS), and Peter DeFazio (D.OR), is the latest attempt to repeal what is a very limited federal antitrust exemption for the insurance industry that has been in place for more than 60 years under the McCarran-Ferguson Act. Insurance Information Institute (I.I.I.) background information on the McCarran-Ferguson Act is available online. The new I.I.I. Insurance Handbook for Policymakers also provides insight on this and other key issues affecting the industry. The following response to the introduction of the so-called Insurance Industry Competition Act has been issued by the Property Casualty Insurers Association of America (PCI).  

 

An early hurricane forecast for 2009 released by AccuWeather.com calls for fewer landfalls in the United States, as well as a lower overall number of named storms. Joe Bastardi, chief long-range and hurricane forecaster at AccuWeather.com sees three hurricanes impacting the U.S. coast in 2009, compared with the four that made landfall last year. However, storms may be more likely to form in the Atlantic Basin closer to the coast and the possibility of a major hurricane making landfall in the U.S. cannot be ruled out. Bastardi also warned that it only takes one major hurricane hitting a highly populated area to have devastating impact. A key takeaway from the forecast is that the number of storms should still be near or a little above normal. While Bastardi expects 13 total storms down from 16 in 2008, the number of likely hurricanes remains the same as last year at 8. You have been duly warned. Check back with us in early April for an updated forecast of 2009 hurricane activity from Colorado State University’s Tropical Meteorology Project. Check out I.I.I. facts and stats on hurricanes. 

Some 90 percent of all natural disasters in the United States involve flooding and spring is peak flood season, so a new Web page launched by the National Weather Service and FEMA to mark the fifth annual National Flood Safety Awareness week is worth checking out. The site shows the effect and cost of flooding to millions of people throughout the U.S. and illustrates the point that floods can happen anywhere at any time of the year. For example, in September 2008 Hurricane Ike slammed into the Texas coast with storm surges up to 17 feet causing an estimated $20 billion in insured losses. Remnants of Ike produced heavy rainfall and flooding all the way up to the Great Lakes. Also last year, the Midwest flood of June 2008 led to severe flooding in parts of Indiana, Illinois, Iowa and Wisconsin and caused total damages of more than $5 billion. The site provides essential information on what to know and do before, during and after a flood and offers a variety of safety tips and online tools. It underscores the importance of buying flood insurance as a first step. Bear in mind that a 2008 poll by the Insurance Information Institute (I.I.I.) found that only 17 percent of Americans have a flood insurance policy. A fact often misunderstood is that standard homeowners and renters policies in the U.S. exclude flood damage. A separate flood insurance policy is available from the National Flood Insurance Program (NFIP). Check out I.I.I. facts and stats on flood insurance.

Latest statistics confirm a trend towards an increase in number and costs of natural catastrophes and man-made disasters, according to Swiss Re. Its annual sigma study found that 2008 was one of the worst years for catastrophe losses. Economic losses from natural and man-made catastrophes around the world added up to $269 billion in 2008, the highest total since 2005 when a series of hurricanes led to losses of $262 billion. More than 240,500 people lost their lives in 311 catastrophic events (137 natural catastrophes and 174 man-made disasters) during the year, most of whom lived in Asia. In the aftermath, property insurers paid out $52.5 billion making 2008 one of the costliest years since the hurricane-prone years 2004 and 2005. The events causing the biggest insurance claims were related to storms. High catastrophe claims in the United States were driven by hurricanes Ike and Gustav (resulting in insured losses estimated at $20 billion and $4 billion respectively) as well as tornadoes and thunderstorms during the first half of 2008. Europe’s losses, down from last year, represented slightly more than one tenth of the world total in 2008, largely due to lower storm and flood damages. Snow storms and freezing rain struck China in early 2008 resulting in losses of $1.3 billion. Check out I.I.I. facts and stats on global catastrophes.