Archive for April, 2014

A major severe weather outbreak continues across parts of the southern and eastern U.S. today, as insurers rush to multiple states hit Sunday and Monday by a total of more than 90 tornadoes, some of which caused fatalities.

Here are the NOAA Storm Prediction Center’s (SPC) storm reports for Sunday, April 27 and Monday, April 28:

A fact that often goes unreported is that tornadoes are among the largest causes of insured losses in any given year, accounting for 36 percent of all insured losses since 1983, according to the I.I.I.

Increasingly dense suburban development across the U.S. is putting more people and property in areas at risk of tornadoes than ever before.

Eighty percent of U.S. natural disaster related insurance claims payouts in 2013 were attributable to tornadoes and severe thunderstorms—$10.27 billion out of total estimate of $12.79 billion, according to remarks made in February 2014 by I.I.I. president Robert Hartwig, at the National Tornado Summit in Oklahoma City, Oklahoma.

We’re visiting the United Kingdom this week, so it’s appropriate we bring you a British themed news item.

An unpublished and original insurance claim for the loss of the Titanic will come under the hammer this Saturday at Aldridge’s auction house in Devizes, Wiltshire. The document is expected to fetch more than £12,000 ($20,185).

It’s more than 100 years since the RMS Titanic, a luxury British passenger liner, sank in the North Atlantic ocean on April 15, 1912 after colliding with an iceberg during her maiden voyage from Southampton, UK to New York City.

She carried 2,224 passengers and crew, but had lifeboats for only 1,178 people. More than 1,500 people died in the disaster.

The 4-page insurance document up for sale was prepared for insurance purposes and written by second officer Charles Lightoller, the most senior officer to survive the Titanic disaster. It was certified and signed by the Titanic’s second, third, fourth and fifth officers on April 19, 1912.

In what appears to be an attempt to avoid the insurers accusing the ship’s crew of negligence, the certified claim includes an interesting and sometimes curious account of the disaster:

The ship sank in very deep water and proved a total loss, with cargo, luggage, personal effects and mails.”

As to the actions on the bridge, the document states:

…the first officer immediately starboarded the helm reversed the engines full and closed all watertight doors. The ship swung to port, but struck a “growler” or small low-lying iceberg…”

In the words of the auctioneers, it’s fascinating that the officers would seem to attempt to minimize their encounter with the rather large and ominous iceberg by describing it as a “small low-lying iceberg.” This could possibly have been an attempt to downplay the size of the iceberg due to the question of liability and who was to blame for the sinking.

As the Western Daily Press reports, the strategy worked. Insurers paid out £3 million ($5.1 million) within 30 days – crucially before a major inquiry revealed the catalogue of mishaps that led to the sinking.

The lot is one of 200 Titanic collectables included in the auction, which is to commemorate the 102nd anniversary of the loss of the ship.

Atlantic Mutual, then the largest marine and general insurance firm in North America, was one of the major insurers of Titanic, providing the Oceanic Steam Navigation Co, Ltd (Titanic’s parent company) with what is believed to be more coverage for the ship than any of the many other single carriers which were part of Titanic’s insurance consortium.

Numerous Lloyd’s syndicates put their names on the insurance slip to cover the Titanic which was considered a prestigious risk to insure. More on how the disaster remains strongly linked to the history of the Lloyd’s market here.

The insurance policy was sold in an October 2013 auction.

Check out I.I.I. facts and statistics on marine accidents.

While the number of lawsuits filed against U.S. companies in the past year was stable, the financial impact of the litigation they face continues to increase, according to Norton Rose Fulbright’s Annual Litigation Trends Survey.

More than one-third (34 percent) of all companies faced at least one lawsuit with more than $20 million at issue in 2013, up from just 23 percent in 2011, continuing a trend in recent years that’s left fewer respondents untouched by high-value cases.

Energy companies are much more likely to have one or more large lawsuits pending against them compared to other industries (52 percent versus 34 percent for the total sample), the study found, as are larger companies generally (51 percent versus 34 percent for the overall sample).

Among the largest companies surveyed (revenue greater than $5 billion), two-thirds reported having one or more lawsuits greater than $20 million pending against them, twice the rate for the overall sample.

Meanwhile, the percentage of larger companies spending $10 million or more annually on litigation increased to 43 percent in 2013 – the second consecutive year of growth (33 percent in 2012, 19 percent in 2011).

Another key takeaway from this year’s study is that healthcare industry respondents had the most litigation matters compared with other industries, with 55 percent indicating more than 20 suits versus 30 percent for the overall sample.

That increased activity also led to higher spending, with 49 percent of healthcare respondents reporting a 2013 litigation spend of $5 million or more, closely followed by energy at 46 percent.

The percentage of financial services companies spending $5 million or more on litigation more than doubled to 38 percent in 2013, up from 15 percent in 2012 and just 11 percent in 2011.

Labor and employment disputes once again were the most common litigation issues facing U.S. companies in 2013.

The number of U.S. companies facing regulatory proceedings increased for the third consecutive year, reflecting a stricter regulatory environment and increased scrutiny from a broad range of state and federal agencies.

Not surprisingly, legal counsel concerns over regulatory/investigation matters are also up sharply in the 2013 survey, with 41 percent of respondents indicating it as a top concern, versus just 23 percent in 2012.

Norton Rose Fulbright’s 10th annual litigation trends survey of corporate law departments in the U.S. saw responses from a total of 401 senior corporate counsel executives representing a broad range of industries.

Allowing the terrorism risk insurance program to expire could increase federal spending by billions of dollars in the event of a future terrorist attack, according to a new study by RAND Corporation.

RAND reports that for terrorist attacks with losses up to about $50 billion, not having the Terrorism Risk Insurance Act (TRIA) in place would result in higher federal spending.

For terrorist attacks with losses ranging from $14 billion to $26 billion, RAND predicts the federal government would spend $1.5 billion to $7 billion more without TRIA than with the program in place.

The greater federal spending without TRIA would result from less insurance coverage, leading to greater uninsured loss and hence greater demand for federal disaster assistance.

RAND’s analysis comes as a bipartisan agreement was introduced in the Senate last week that would extend TRIA for seven years, with changes in the insurer co-pay and mandatory recoupment threshold.

An excerpt from the RAND report reads:

If allowing TRIA to expire causes terrorism insurance coverage to revert to pre-TRIA levels, a greater fraction of loss in a terrorist attack would go uninsured than would be the case with TRIA in place. More loss going uninsured would increase demand for other forms of compensation, which could, in turn, lead to an increase in other (non-TRIA) forms of federal disaster assistance.”

The study makes the point that the federal government currently makes no net expenditures under TRIA until the commercial insurance industry has paid at least $27.5 billion in claims in TRIA-eligible lines.

As the size of the attack increases and the insured loss increases beyond the $27.5 billion industry retention amount, the federal liability through TRIA kicks in.

Based on current take-up rates, a 9/11 type attack would result in an insured loss of about $33 billion, RAND notes. Therefore, taxpayers would contribute through TRIA only in an attack comparable in magnitude to 9/11, which remains the second most costly insurance event in U.S. history, exceeded only by Hurricane Katrina.

For attacks with greater losses, in excess of $50 billion, the increase in disaster assistance after an attack without TRIA begins to be countered by the elimination of federal payments through the TRIA program, eventually leading to a net decrease in federal spending should TRIA expire.

RAND concludes:

From the perspective of federal spending, TRIA therefore appears to be a reasonable federal policy: In the absence of a terrorist attack, it costs taxpayers relatively little, and in the event of a terrorist attack comparable to any experienced before, it is expected to save taxpayers money.”

Claims Journal reports on the study findings here.

The number of countries with downgraded political risk ratings grew in the last year, as all five emerging market BRICS countries (Brazil, Russia, India, China, South Africa) saw their risk rating increase, according to Aon’s 2014 Political Risk Map.

As a result, countries representing a large share of global output experienced a broad-based increase in political risk including political violence, government interference and sovereign non-payment risk, Aon said.

The 2014 map shows that 16 countries were downgraded in 2014 compared to 12 in 2013. Only six countries experienced upgrades (where the territory risk is rated lower than the previous year), compared to 13 in 2013.

Aon noted that Brazil’s rating was downgraded because political risks have been increasing from moderate levels as economic weakness has increased the role of the government in the economy.

This is of particular concern given this year’s World Cup and the 2016 Olympics.”

Russia’s rating was also downgraded due to recent developments with the Ukraine and the annexation of Crimea.

Aon said:

Political strains and focus on geopolitical issues have exacerbated an already weak operating environment for business and exchange transfer risks have increased following the risk of new capital controls. Russia’s economy continues to be dominated by the government, so economic policy deadlock has brought growth to a standstill and with it an increase in the risk of political violence.”

India, China and South Africa also saw their ratings downgraded.

In another key takeaway Aon noted that Ukraine is now rated a very high risk country, as the implications of developments following the annexation of Crimea by Russia and government collapse warranted a further downgrade in political risk.

Exchange transfer risks, which are already very high will be further increased by restrictions in the financial system, Further, the willingness and ability of the country to settle its debts may be affected.”

The map measures political risk in 163 countries and territories, in order to help companies assess and analyse their exposure to exchange transfer, legal and regulatory risk, political interference, political violence, sovereign non-payment and supply chain disruption.

Hat tip to Insurance Journal which reports on this story here.

Hurricane forecasters are sounding a warning bell for the U.S. East coast in their latest predictions for the 2014 hurricane season, even as overall tropical storm activity is predicted to be much-less than normal.

WeatherBell Analytics says the very warm water off of the Eastern Seaboard is a concern, along with the oncoming El Niño conditions.

In its latest commentary forecaster Joe Bastardi and the WeatherBell team notes:

We think this is a challenging year, one that has a greater threat of higher intensity storms closer to the coast, and, where like 2012, warnings will frequently be issued with the first official NHC advisory.”

WeatherBell Analytics is calling for a total of 8 to 10 named storms, with 3-5 hurricanes and 1-2 major hurricanes.

According to WeatherBell, there have been plenty of El Niño years with high impact seasons for the U.S. coast: 1957, 1965, 1969, 1976, 1983 (fading but still there), 1991, 1992, 2002, and 2004.

The forecasters say this pattern favors stronger storms (relative to normals) in-close to the U.S. rather than in the deep tropics which will have less to much-less than normal activity this year.

There is nothing to prohibit another Sandy-type hit from the southeast or three storms up the East Coast in one year despite a relatively low number of named storms in a season.”

Check out this post by Eric Holthaus over at Slate’s Future Tense blog for his take on how this year’s El Niño could grow into a monster.

Meanwhile, London-based consortium Tropical Storm Risk (TSR) has lowered its forecast and predicts Atlantic hurricane activity in 2014 will be about 25 percent below the 1950-2013 long-term norm and about 40 percent below the recent 2004-2013 10-year norm.

In its updated forecast TSR is calling for 12 named storms, 5 hurricanes and 2 major (Category 3 and higher) hurricanes.

TSR says two key factors in its forecast for below-normal activity are: lighter trade winds over the Caribbean and North Atlantic coinciding with the likely development of a moderate El Niño; and cooler than normal sea surface temperatures in the tropical North Atlantic.

TSR says both these predictors will have a moderately suppressing effect on activity.

A post over at Artemis blog points out that while El Niño typically results in a below average hurricane season in terms of the number of storms that form, that is no guarantee of a benign season in terms of catastrophic losses as that is down to the strength or severity and path of any storms that do form.

Updated forecasts will be released around June 1, when hurricane season opens.

Check out I.I.I. facts and statistics on hurricanes.

Online insurance exchange MarketScout reported that rates for commercial insurance in the United States were up slightly in March 2014, extending the slow but steady rate increases business owners have been paying since November 2011.

The composite rate for property and casualty coverages in the U.S. was up 3 percent in March, compared to plus 2 percent in February.

Richard Kerr, CEO of MarketScout said the ongoing rate adjustments come as insurers look to meet profit targets:

Insurers target a specific ROE. Despite improving margins, insurers are still not meeting their profit targets, thus the continued marginal increases.”

BOP, commercial auto, and workers compensation led the way with rates up 4 percent. However, as PC360 reports, both commercial auto and BOP were flat compared to February increases, while workers compensation was up 1 percent over the prior month.

By account size, any account with premium from $25,000 to $1 million paid a 3 percent increase compared to 2 percent the prior month.

By industry classification, manufacturing and energy accounts paid more than the prior month with manufacturing up to plus 4 percent and energy up plus 2 percent.

Check out I.I.I. information on financial results and market conditions.

The second earthquake to strike the Los Angeles area on March 28 is a wake-up call and reminder of the risk to commercial and residential properties in Southern California, according to catastrophe modeling firm EQECAT.

(The M5.1 quake located 1 mile south of La Habre follows the M4.4 earthquake near Beverley Hills (30 miles to the northwest) on March 17.)

In its report on the latest quake, EQECAT notes that most homeowners do not carry earthquake insurance (only about 12 percent of Californians have earthquake coverage, according to I.I.I. stats), and those that do typically carry deductibles ranging from 10 percent to 15 percent of the replacement value of the home, and commercial insurance often carries large deductibles and strict limits on insurance coverage.

The remainder of the risk which is not insured is retained by property owners and frequently, their lenders. EQECAT reports:

CoreLogic regional studies have noted that a major earthquake in the Los Angeles Basin could easily produce damages to residential and commercial property exceeding $200 billion (Source: the EQECAT Insured Loss Database, 2013). The general lack of insurance coverage and high deductibles have led to concerns over the likelihood of widespread residential mortgage defaults arising from a large basin earthquake.”

This raises an important point.

Concerns have been raised before (here) about how the lack of mandatory earthquake insurance in California would result in high levels of mortgage defaults should a major earthquake occur, with widespread economic implications.

The post-quake scenario envisioned is one in which homeowners walk away from their damaged homes without repairing them, leaving many homes in foreclosure and forcing banks to bear the brunt of the loss in capital.

The potential knock-on effect for insurers and reinsurers? The loss of home ownership could severely diminish incoming capital on homeowner insurance policies.

According to an Aon Benfield report, the 1994 Northridge earthquake cost the mortgage industry up to $400 million in mortgage defaults due to foreclosure expenses, property repair costs, lost interest income, write-downs of existing loan balances and other administrative costs.

Check out an informative I.I.I. background paper on earthquake risk and insurance issues here.

I.I.I. chief actuary James Lynch brings us an intriguing tale of workers comp and college football:

The most interesting story in workers compensation these days is playing out, quietly, on the sports page. At least the insurance part is quiet.

You’ve doubtless heard that Northwestern University football players were recognized as employees by an arm of the National Labor Relations Board and earned, tentatively, the right to form a union. The news made The New York Times front page, among others, and merited editorials in The Times and The Wall Street Journal.

Less prominent in the stories is what the players want: workers compensation – or at least some system to pay for the injuries they suffer on the field.

The players, petitioning as the College Athletes Players Association (CAPA), aren’t shy about wanting comp-like coverage. Here’s the second paragraph of their petition to the NLRB (pdf):

Faced with the serious risk of concussions and long-term injuries, the Players seek to bargain over health and safety issues like other employees protected by the [National Labor Relations] Act.”

And they make it clear, in the next sentence, that they aren’t out for money, at least not primarily:

CAPA will not jeopardize the Players’ eligibility by bargaining compensation not permitted by National Collegiate Athletic Association rules, but can bargain additional financial support and protections within the existing NCAA rules, and will speak for the Players as the NCAA landscape continues to evolve.”

The seminal takedown of the NCAA is Taylor Branch’s long, long, click-only-if-you’re-stranded-at-O’Hare opus in The Atlantic magazine’s September 2011 issue. In Branch’s telling (scroll down – wayyyy down – to ‘The Myth of the Student-Athlete’) it was precisely because the NCAA feared workers comp that it fought against classifying athletes as employees. The term student-athlete, he writes, was invented in the 1950s after a widow filed for a workers comp death benefit after her husband died from a head injury he got playing football.

Northwestern is appealing last week’s ruling. If the union gets what it wants, it will likely mean the players could be covered under Illinois’ Workers Compensation Act, like other Northwestern employees.

Northwestern is a private university. Public universities – being state entities – don’t always fall under a state’s workers comp laws. Take, for example, the University of Alabama, a powerhouse program I happened to Google. Its employees are covered by The University of Alabama On-the-Job Injury/Illness program – not part of the workers comp system, but governed by similar principles.

The most interesting what-if discussion I’ve seen on the topic comes from – where else? – Bleacher Report.

(Full disclosure: I used to live about 50 yards from Ryan Field, where Northwestern plays. Talk about noisy neighbors.)