Archive for March, 2014

Swiss Re’s final tally of 2013 global cat losses highlights the growing risk protection gap between economic losses and insured losses.

Total economic losses from natural catastrophes and man-made disasters amounted to $140 billion in 2013, of which almost one third – around $45 billion – were insured.

This means that in 2013 the global protection gap (the level of uninsured losses) was $95 billion.

Swiss Re notes:

Economic development, population growth, urbanization and a higher concentration of assets in exposed areas are increasing the economic cost of natural disasters. In addition, climate change is expected to increase weather-related losses in the future. All of the above, if not accompanied by a commensurate increase in insurance penetration, results in a widening protection gap.”

That’s not to say that there hasn’t been any progress over the years in the area of risk prevention and mitigation measures.

Swiss Re makes the point that a very effective pre-designed evacuation drive saved thousands of lives when Cyclone Phailin made landfall in Odisha, India in October 2013, with winds up to 260km per hour.

However, the cyclone destroyed around 100,000 homes and more than 1.3 million hectares of cropland.

Kurt Karl, chief economist at Swiss Re, says:

The total economic loss of Cyclone Phailin is estimated to be $4.5 billion, with just a tiny portion covered by insurance. The insurance industry can play a much larger role in helping societies deal with the fallout of disaster events, such as this and Typhoon Haiyan.”

Meanwhile, a post at Artemis blog suggests that sustaining local markets is the key to increasing insurance penetration and ultimately narrowing the gap between economic and insured losses:

In order to narrow this gap reinsurers and insurers need to work together with development organisations and the capital markets to create risk transfer facilities that truly meet the goal of growing insurance penetration. Sustaining local markets is key here. Initiatives which seek to create new capacity for a single, often reinsurer, backer just don’t seem to be having the desired effect so far and at the moment seem less likely to be sustainable over the longer-term.”

Here’s the Swiss Re chart showing the difference between total losses and insured losses from 1970 to 2013, highlighting the widening protection gap over the last 40 years:

Check out our prior post on the widening gap between economic and insured cat losses here.

Cyber security and data breaches remain front and center on the Congressional radar as the Senate Commerce Committee today holds a hearing on protecting consumers from data breaches.

The witness list includes John Mulligan, vice president and chief financial officer at Target, and Dr. Wallace Loh, president, University of Maryland. There’s an insurance industry witness too, with Peter Beshar, executive vice president and general counsel, Marsh & McLennan giving testimony.

Recent data breaches at Target and the University of Maryland highlight the fact that organizations across many different business sectors are vulnerable to cyber attacks.

The February 18, 2014 UMD data breach compromised an estimated 309,079 student, faculty and staff records, including names, birth dates, university ID numbers and social security numbers.

The massive 2013 data breach at Target during the holiday season exposed the financial and personal information of as many as 110 million consumers.

A report released yesterday by the U.S. Senate Commerce, Science and Transportation Committee suggests that Target missed a number of opportunities to prevent the massive data breach. Hat tip to Reuters via Huffington Post which reports on the findings here.

The Senate staffers report, titled “A Kill Chain Analysis of the 2013 Target Data Breach” says key points at which Target apparently failed to detect and stop the attack include:

● Target gave network access to a third-party vendor, a small Pennsylvania HVAC company, which did not appear to follow broadly accepted information security practices. The vendor’s weak security allowed the attackers to gain a foothold in Target’s network.

● Target appears to have failed to respond to multiple automated warnings from the company’s anti-intrusion software that the attackers were installing malware on Target’s systems.

● Attackers who infiltrated Target’s network with a vendor credential appear to have successfully moved from less sensitive areas of Target’s network to areas storing consumer data, suggesting Target failed to properly isolate its most sensitive network assets.

● Target appears to have failed to respond to multiple warnings from the company’s anti-intrusion software regarding the escape routes the attackers planned to use to exfiltrate data from Target’s network.

The report analyzes what has been reported to date about the Target data breach, using the “intrusion kill chain” framework, an analytical tool introduced by Lockheed Martin security researchers in 2011, and widely used by information security professionals today.

This analysis suggests that Target missed a number of opportunities along the kill chain to stop the attackers and prevent the massive data breach.”

Check out an I.I.I. whitepaper on cyber risks and insurance here.

The Terrorism Risk Insurance Program, a public/private risk-sharing partnership which is set to expire at the end of 2014, is absolutely critical to maintaining the health of the American economy, according to an updated white paper just released by the Insurance Information Institute (I.I.I.).

The I.I.I.’s Terrorism Risk: A Constant Threat, Impacts for Property/Casualty Insurers explains that should the federal Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) be allowed to expire at year-end 2014, this would have a detrimental impact on the availability and affordability of terrorism insurance for businesses.

Introducing the paper, Dr. Robert Hartwig, I.I.I. president and an economist says:

The war on terror is far from over, as last year’s Boston Marathon bombings and other events around the world attest, but TRIA by all objective measures is now a proven and unqualified success. The program not only succeeded in restoring stability to the country’s vital insurance and reinsurance markets in the years immediately following 9/11, but it continues more than a decade later to deliver substantive, direct benefits to millions of businesses, workers, consumers and the overall economy—all at essentially no cost to taxpayers.”

Industry data shows that the proportion of businesses buying property terrorism insurance (the take-up rate for terrorism coverage) has increased since the enactment of TRIA in 2002. In fact for the last five years, some 60 percent of businesses nationally have purchased terrorism coverage, usually at a reasonable cost.

Dr. Hartwig notes that industries responsible for much of the country’s critical infrastructure such as power and utilities, telecommunications and health care, along with financial institutions and local government have take-up rates that approach or exceed 70 percent.

Moreover, the take-up rate for workers compensation is effectively 100 percent, meaning that every worker in America is protected against injuries suffered as the result of a terrorist attack, he adds.

I.I.I. chief actuary James Lynch brings us a timely post on one of the most important female contributors to the history of property/casualty insurance:

Constituting nearly 60 percent of the insurance work force in the United States, women are clearly important to the insurance industry.

March is Women’s History Month and this is the perfect time to honor the importance of women in the industry. Our earlier post on this topic can be read here.

The Casualty Actuarial Society (CAS) plays its part, in an indirect way. This month’s Actuarial Review, as part of the organization’s centennial, touches on one of the most important female contributors to the history of property/casualty insurance.

The woman is Crystal Eastman (pictured).

Eastman wasn’t an actuary, and to my knowledge she never worked in insurance. She was a lawyer, a radical in her day, and one of her causes was workers’ rights. Her 1910 publication, Work-accidents and the law, detailed worker injuries in 1907 and 1908 in Allegheny County, Pennsylvania, and the economic toll those injuries took.

In those 12 months, 529 workers died from job-related maladies (see table). Eastman led a team that investigated every death, plus another 509 workers hospitalized between April and June 1908.

About one third of the accidents were unavoidable, the study found, while one third were the fault of the workers themselves and another third resulted from employers failing to provide a safe workplace. The financial burden of the accidents, though, fell overwhelmingly on the victims and their families. They lacked the resources to sue, and common law at the time was stacked against them anyhow.

The solution: workers compensation – insurance covering worker injuries without regard to fault. But early workers comp laws were ruled unconstitutional, typically because they took from employers their right to due process – their day in court. New York’s law, for example, was found unconstitutional on March 24, 1911.

The next day, 146 workers – 123 of them women – died in the Triangle Shirtwaist factory fire. The tragedy led to a state commission, headed by Frances Perkins – later the first female Cabinet member – that documented dismal and dangerous working conditions across the state. The result: a workers comp law that passed constitutional muster.

The law addressed the workers problems – now they could be compensated for their injuries. It created an insurance problem: without a court to adjudicate, how does one set a fair compensation for an injury?

It was for this task that, in 1914, the Casualty Actuarial Society (CAS) was created. So it is not much of a stretch to say that women, both famous and not so famous, are at the fountainhead of the organization.

Check out I.I.I. facts and statistics on workers compensation here and on careers and employment here.

The Ukraine crisis is making headlines around the world, and also in the insurance world.

While events are still unfolding, Russia’s move to annex the Crimea region of Ukraine has prompted United States and European Union leaders to impose economic and travel sanctions on some Russian officials.

U.S. and EU leaders will meet next week in the Netherlands to discuss the crisis and further sanctions are possible.

As for insurance implications, the ongoing turmoil has the potential to impact the political risk, structured credit and trade credit insurance markets.

Broker Marsh said in a briefing last week that some insurers had stopped underwriting political risk insurance in the two countries due to concern over the political unrest and credit ratings in Ukraine and potential sanctions in Russia.

Canadian Underwriter reported on the story here.

Noting the uncertainty of the evolving situation, Marsh said:

Companies with interests in the region face the potential for damage to assets through political violence and possible broader expropriation measures or sanctions against foreign interest in Russia should sanctions be imposed against the country. This is in addition to the potential for payment delays on trade payment obligations due from customers, especially those in Ukraine.”

Marsh also noted that because Russia is the political risk and structured credit market’s largest country exposure, if the current conflict results in large-scale insurable damage, global premiums and insurance capacity for these coverages could be adversely affected.

There is also the potential for a downgrade of the country rating by the ratings agencies and possible payment difficulties for creditors of Ukrainian companies, either commercial or economic, Marsh added.

The broker advised businesses with operations in Ukraine, especially those in Crimea, to check their crisis response and insurance programs to ensure they sufficiently mitigate the potential effects on their operations.

The I.I.I.’s International Insurance Fact Book has insurance and economic data on Russia and Ukraine here.

Emerging risks that risk managers expect to have the greatest impact on business in the coming years could be on the cusp of a changing of the guard, according to an annual survey released by the Society of Actuaries.

It found that the risk of cyber attacks and rapidly changing regulations are of growing concern to risk managers around the world, and may be slowly replacing the risk of oil price shock and other economic risks which were of major concern just six years ago.

Some 47 percent of risk managers saw cyber security as a significant emerging risk in 2013, up seven points from 40 percent in 2012.

The SOA noted that this perceived risk predates recent cyber security events (read: the December 2013 Target breach) that have opened up new corporate data security vulnerabilities. The online survey of 223 risk managers was conducted in October 2013.

Regulatory framework/liability regimes was also perceived to be an emerging risk of impact by 23 percent of risk managers, an increase of 15 points from just eight percent in 2012.

The survey noted that as the regulatory framework takes shape post-financial crisis, risk managers are currently trying to implement voluminous and changing regulations on short time frames with: limited additions to staff; and regulators who often have limited understanding of risk tools.

Just 33 percent of risk managers said economic risks – such as oil price shock, devaluing of the U.S. dollar, and financial volatility – will have the greatest impact over the next few years, versus an all-time high of 47 percent in 2009.

In fact, the economic risk category is at an all-time low in 2013, the SOA said.

Hat tip to The Wall Street Journal’s CFO Report which reported on the survey here.

I.I.I. chief actuary James Lynch reports from Day 2 of the WCRI annual conference in Boston:

Health insurance and workers compensation are sort of kissin’ cousins, in that changes that affect one inevitably affect the other.

But that’s my metaphor. Dr. Richard Victor, executive director of the Workers Compensation Research Institute (WCRI), likens the impact of health care reform to a hurricane.

Like a storm whose path is not quite defined, health care reform could take a significant toll – but we don’t know precisely where. Since workers comp differs from state to state, the impact of the Affordable Care Act (ACA) will differ from state to state. Like a good weatherman, Dr. Victor told an audience of about 400 at WCRI’s annual conference in Boston on Thursday he could make some educated guesses what might happen.

He is assuming the ACA is enacted exactly as written – a tough assumption but as good a starting point as any. In that case, the increase in insured Americans will increase demand.

The marketplace might decrease the use of doctors, relying instead on well-trained nurses or even sophisticated computers to help provide care.

Or doctors might raise prices in the face of rising demand.

What actually happens will differ by state. Some states make it difficult to take diagnosis and treatment out of the doctors’ hands. In those states, medical costs – and their kissin’ cousin, comp costs — are likely to rise. Elsewhere, the effect will be muted.

Other insights:

● Health care reform will result in a healthier work population. This will tend to help the comp system, because healthy workers are less likely to get hurt on the job, and if they do get hurt, they get well faster.

● Changes in billing, Dr. Victor said, will “absolutely” lead to upcoding – in which a doctor exaggerates the severity of a treatment to receive a bigger reimbursement. The practice is well-documented in workers comp, he said, citing examples from Florida and California.

● Changes are likely to shift into workers compensation. That’s because many employers are increasing deductibles that employees pay for treatment. Workers comp, meanwhile, has no deductibles and no co-pays – giving an employee the incentive to label an injury as work-related.

I blogged about Day 1 of the conference here. Other highlights from Day 2:

● Alex Swedlow, president of the California Workers Compensation Institute (CWCI) noted that even after all appeals are exhausted only about five percent of denials of comp claims are overturned. Swedlow also said evidence-based pain management guidelines effectively control costs; and a comparison of California and Washington pharmaceutical costs show that more cost savings are possible.

● Harry Shuford, chief economist of the National Council on Compensation Insurance (NCCI), argued that underwriting cycles are closely linked to bond yields and that when it comes to managing their business, insurers in the long run “do a much better job than other financial intermediaries” like banks.

Workers compensation insurance will have to move quickly to keep from being a net loser from health care reform, said Dr. Jonathan Gruber, one of the architects of what ultimately became the template for the Affordable Care Act (ACA).

Dr. Gruber, an MIT economist who helped construct the Massachusetts health reform that the ACA modeled, spoke to more than 400 attendees at the Workers Compensation Research Institute (WCRI) conference in Boston.

Health care reform should help the workers compensation system, he said. Fewer workers will be uninsured, so fewer people will get injured over the weekend and then claim on Monday they got hurt at work.

But Dr. Gruber, an MIT economist, noted that the comp system is incredibly inefficient. It pays higher rates for services than most health plans. And it changes slowly, which could be a big disadvantage as the ACA forces efficiency on the other parts of the health care system – hospitals, doctors and health insurers. If the comp system can’t keep up, the rest of the system will find ways to dump costs on it.

Dr. Gruber said it will be three years before we can tell whether ACA has been successful. At this point – in ACA’s early days, its proponents and opponents are “saying too much.”

Gruber also gave a nod to researchers like those at WCRI. With ACA’s many moving parts, he said, it will be important to intelligently determine which of those parts are truly working.

Day One of the WCRI conference also featured two examinations of how changes in state comp laws play out.

The first showed how Texas successfully reduced the rate of claims through changes enacted in 2002, 2003 and 2005. The changes brought individual claims under greater scrutiny.

The good news: the rate of claims in Texas lagged those of 15 states studied, said WCRI senior analyst Carol Telles. The rate of claims from chiropractors fell more sharply than other professional services, though Texans continue to use chiropractors more than the other states.

Costs per claim, though, increased, in part because the changes aren’t free. It costs money to review claims. Any changes to a workers comp system must consider whether savings will be able to justify those costs.

The second study showed how Illinois took a more blunt approach in 2006. It cut fee schedules 30 percent across the board. One interesting result, said senior public policy analyst Rebecca Yang: costs per claim fell, as you might expect, but only by 24 percent overall.

Among the reasons: the rate of claims increased, and there were signs that doctors were billing for more complex office visits than before.

Day Two of the conference will take a longer look at the impact of ACA on workers comp. Other sessions will look at how the economy drives workers comp results; accountable care organizations; and medical dispute resolution.

With the Affordable Care Act (ACA) at center stage, interest is high in this week’s workers compensation conference in Boston, Massachusetts.

We read a lot about how ACA is changing health insurance and the world of business, but an effect of less renown is how the health law will affect workers compensation insurance.

Check out previous T+C posts on this topic here and here.

The conference, sponsored by the Workers Compensation Research Institute (WCRI), will feature health care experts like economist Jonathan Gruber, an MIT professor and one of the architects of the ACA, teasing out how health care and workers comp will intertwine in the coming years.

More than a dozen media organizations are scheduled to attend, from industry blogs to national media. I.I.I. will be there, too, with chief actuary James Lynch reporting and tossing off the occasional tweet @III_Research under the hashtag #WCRI.

WCRI is an independent, not-for-profit research organization that provides high-quality, objective information about public policy issues involving workers compensation systems. The conference is March 12 and 13, with details here.

A roundup of I.I.I. workers comp work can be found here.

Saturday is International Women’s Day and March is Women’s History Month so it’s a good time to talk about gender diversity in the insurance industry.

While women are well-represented across the insurance industry as a whole, there are very few women in the top executive positions.

The fact remains that only 6 percent of C-suite positions (CEO, CFO, COO) in the insurance industry are occupied by women and only 12.6 percent of board seats are held by women, according to a recent study by the Academy of Risk Management & Insurance at St Joseph’s University.

Findings from the SJU study were presented at last year’s IICF Women in Insurance Global Conference.

However, the glass ceiling is starting to shatter, as evidenced by the recent appointment of Inga Beale as Lloyd’s first female CEO.

Beale took the reins in January and shares her vision for the Lloyd’s market and the challenges and opportunities ahead in this interview at lloyds.com.

Asked to describe her management style, Beale said:

I’ve always enjoyed teamwork and see great benefit in having diverse teams working well together. I therefore do my best to be inclusive, get people involved, particularly when they are the experts, and build solutions and plans together.”

Read more about Beale’s historic appointment in this article by the Financial Times.

For more on women in insurance, Business Insurance’s annual feature Women to Watch spotlights 25 women who are doing outstanding work in commercial insurance, reinsurance, risk management, employee benefits and related fields, such as law and consulting.

Check out Insurance Information Institute (I.I.I.) facts and statistics on women in insurance here.