Firm Foundation 2008

For those of you looking for tangible numbers telling the important story of how the insurance industry contributes to state, local and national economies, look no further. The I.I.I. has just released an updated edition of its online publication “A Firm Foundation†. The 2008 edition again shows the myriad ways in which insurance supports the economy, from offering employment and fueling the capital markets, to defraying the cost of catastrophes and providing financial security and income to individuals and businesses through the payment of claims. State-specific editions also highlight the industry’s role as a key player in a number of state economies, including California, Florida and Texas. The latest state edition focuses on New Jersey and can be accessed on the I.I.I. Web site at http://www.iii.org/static/statepdfs/newjersey.pdf.  

NY Cat Fund Debate

The availability and affordability of coastal property insurance is an issue that elicits a wide range of viewpoints. Insurers, legislators and regulators face growing challenges in managing this problem because of the escalating values at stake. Even in a hurricane season without a major U.S. landfalling storm, the numbers at play are of grave concern. Let’s revisit some of the figures: total value of insured coastal exposure nationwide is more than $7 trillion and growing; Florida and New York — with more than $1.9 trillion insured coastal property each — have the highest coastal exposure as a share of all insured exposure in their states; coastal populations continue to surge; natural disasters cost insurers $14.5 billion annually in the 20-year period from 1986-2005, and since 2000 the toll has increased to $20 billion annually, mostly due to hurricane damage. To-date many proposals have been put forward to deal with the coastal property insurance problem. The latest solution, unveiled late last week by New York insurance superintendent Eric Dinallo, would require insurers to create a catastrophe reserve fund to help pay claims from hurricanes and other natural disasters. Like many issues in our industry, there  are varied responses to this plan. National Underwriter’s October 9 online article by Daniel Hays “Insurers of Three Minds on N.Y. Cat Fund Proposal† sums up where we are right now. We welcome more feedback on this topic.  

Avian Flu Update

In the four months since his last update on H5N1 (the Avian flu), I.I.I.’s chief economist and resident bird flu expert Dr. Steven Weisbart notes that 22 more people have been confirmed to have been infected with the disease, and 15 of them have died. This brings the cumulative total to at least 201 dead and 329 confirmed infected since December 2003 (the start of the current outbreak) through October 2, 2007. In 2007 alone there have been 66 infections and 43 deaths (65 percent), roughly the same pace of infections and deaths as in 2006 (69 percent death rate). Dr. Weisbart explains that the lethality rate of the virus varies substantially: in 2007, 25 percent of those infected in Egypt died, compared to 87.5% of those infected in Indonesia. Human infection is still believed to be mainly from birds to humans, basically from very close contact with infected chickens and similar birds in home environments. Virtually all of the cases continue to be under 40 years old. There are still no cases of birds or people in the U.S. with this flu virus.  

Considering Stoneridge

Today the U.S. Supreme Court will begin hearing a major securities litigation case with potentially enormous implications for businesses. The outcome of Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. will decide whether shareholders can sue third parties (such as accountants and lawyers) charged with aiding a corporation that has defrauded its investors. The Securities and Exchange Commission (SEC) already has the ability to sue third parties for aiding corporate fraud, but a decision in favor of investors in this case would likely expose U.S. companies as well as  those doing business with them to significant additional costly shareholder suits. We don’t need to remind you of how much litigation costs U.S. businesses. For more on this, check out I.I.I.’s liability issues update. Further commentary on the Stoneridge case can be found at The D&O Diary, a blog focused on D&O liability issues.

Auto Theft Cools

So Columbus Day brings some good news and not so good news for auto owners and their insurers. Vehicle thefts have declined for the third year in a row, according to the National Insurance Crime Bureau’s (NICB) Hot Wheels study. The headline stats are 1,192,809 motor vehicles reported stolen in 2006, some 42,417 fewer than in 2005. That’s one vehicle every 26.4 seconds. Based on the FBI’s average valuation of $6,649 per stolen vehicle, this amounts to over $7.9 billion in losses just in vehicle value alone for 2006. But the other side of the coin is that only 59 percent of stolen vehicles were recovered last year — the lowest recovery rate in over a decade. More than 700,000 vehicles remain outstanding, which as the NICB points out, fuel a number of related insurance fraud and vehicle theft activities. Exports of stolen vehicles to foreign countries are part of the problem. In 2006, over 4,000 vehicles valued at nearly $42 million were returned to the U.S. from various countries. A trend to monitor.  NICB’s advice to owners is to take a layered approach to theft prevention, and that doesn’t have to be costly. The cheapest form of defense? Locking your car and taking your keys. Warning devices, immobilizing devices, and tracking devices are other effective tools. I.I.I.’s auto theft update has more details.

MLB Champ Forecast

With the World Series all but upon us, we happily give away the pen for today’s posting to I.I.I. executive vice president and resident baseball expert Cary Schneider for his take on the 2007 postseason finale: “Defying all odds, the team with the fewest wins among all the division champs went on to win the World Series last year. So predicting the outcome of the World Series is a riskier task than ever. Rather than speculate on which team should win, I prefer to identify the team that should lose. My overwhelming pick is the sentimental favorite, the Chicago Cubs. After all, they have not been in the fall classic since 1945 and have not won one since 1908.  I believe the team’s historic futility must continue. A Cubs victory in the World Series would alter the natural balance of the universe, the laws of physics as well as all established actuarial principles, particularly Simpson’s Paradox of Confounding Variables.  Besides, I’m a St. Louis Cardinals fan.  World Series winner?  Anyone but the Cubs.†Ã‚  

Obesity Update

Evidence of the growing economic and social costs of obesity continues to dominate the news. Research by Emory University published in the journal Health Affairs reveals that Americans are nearly twice as likely as Europeans to be obese. Apparently while 17.1 percent of European adults are obese, the rate is 33.1 percent for U.S. adults. Older U.S. adults are also more likely than their European counterparts to be diagnosed with costly chronic diseases and to be treated for those diseases, adding about $100 billion to $150 billion per year to the U.S. health care tab, according to the study. Interesting stat: Emory professors believe the U.S. could save $100 billion a year if it could bring its obesity rates more in line with Europe. Point to bear in mind: explanations for the TransAtlantic differences in disease prevalence remain varied. While  it’s possible Americans are actually sicker than Europeans, it’s also possible that more aggressive diagnosis and pretreatment of chronic diseases in this country raises disease prevalence rates, researchers say. Meanwhile, another  study of 663 patients with HIV at Navy hospitals in San Diego and Bethesda, Maryland, found that 63 percent of them were overweight or obese, while only 3 percent were underweight.  Check out further information from the I.I.I. on obesity.

Volcanic Risk

We notice that the top search on Yahoo! today is Active Volcanoes. A glance at the headlines reveals why. A volcano on the Yemeni island Jabal al-Tair in the Red Sea is erupting for the third straight day,  with so far three reported dead and five missing. Meanwhile, the possibility of a major eruption of Mount Kelud, located about 385 miles east of Jakarta, Indonesia, led authorities there to prepare to evacuate about 24,000 residents over the weekend. And just last week, Mount Ruapehu volcano on New Zealand’s North Island erupted, injuring one. Heightened public interest on this natural hazard is a good thing. The 2007 Hazard and Risk Science Review from Benfield and PartnerRe notes that as another year goes by without a major eruption in a developed country, and no large insured loss arising from volcanic activity, so market interest in the volcanic threat remains low. Nevertheless, at least 1,500 (and possibly as many as 3,000) volcanoes have the potential to erupt in future, many located where they can cause major damage and huge losses. By the way, volcanic eruption is a covered cause of loss under homeowners and business  insurance policies in the U.S. The May 1980 eruption of Mount St. Helens was the most catastrophic in U.S. history. Check out I.I.I. world catastrophe facts & stats.

Auto Spend Down

Countrywide average expenditures  for auto insurance declined by 1.3 percent in 2005, the first drop since 1999, according to a September 2007 report from the National Association of Insurance Commissioners (NAIC). That’s good news for the many millions of drivers in the U.S. and underscores the point made by I.I.I. president Dr. Robert Hartwig in his recent commentary on the industry’s first-half 2007 results that falling insurance prices are lowering the cost of driving a car (as well as doing business and owning a home) for most Americans. In our annual auto insurance forecast the I.I.I. has highlighted the slowdown in auto insurance costs over the past several years. Fewer auto accidents due to better drivers and safer cars, crackdowns on fraud and advances in technology are some of the key reasons behind this trend. For state-by-state auto insurance cost comparisons, check out I.I.I.’s auto insurance facts & stats online.

Illuminating Surplus Lines

Phrases like non-admitted or non-standard are enough to give any market a complex, but as is widely known, surplus lines insurers perform a vital role by assuming risks that licensed companies decline to insure or will only insure at a very high price. With that in mind the latest figures indicating that despite the soft market, the surplus lines share of the commercial insurance market grew again in 2006, might come as a bit of a surprise. In fact A.M. Best reports that surplus lines insurers benefited from the one notable soft market exception: catastrophe-exposed coastal property. It also notes that the growth of the surplus lines market as a percentage of total commercial lines premiums has increased steadily over the past two decades, from 5.4 percent in 1986 to 14.4 percent in 2006. How to sustain that growth in the coming year is likely to be one of the discussion points at the annual meeting of the National Association of Professional Surplus Lines Offices (NAPSLO) in New Orleans this week. For more on the surplus lines market, what it is and how it operates, check out I.I.I.’s commercial insurance site.  

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