Archive for January, 2014

It’s Super Bowl weekend and whether you’re cheering for the Denver Broncos or the Seattle Seahawks, or have no idea who even made the final, the big game wouldn’t be able to happen without the support of the risk management and insurance community.

While it doesn’t look as if a blizzard will disrupt Sunday’s title game at MetLife Stadium in New Jersey, it’s no surprise that event-cancellation policies have been making the headlines.

Earlier this year New York-based broker DeWitt Stern announced that it had designed an event cancellation policy to protect businesses from lost revenue if for any reason the Super Bowl was cancelled or moved more than 60 miles.

In the event a terrorist attack or blizzard causes the game to be cancelled, the policy would respond and cover businesses for loss of estimated potential revenue. The policy is underwritten by Houston Casualty Company.

There are many other risks that insurers will cover, from the Bruno Mars and Red Hot Chili Peppers halftime show (remember the infamous wardrobe malfunction during Janet Jackson’s performance with Justin Timberlake in 2004?), to coverage for broadcasters in the event their transmissions are interrupted due to a technical problem (think back to last year’s championship game in New Orleans when a power outage halted play for 34 minutes).

For more on Super Bowl risks, check out this post at KYForward.com by Kevin Moore, director of Risk Management Services for Roeding Insurance.

And for the betting among you, check out the Super Bowl Prediction System of John Dewan to see which team you should be backing.

May the best team win!

Efforts to delay or repeal rate increases under the Biggert-Waters reforms to the National Flood Insurance Program (NFIP) would likely continue to increase the NFIP’s long-term burden on taxpayers.

They may also reinforce private insurers’ skepticism that they would ever be permitted to charge adequate rates and make their participation in the flood insurance market unlikely in the foreseeable future, according to a new Government Accountability Office (GAO) report.

In its analysis GAO notes that new technologies and a better understanding of flood risks may have increased private insurers’ willingness to offer flood coverage, but a key condition to their participation is the ability to charge rates that fully reflect the estimated risk of flooding.

GAO states:

As debates over the private sector’s role continue, one step to address the burden on low- and moderate-income policyholders could be taken immediately. As we have suggested previously, Congress could eliminate subsidized rates, charge full-risk rates to all policyholders, and appropriate funds for a direct means-based subsidy to eligible policyholders. The movement to full-risk rates would encourage private sector participation, and the explicit subsidy would address affordability concerns, raise awareness of the risks associated with living in harm’s way, and decrease costs to taxpayers, depending on the extent and amount of the subsidy.”

Even with increased private insurer participation in the flood insurance market, the GAO report foresees a continuing role for the federal government in the form of a residual market or NFIP reinsurer.

Insurance Journal has more on this story.

Check out this USA Today article on latest Congressional action to delay new flood insurance premiums.

Also check out I.I.I. facts and statistics on flood insurance.

The widening gap between economic losses and insured losses from natural catastrophes is our topic du jour.

Guy Carpenter’s GCCapitalIdeas.com just published this chart showing that approximately 70 percent of global economic losses from natural catastrophes were uninsured between 1980 and 2013:

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Another compelling chart shows how small a proportion of catastrophe losses were insured in both advanced and emerging markets between 2002 and 2011:

Munich Re just reported that economic losses from natural catastrophes worldwide in 2013 amounted to around $125 billion and insured losses around $31 billion. This compared with economic losses of $160 billion and insured losses of $65 billion reported by Munich Re in 2012.

According to a recent post over at Artemis blog, this means that just over 40 percent of economic losses from natural catastrophes were insured in 2012, while in 2013 that percentage was significantly lower at 25 percent.

Artemis blog’s take on this disparity:

The reason for this is likely that losses were more widely distributed around the world, in 2012 90% of insured losses were in the U.S. (compared to just 54% in 2013). The lack of hurricanes, a well covered risk typically with high insured to economic loss ratios and the fact that as a market the U.S. has one of the greatest insurance penetrations for property cover, as well as hurricane Sandy’s impact.”.

The Guy Carpenter charts also point to a growing need for coverage to protect against catastrophes in both advanced and emerging markets.

Climate change is among the five most likely and most potentially impactful global risks, according to the just-released World Economic Forum (WEF) 2014 Global Risks Report.

The report assesses 31 risks that are global in nature and have the potential to cause significant negative impact across entire countries and industries if they take place.

An analysis of the five risks considered most likely and most impactful since 2007 shows that environmental risks, such as climate change, extreme weather events and water scarcity, have become more prominent since 2011 (see chart above).

This suggests a pressing need for better public information about the potential consequences of environmental threats, the WEF says.

Concern about socio-economic risks such as income disparity, unemployment and fiscal crises has become more prominent over the years.

The report reveals that fiscal crises and structural unemployment and underemployment are among the most impactful risks while the latter also feature among those most likely to occur. This has knock-on effects on income disparities, which is regarded as the overall most likely risk, the WEF notes.

Cyber attacks and the breakdown of critical information infrastructure also feature among the most prominent risks in this year’s report.

The WEF notes:

This arguably reflects the increasing digitization of economies and societies, where rising dependence on information and data, as well as the systems to analyze and use them, has made attacks more likely and their effects more impactful.”

WEF note: Global risks may not be strictly comparable across years, as definitions and the set of global risks have been revised with new issues having emerged on the 10-year horizon. For example, cyber attacks, income disparity and unemployment entered the set of global risks in 2012. Some global risks were reclassified: water supply crises and income disparity were reclassified as environmental and societal risks, respectively, in 2014.

The report is published in collaboration with Marsh & McLennan Companies, Swiss Re, Zurich Insurance Group, National University of Singapore, Oxford Martin School, University of Oxford, Wharton Risk Management and Decision Processes Center, University of Pennsylvania.

A survey conducted by the Insurance Information Institute (I.I.I.) at its 18th annual Property/Casualty Insurance Joint Industry Forum found that property/casualty insurance industry leaders believe Congress will delay implementation of the Biggert-Waters (BW) reforms to the National Flood Insurance Program (NFIP).

Some 75 percent of respondents expect Congress will delay implementation of the Act intended to help reduce the debt of the NFIP, a debt now estimated at more than $25 billion, by bringing rates charged more in line with the risk and losses in flood-prone areas, the I.I.I. survey revealed.

A majority of respondents to the survey—93 percent—also believe the Terrorism Risk Insurance Act, which is set to expire at the end of this year, will be reauthorized by Congress.

Meanwhile, a panel of industry chief executives agreed that a repeat performance of the property/casualty industry’s stellar 2013 performance will be hard to repeat.

The CEOs said higher rates, fewer-than-normal catastrophes, and strong stock market returns seem likely to make last year one of the best of the past decade.

But new challenges in growth and price competition make a repeat performance unlikely this year, the CEOs said.

By lines of insurance, only 35 percent of I.I.I. survey respondents believe there will be an improvement in profitability in personal auto in 2014, while 45 percent expect an improvement in homeowners profitability.

Only 40 percent expect an improvement in profitability in commercial lines, while 50 percent expect an improvement in workers compensation.

Looking at economic growth, 40 percent of insurance industry leaders think the U.S. economy will accelerate and 58 percent think it will remain the same, according to the I.I.I. survey.

Dr. Steven Weisbart, senior vice president and chief economist with the I.I.I. said:

Many economic forecasts say that the U.S. and most global economies will grow stronger in 2014, and this means a greater need to protect more assets and income, which leads to greater insurance premium volume.”

Some 30 percent of survey respondents believe that premium growth will be higher in 2014; 42 percent believe it will remain flat; and 28 percent believe it will be lower.

In terms of capacity, as measured by policyholders’ surplus, 73 percent of respondents expect it to increase; 20 percent believe it will remain flat; and 7 percent believe it will decrease.

Some 68 percent believe the combined ratio (the percentage of each premium dollar a property/casualty insurer spends on claims and expenses) will be higher in 2014 compared to last year.

Twenty years on, the Northridge earthquake remains the costliest U.S. earthquake for insurers, causing $15.3 billion in insured damages when it occurred (about $24 billion in 2013 dollars), according to the Insurance Information Institute (I.I.I.).

The 6.7 magnitude quake, which hit Los Angeles on January 17, 1994, also still ranks as the fourth-costliest U.S. disaster, based on insured property losses (in 2013 dollars), topped only by Hurricane Katrina, the attacks on the World Trade Center and Hurricane Andrew.

On the global scale, the Northridge earthquake still ranks as the second costliest earthquake for insurers, after Japan’s earthquake and tsunami of 2011, according to Munich Re.

While there has been no major earthquake on the U.S. mainland since Northridge, I.I.I. president Dr. Robert Hartwig notes that the potential cost of U.S. earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may or may not have been built or upgraded to current building code.

Still many homeowners do not purchase earthquake insurance. A recent poll by the I.I.I. found that only one out of 10 American homeowners (10 percent) have earthquake insurance, compared with 13 percent in 2012.

In western states, 22 percent of homeowners said they have earthquake coverage, down from 27 percent.

Earthquakes are not covered under standard U.S. homeowners or business insurance policies. However, coverage is usually available in the form of an endorsement to a home or business insurance policy.

As Dr. Hartwig reminds us:

While the cost of insurance has increased since Northridge, it’s important that home and business owners in California and other vulnerable areas consider purchasing earthquake coverage, which is the fastest and most efficient path to recovery.”

Check out additional I.I.I. facts and statistics on earthquakes and tsunamis.

Of the five costliest natural catastrophes for the insurance industry in 2013, only two were U.S. events, though neither ranked first or second, according to Munich Re.

In its 2013 Natural Catastrophe Year-in-Review Webinar jointly presented with the I.I.I., Munich Re noted that hailstorms in Germany in July actually caused the highest insured losses of the year. This was also the insurance industry’s most expensive hail event in German history, costing $4.8 billion in overall economic losses, of which $3.7 billion was insured.

Flooding in Europe in June was the second most costly natural catastrophe for the insurance industry in 2013, causing insured losses of $3 billion, though overall economic losses from this event totaled $15.2 billion, making it the costliest natural catastrophe of the year in terms of economic losses.

With not a single storm of hurricane strength reaching the U.S. mainland during a quiet Atlantic hurricane season, the most serious natural catastrophe in the U.S. in 2013 was a series of very severe tornadoes in Oklahoma, according to Munich Re.

On May 21 a tornado of the highest category (five), with wind speeds over 300km/h devastated the suburb of Moore. The overall economic loss resulting from the squall line totaled $3.1 billion, of which $1.8 billion was insured. This was the third most costly natural catastrophe for insurers in 2013.

In a year in which insured losses from natural catastrophes in the U.S. totaled $12.8 billion – far below the 2000 to 2012 average loss of $29.4 billion (in 2013 dollars), it’s interesting to note that insured losses from thunderstorm events exceeded $10 billion, despite the lowest observed tornado count in a decade.

Munich Re reported that average insured thunderstorm losses have increased sevenfold since 1980.

Overall, Munich Re said economic losses from natural catastrophes worldwide in 2013 amounted to around $125 billion and insured losses around $31 billion. These were both below the 10-year averages of $184 billion and $56 billion, respectively.

While floods and hailstorms caused double-digit billion-dollar losses in central Europe, in the Philippines one of the strongest cyclones in history, Supertyphoon Haiyan, resulted in a human catastrophe with over 6,000 fatalities, Munich Re added.

Online insurance exchange MarketScout reported that the composite rate for U.S. commercial insurance slipped to plus 3 percent in December 2013, down from plus 4 percent in November 2013.

Year-end 2013 closed with ample capacity, and additional capacity from new investors in the insurance market may put further downward pressure on rates in 2014, MarketScout noted.

Commercial auto was the most expensive coverage, leading the way with rates up 4 percent.

By industry, transportation and contracting risks were assessed the largest rate increases at plus 5 percent, while public entities were assessed the lowest rate increases at plus 2 percent, according to MarketScout.

By account size, small accounts (up to $25,000 premium) had the highest rate increases at plus 5 percent, while the largest accounts ($1 million plus premium) only had rate increases of plus 1 percent.

Richard Kerr, CEO of MarketScout, offered the following perspective:

If you are in favor of significant rate increases in 2014 you may be disappointed sans a catastrophic event or some sort of new tort liability issue. Investors are clamoring for decent returns in instruments not directly connected to the stock market. When this occurs, smart people come up with creative solutions to put these investor funds to work. Insurance Linked Securities (ILS) and new age reinsurance structures have opened the insurance market to many new investors and as a result, additional capacity. This added capacity may well put additional pressure on rates in 2014.”

Check out latest information from the I.I.I. on financial results and market conditions.

The arrival of the first major winter storm of 2014 just two days into the new year makes this a good time to take stock of the insurance implications.

The Insurance Information Institute (I.I.I.) reports
 that winter storms are historically very expensive and are the third-largest cause of catastrophe losses, behind only hurricanes and tornadoes.

From 1993 to 2012, winter storms resulted in about $27.8 billion in insured losses—or $1.4 billion per year, on average, according to Property Claims Service for Verisk Insurance Solutions (see chart below).

Dr. Robert Hartwig, president of the I.I.I. and an economist, notes:

The I.I.I. offers additional facts and statistics on winter storms here.

INFLATION-ADJUSTED U.S. INSURED CATASTROPHE LOSSES BY CAUSE OF LOSS, 1993-2012 (1)
(2012 $ billions)

INFLATION-ADJUSTED U.S. INSURED CATASTROPHE LOSSES BY CAUSE OF LOSS, 1993-2012 (1)

(1) Adjusted for inflation through 2012 by ISO using the GDP implicit price deflator. Excludes catastrophes causing direct losses less than $25 million in 1997 dollars. Excludes flood damage covered by the federally administered National Flood Insurance Program.
(2) Excludes snow.
(3) Includes wildland fires.
(4) Includes losses from civil disorders, water damage, utility service disruptions, and any workers compensation catastrophes generating losses in excess of PCS’s threshold after adjusting for inflation.

Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.

As this blizzard passes, commentators note that arctic conditions are forecast to continue in its wake. Check out Eric Holthaus’ post at the Daily Beast for the latest.