Archive for April, 2010

Speculation is mounting that the growing oil spill in the Gulf of Mexico following the explosion, fire and sinking of the Deepwater Horizon oil rig off the coast of Louisiana may prompt the declaration of a federal disaster. The Jackson Clarion Ledger reports that just as Mississippi Governor Haley Barbour submits a disaster declaration request to President Obama for last Saturday’s deadly tornado, another major disaster looms for Mississippi.

Latest reports suggest oil is leaking at the rate of 5,000 barrels a day from the damaged rig, not 1,000 as had been initially estimated and officials believe the spill could reach the coast of southeastern Louisiana as soon as Friday night. The Clarion Ledger reports:

The impact of the spill is a direct threat to the state’s shrimp and oyster fishermen and to some of the state’s most pristine and important wetlands. Those areas have only recently begun to recover from 2005′s Hurricane Katrina.”

Meanwhile, a post at the Mississippi Press blog cites experts saying that although federal disaster declarations usually follow hurricanes and other natural catastrophes, the manmade oil spill in the Gulf could conceivably qualify as well. It quotes a spokesman for Gov. Barbour saying that while officials are still focused on keeping the oil spill offshore, a disaster declaration “would be one of the options open to us.”

According to FEMA data, there have been 35 major disaster declarations in 2010 so far – all of which were for various weather-related events. A major disaster declaration must be requested in writing to the President by the governor of a particular state. In this request the Governor certifies that the combined local, county and state resources are insufficient and that the situation is beyond their recovery capabilities.

The Mississippi Press blog notes that in 2001 then-President George W. Bush issued major disaster declarations for Virginia and New York following the September 11 terrorist attack. Two years later, he also issued a less-weighty emergency declaration for Texas and Louisiana following the loss of the space shuttle. Check out I.I.I. information on offshore energy facilities and insurance considerations.

The Los Angeles Times reports that more than 50 new surface earthquake faults have been discovered in California over the last two decades, according to a new state map produced by the California Geological Survey. The map is the first in 16 years, and offers a sober reminder of California’s quake risks, the LA Times article notes.

Its release comes just a few weeks after a 7.2 magnitude earthquake struck northern Baja California on April 4. The quake, which was centered south of California’s border with Mexico, swayed buildings as far away as San Diego, Loss Angeles and Arizona.

The LA Times observes that the new faults identified by the map range from small ones that don’t pose much threat for major temblors to very large ones:

Most of the faults have been known to researchers, and information on them is contained in scientific files. But state officials and quake experts hope that putting all the faults on one map will educate the state about quake risk zones and help.”

Release of the map is timely. We’ve already seen a number of major quakes in the early part of 2010, including an 8.8 magnitude earthquake in Central Chile, and a 7.0 magnitude earthquake in Haiti in January. On April 14, a magnitude 7.1 earthquake jolted Qinghai Province in the northwestern region of China, causing significant damage and loss of life. Check out I.I.I. earthquake facts and stats.

Given the record flooding seen in parts of the United States this spring, it may be hard to imagine water scarcity being an issue right now for the business community. However, according to a new report from Lloyd’s and the WWF, global water shortages are an increasing threat to business and risk managers must act now to address this risk.

The report observes that as well as being our most important human resource, water is critical for many businesses because all goods require water in their production. But there is a finite amount of freshwater on our planet – only 3 percent of the total water in the world is freshwater and less than 1 percent is readily usable by humans. It warns that economic growth, population shifts and climate change will contribute to severe shortage and degradation of global water supplies and ecosystems over the next 30 years.

Lloyd’s CEO Richard Ward makes the point that the issue of water scarcity is acquiring a new impetus and managing water is no longer simply a corporate social responsibility matter – it’s now a core business issue:

Over the next few decades, the world will have to make some hard decisions about water. The global population may grow by 3 billion people up to 2050, all of which will need water, and rising prosperity in Asia will further heighten demand. Set against more extreme and unpredictable climate conditions, we in the corporate world will need to find a way to ensure the sustainability, and appreciate the value, of the world’s water resources.”

He goes on to observe that this report is not simply for the insurance market, or solely concerned with the physical risks of too much, or too little water. It covers a wide variety of issues relating to water use for today’s risk manager. Questions to consider are:

  • • How confident are you in your ability to maintain a steady supply of water?
  • • Could the record of your suppliers on water management damage your brand or reputation?
  • • What new regulations could be imposed on how your company manages water?

There’s been a lot of talk about how the property/casualty insurance sector may be affected by landmark healthcare legislation enacted by Congress last month. One of the concerns among p/c insurers is cost shifting. A new study from the Insurance Research Council (IRC) shows that hospitals have been shifting costs to auto insurers for some time because of low reimbursements from public health insurance programs, such as Medicare and Medicaid. This raises auto injury claim costs and forces auto insurers to more closely scrutinize and negotiate hospital bills prior to payment.

According to IRC estimates, in 38 tort and add-on states, cost shifting for bodily injury claims in 2007 resulted in $1.2 billion in excess hospital charges. However, the full impact of hospital cost shifting, including that occurring in other insurance coverages and in other states, may be much greater. Over to Elizabeth Sprinkel, senior vice president of the IRC:

The conventional wisdom is that hospitals aggressively seek to shift costs from public insurance programs to private payers such as auto insurance companies. With this study, we now have information on the magnitude of cost shifting and a better understanding of the need for supportive state laws and effective tools that will enable auto insurers to pay hospitals appropriately and help control auto injury claim costs.”

Hospital cost shifting to auto injury claims also illustrates the complex relationship between p/c insurance and the broader healthcare and insurance system, according to Sprinkel:

Healthcare legislation enacted by Congress last month underscores the complexity of this relationship. It will take months, if not years, to understand the full impact of the reforms on hospital cost shifting and the auto insurance system.”

To explore the relationship between key health system features and auto injury hospital costs, IRC developed a statistical model of average hospital charges for auto injury claims in different states. Key predictors of average hospital charges confirmed by the model are the percentage of a state’s population without health insurance coverage and the percentage of the population covered by Medicaid. To estimate excess hospital charges due to hospital cost shifting, IRC compared average hospital charges for BI liability claims in Maryland with average charges in 38 other tort and add-on states. Some 22 insurers, representing 58 percent of the private passenger auto insurance market in the United States in 2006, participated in the study. Check out I.I.I. facts and stats on auto insurance.

• On a separate note, we’re honored to have been named a top 50 hospital administration blog by Hospitalicious in the “Health Insurance and Disease Management” category.

Concerns are rising about the potential environmental impact after the sinking of the Deepwater Horizon oil rig in the Gulf of Mexico about 50 miles off the coast of Louisiana. Eleven workers are feared dead and 17 others were injured following an explosion and fire that ripped through the rig late Tuesday. The rig, which is owned by offshore drilling contractor Transocean Ltd, was under contract to oil giant BP, according to media reports. Check out a Guy Carpenter risk report for more on this story. An article in the New York Times notes that the potential for environmental disaster from the spill would be greatest if the oil were to reach the Louisiana coast. BP was reported to be dispatching a flotilla of more than 30 vessels capable of skimming more than 170,000 barrels of oil a day to protect sea lanes and wildlife in the area of the sunken platform. A Reuters report focuses on the financial impact of the loss of the rig for Transocean Ltd, noting analysts’ comments that the cost of the rig will be largely covered by insurance. The comments underscore the point that insurance provides support to many different industries, including energy. Check out a recent presentation by I.I.I. president Dr. Robert Hartwig for information on the impact of the global financial crisis on the energy sector and trends and challenges in energy markets.

Legislative proposals to reform the National Flood Insurance Program (NFIP) were once again up for debate at a hearing before the U.S. House Financial Services Subcommittee on Housing and Community Opportunity yesterday. The NFIP recently was granted another temporary extension until May 31. The renewal is retroactive to March 28, covering the more than two-week period (March 28-April 15) when Congressional inaction effectively allowed the program to lapse. In testimony at yesterday’s hearing, Orice Williams Brown, of the Government Accountability Office (GAO) noted that the NFIP is not actuarially sound. Key points made by GAO are:

  1. While NFIP’s financial condition has improved slightly due to an increase in the number of policyholders and moderate flood losses, it is unlikely to pay off its full $18.8 billion debt, especially if it faces catastrophic loss years.
  2. Many property owners are paying premium rates that do not reflect the full, long-term risk of flooding. Almost 25 percent of property owners pay subsidized premium rates, and even “full-risk” premium rates may not reflect the actual risk of flooding.
  3. NFIP cannot deny insurance on the basis of frequent losses and thus provides policies for repetitive loss properties, which represent only 1 percent of policies, account for 25 to 30 percent of claims.

For further coverage of the hearing, check out an article in the Biloxi Gulfport Sun Herald by Anita Lee. Check out I.I.I. information on flood insurance.

The Wall Street Journal’s Washington Wire blog, among many others, tips us off that President Barack Obama will be speaking at Cooper Union in New York City tomorrow on financial regulatory reform. The president’s address comes on the same day that the Senate is expected to begin debate on the regulatory overhaul plan and according to White House press secretary Robert Gibbs the president “will call for swift action” on the package. The Restoring American Financial Stability Act of 2010, which passed the Senate Banking Committee in March and was drafted by committee chairman Christopher Dodd (D-CT), has a number of implications for insurers, not all of them good, according to industry experts. The key takeaways are as follows: the establishment of an Office of National Insurance within the Treasury; the streamlining of regulation for surplus lines insurers; the establishment of a Financial Stability Oversight Council that would subject to Fed oversight any nonbank financial companies that pose risks to the financial stability of the United States; and the creation of a $50 billion resolution fund, financed by assessments on the largest financial firms, including insurers. The House passed its version of financial services regulatory reform last December. Insurance Information Institute (I.I.I.) president Dr. Robert Hartwig has suggested that subjecting insurers to bank style regulation would be  counter-productive. Check out I.I.I. information on regulation modernization.

Fierce competition, abundant capacity and diminished demand continue to suppress commercial property/casualty rates, according to two market surveys. The First Quarter RIMS Benchmark Survey found that the soft market (now in its seventh year) shows few signs of loosening its grip on commercial insurance pricing, benefiting risk managers with lower premiums. Average premiums in every line tracked by the survey fell in the first quarter of 2010, though forecasts for an above-average hurricane season may signal rising premiums on the horizon. Meanwhile, the latest quarterly Commercial P/C Market Index Survey from the Council of Insurance Agents and Brokers (CIAB) reported that rates on average declined by 5.3 percent in the first quarter compared with a 5.6 percent decrease in the fourth quarter of 2009. Council President Ken Crerar noted: “Until demand picks up we don’t see any significant uptick in commercial rates for the foreseeable future.”  Seventy-three percent of the brokers responding to the survey said they saw no increase in demand from last quarter. Commercial pricing for small, medium and large business accounts continued to decline in the first quarter, with the largest decline in the large accounts, according to the Council’s survey data. All individual commercial lines surveyed experienced rate decreases. According to the RIMS survey, general liability was the most competitive line with the average premium falling 4.4 percent in the first quarter. The average property premium, which had been essentially flat over the past several quarters, fell 2.9 percent. The average workers compensation premium was down 2.0 percent, and average directors and officers liability (D&O) premium was off 1.1 percent after being flat to slightly higher throughout 2009 due to rate increases in the financial institution sector. Check out I.I.I. information on the industry’s financial outlook.

Just as litigation related to the subprime and financial crisis appeared to be on the decline, along comes an action that experts say could reverse the trend. Last Friday the Securities and Exchange Commission (SEC) announced that it is charging Goldman Sachs and one of its vice presidents with fraud in the structuring and marketing of a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. The news sent shockwaves through the financial markets and led to extensive media coverage over the weekend. In a comprehensive post on the Goldman fallout over at the D&O Diary today, Kevin LaCroix asks the question on everyone’s minds: will the SEC’s action against Goldman spawn further investor litigation? LaCroix cites several blog and press stories quoting plaintiffs’ attorneys eager to pursue claims against Goldman. He also observes that investors who lost money in other subprime-related investments now may be asking whether their transaction involved the same kind of undisclosed conflict of interest as alleged by the SEC in this action. LaCroix also notes that these developments arise just as it appeared the long-running subprime and credit crisis-related litigation wave might be losing momentum – a trend that he suggests could now reverse:

In light of popular and press reaction to the SEC’s allegations against Goldman, it is possible that these revelations in the Goldman complaint could revitalize the subprime litigation wave. Indeed, the SEC’s action may be only one of several recent developments that could reinforce a renewed interest in pursuing claims against Wall Street firms.”

Advisen recently reported that securities lawsuit filings fell by 39 percent in the first quarter of 2010, but cautioned that corporations and their directors and officers would be unwise to let their guards down given heightened regulatory enforcement activities and the fact that regulators have increased coordination of their efforts since the credit crisis.

Spare a thought for the tens of thousands of passengers (including I.I.I. president Dr. Robert Hartwig) stranded at airports across Europe as the continued eruption of a volcano beneath Iceland’s Eyjafjallajokull glacier grounded thousands of flights for the second consecutive day. According to an Associated Press report, Eurocontrol, the European air traffic agency, said half a dozen European nations have closed their airspaces and 60 percent of European flights would not operate with delays continuing into Saturday. Only 11,000 of the 28,000 flights on an average day were expected to take place Friday in European airspace, while about 100 trans-Atlantic flights arrived of the 300 typically expected. As for insurance implications, in a Reuters report via InsuranceJournal.com, several European reinsurers noted that the airlines typically are not insured against cancellations. In an article at BusinessWeek.com several insurers state that business interruption policies for airlines and airports would be triggered only if there is physical damage to equipment. An online article at National Underwriter quotes Gordon Woo at Risk Management Solutions saying that payouts from Iceland’s national natural catastrophe fund could follow if there is property damage. Aside from the significant travel disruption, the event highlights the point that even though many volcanoes with the potential to erupt are located where they can cause major damage and losses, the volcanic threat appears to attract little attention relative to other natural hazards. According to the 2009 Hazard and Risk Science Review from Aon Benfield and Partner Re research on the impacts of volcanic eruptions continues to grow. It’s worth noting that here in the United States volcanic eruption is a covered cause of loss under homeowners and business insurance policies. Check out State Farm’s info on insurance and volcano damage on what is and isn’t covered. Check out I.I.I. facts and stats on volcanoes.