Archive for November, 2009

The fact that no hurricanes and only two tropical storms (Claudette and Ida) made U.S. landfall this year may be the key takeaway of the 2009 Atlantic hurricane season, but Colorado State University hurricane forecasters remind us to take a long-term view. In addition to a large increase in U.S. hurricane destruction in 2004, 2005 and 2008, the forecasters note that the Atlantic has seen a very large increase in major hurricanes over the past 15 years. There were an average 3.9 major hurricanes per year during the 1995-2009 period, compared to an average of 1.5 per year in the prior 25-year period (1970-1994). The CSU team says the increase is primarily the result of a multi-decadal cycle in the Atlantic, and is not directly related to global sea surface temperatures or CO2 increases. The final 2009 season tally shows a total of nine named storms occurred, the fewest named storms in a season since 1997. There were three hurricanes, including two major hurricanes. The CSU team notes that following seven major hurricane landfalls in 2004-2005, the U.S. has not witnessed a major hurricane landfall in the past four years. However, the four consecutive years between 2000-2003 also experienced no major U.S. hurricane landfalls. I.I.I. hurricane facts and stats show that eight of the top 10 most costly hurricanes in U.S. history have occurred since 2004.

Some 38.4 million Americans will travel 50 miles or more from home over the Thanksgiving holiday weekend, up 1.4 percent over last year when 37.8 million traveled, according to the AAA. This year’s expected increase in travel reflects improved customer confidence from one year ago, better financial market performance and a growing sense among many consumers that the worst of the global economic crisis is behind us, AAA said. In 2008 Thanksgiving travel dropped a precipitous 25.2 percent in the wake of the ongoing housing and financial crisis. Some 33.2 million motorists are expected to hit the road this Thanksgiving, a 2.1 percent increase on last year. Another 2.3 million plan to travel by air, a decline of 6.7 percent, while the number traveling by train, bus or other transportation is expected to increase by 1.2 percent to 2.9 million. According to AAA’s Leisure Travel Index (LTI), Thanksgiving holiday travelers will pay less for airfares and car rentals this year. On average, car rental rates are down three percent to an average of $44 per day for a mid-size car versus $45 per day last year. To help consumers better understand car rental insurance, I.I.I. has created a podcast outlining the coverages offered in most policies. The podcast is available on iTunes and the I.I.I. Web site at Podcast: Rental Car Insurance. Have a safe and happy Thanksgiving!

A second report from the Consumer Product Safety Commission (CPSC) on Chinese drywall has found “a strong association” between homes with the problem drywall and the levels of hydrogen sulfide and metal corrosion in those homes. However, the findings on possible health effects are less definitive. “While drywall-related corrosion is clearly evident, long term safety effects are still under investigation,” CPSC said. The study of 51 homes also found elevated levels of formaldehyde and hydrogen sulfide, both of which are known irritants at sufficiently high levels. “While hydrogen sulfide and formaldehyde levels detected in homes containing the problem drywall were at concentrations below irritant levels, it is possible that additive or synergistic effects of these and other compounds in the subject homes could cause irritant effects,” CPSC noted. Over at the Huffington Post, Brian Skoloff cites the Formaldehyde Council, a trade group, saying there is no scientific evidence to support the theory that formaldehyde and hydrogen sulfide can combine to cause adverse health effects. The investigation continues. To-date CPSC has received about 2,091 reports in 32 states, the District of Columbia, and Puerto Rico, from residents who believe their health symptoms or metal corrosion in their homes are related to the presence of Chinese drywall. Check out the I.I.I. fact sheet on Chinese Drywall for more info on what homeowners should do if faced with this problem.

The more gadgets we have the more gadgets we need, or at least that’s the way it often seems. But put this in the context of the distracted driving problem and you may have a solution that reduces crash fatalities and auto insurance premiums. An article in Saturday’s New York Times by Sam Grobart explains how technology companies are trying to solve a problem caused by our addiction to technology with more technology. It points to the rising interest in services that automatically disable an individual’s cellphone when it is in a moving car. Apparently a number of companies have started offering call-blocking systems that place restrictions on phones based on its GPS signal, data from the car itself or from cell towers. Incoming calls would then be routed to voice mail or message. The concept goes a step further than hands-free systems. A key takeaway from the article is that while proponents of hands-free systems believe their products make driving safer, there is a growing body of evidence that hands-free is not the answer. Indeed, a number of studies have suggested that driver response times still may be significantly slower with hands-free devices and that the risk of crashing doesn’t vary with type of phone. Nationwide is among insurers offering a discount to policyholders who sign up to use a call-blocking service from Aegis Mobility. Time will tell whether the use of call-blocking devices takes off. Certainly for employers concerned that they may be liable for accidents caused by employees taking work-related cellphone calls while driving, the use of call-blocking systems may be an item worth adding to the technology budget. Check out I.I.I. information on cell phones and driving.

The fortunes of ocean marine insurers are inextricably tied to the state of the economy and world trade so in today’s environment of slow economic growth, low inflation and minimal interest rates they really have their work cut out. At the annual meeting of the American Institute of Marine Underwriters (AIMU) in New York City yesterday, AIMU chairman Dennis Marvin noted that with fewer ships to insure, fewer goods in transit to cover with reduced value of merchandise and lower exposures most marine segments are seeing flat or falling premium volume. Combined with more than sufficient capacity, the budget constraints of buyers and shrinking profit margins, these factors are likely to lead to a continuing soft market in 2010, he said. “Now, more than ever, the most successful marine underwriters are the most diligent, knowledgeable and focused on the risks they assume,” Marvin said. Restrictive trade practices, cargo theft and piracy attacks are just some of the other issues affecting marine insurers. While incidents of piracy continued to increase during the first nine months of 2009, with the Gulf of Aden and the coast of Somalia primary areas of concern, a host of initiatives are being undertaken to counter the threat. For example, Marvin noted that a consortium of industry associations, including the International Union of Marine Insurers (IUMI), have produced a set of guidelines which stress that superior planning and training by a ship’s crew can significantly reduce the risk of hijacking.

What a difference a year (and a half) can make. In April 2008, ratings agency Fitch published a report indicating that while the outlook for commercial real estate (CRE) related investments had deteriorated, it did not anticipate a major impact on U.S. life insurers’ capital or ratings in 2008. Now, Fitch has published a revised report projecting that U.S. life insurers may incur CRE-related investment losses in the range of $18.5 billion to $22.6 billion through 2011. Why the reversal of fortunes? Fitch reports that commercial real estate fundamentals are softening as rents are declining and vacancies increasing in response to the broader economic downturn. It expects all commercial property types to experience declines in income and value in this stressed environment. On a positive note, Fitch believes the industry’s loss exposure to CRE-related assets is manageable in the context of the industry’s strong capital position and earnings (industry capital of $228 billion at June 30, 2009 and statutory net operating earnings of $22.4 billion in the first half of 2009), but it warns that CRE-related losses are additive to the industry total investment loss exposure and will be a source of incremental pressure on industry ratings. To date, life insurers have not recognized material impairments or losses on CRE-related investments. While the financial crisis has led to a significant increase in investment losses and a material capital decline for U.S. life insurers, until now this has been driven primarily by their exposure to corporate bonds, residential mortgage-backed securities, asset-backed securities and equities. According to Fitch, this trend is about to change. For more on this story, check out a November 17 Bloomberg article by Jamie McGee. Check out I.I.I. facts and stats on life insurer investments.

We picked up a couple of tidbits on the topic of climate change at the Casualty Actuarial Society (CAS) annual meeting that are worth sharing. A session yesterday on climate risk reporting and monitoring was headed up by Joel Ario, Pennsylvania insurance commissioner and Andrew Logan, of Ceres. Both anticipate a high likelihood that the Securities and Exchange Commission (SEC) will act in 2010 to require all public companies, including insurers, to disclose their climate change risks. A recent article by Evan Lehmann of ClimateWire in the New York Times has more on the potential SEC climate disclosure rules. As some of you know, state insurance regulators earlier this year adopted a mandatory requirement that insurers disclose the financial risks they face from climate change, as well as actions they are taking to respond to those risks. As a result, all insurers with annual premiums of $500 million or more are required for the first time to complete the annual climate risk disclosure survey developed by the National Association of Insurance Commissioners (NAIC) by May 1, 2010. The threshold for participation in the survey will expand to insurers with annual premiums of $300 million or more in 2011, according to Ario. Also, the NAIC will be holding a Climate Change Risk Summit as part of its upcoming Winter National meeting in San Francisco this December. The summit is scheduled for December 9. Check out I.I.I. information on climate change and insurance.

As Congress continues to work on overhauling the regulatory system in response to the financial crisis, it was timely to hear a reformer from the past financial crisis speak today at a key meeting of actuaries. In a luncheon speech at the Casualty Actuarial Society (CAS) annual meeting in Boston, Senator Paul Sarbanes, former U.S. Senator and co-author of the Sarbanes-Oxley Act of 2002 (or SOX, as it is better known) made clear that he stands by the law that he helped craft. Senator Sarbanes noted that the latest financial crisis was a breakdown in risk management and regulatory oversight, neither of which SOX was designed to address. “This crisis was not a breakdown in financial reporting. In fact, the legislation (SOX) has helped us avoid a crisis involving both risk management and financial reporting,” he said, adding: “SOX never mandated against bad business judgments which are what we have seen take place.” At the same time, Senator Sarbanes addressed concerns over Section 404 under SOX which requires companies to assess the adequacy of internal controls. This provision has proved controversial because some businesses say the cost of compliance is far too great. Senator Sarbanes said he is not in favor of an amendment that would exempt small-cap companies under $75 million from auditing requirements under SOX. “My strong view is that we should address the complaint about the cost, but every public company that gets listed on an exchange ought to have a certified system of internal financial controls.” There you have it – directly from a reformer of the previous financial crisis. Check out further I.I.I. information on regulation modernization and insurance.

The Centers for Disease Control and Prevention (CDC) yesterday released new fatality estimates for the H1N1 influenza virus, also known as swine flu. Since the start of the 2009 H1N1 flu outbreak in April, there have been some 3,900 deaths, more than the 1,200 previously estimated, but significantly less than the 36,000 deaths each year attributed to seasonal flu. In the six months from April to October 17, 2009, the CDC puts the total number of swine flu cases at 22 million and the number of hospitalizations at 98,000. The Wall Street Journal Health blog ponders what these numbers might mean. For starters, it observes that there’s a lot of uncertainty around the figures because so many cases of swine flu go unreported. Indeed, the CDC itself says that estimating the number of individual flu cases in the U.S. is very challenging because many people with flu don’t seek medical care and only a small number of those that do seek care are tested. More people who are hospitalized or die of flu-related causes are tested and reported, but under-reporting of hospitalizations and deaths occurs as well. The WSJ also points out that the CDC presents a wide range of numbers around their estimates. For example, the possible number of total cases ranges from 14 million to 34 million and the estimated total number of deaths ranges from 2,500 to 6,100. There are also several big caveats to comparisons between H1N1 and seasonal flu estimates. Demographic difference is one. While about 90 percent of seasonal flu-related deaths occur in people over 65 years old, the proportion of younger people being impacted by H1N1 is much greater. Another caveat, according to the WSJ, is that the six months of data the CDC is looking at are typically flu’s off-season. How H1N1 and seasonal flu data will compare when we hit the traditional big flu months this winter is something to watch for. I.I.I. facts and stats on public health risks show that flu and pneumonia are among the leading causes of death each year in the U.S. However, pandemic influenza viruses have the potential to be far more deadly.

In the wake of the global financial crisis and amid the unraveling of numerous financial scandals including Madoff, Stanford and Galleon, the 22nd International PLUS Conference in Chicago this week would be anything but dull. Add to the mix an opening day keynote by former President Bill Clinton and a forecast on the industry by I.I.I. president Dr. Robert Hartwig and you have the ingredients for a showstopper. In a speech that spanned major topics such as global warming, healthcare reform, and the struggling economy to name just a few, Clinton gave the crowd of professional liability insurance executives and media (seated in the back row of the conference hall) something to think about. A key theme to come from Clinton and one that is very pertinent for insurers is the interdependence of the world we live in. Interdependence brings both benefits and risks, Clinton noted: “Interdependence means being tied together. You can’t get away from the consequences of each others’ actions and you can’t get a divorce.” He said it was important to create a world of positive interdependence. In other words, we have to work together to build a better future. Ahead of Clinton, I.I.I. president Dr. Robert Hartwig gave a wide-ranging presentation on the impact of the global financial crisis and U.S. recession on the property/casualty industry. Dr Hartwig concluded that regulatory overreach, the erosion of tort reform and the long-term reduction in investment earnings are some of the major threats facing the p/c industry going forward.