Entries tagged with “Economy”.


Despite a rather quiet first half of 2015 for global catastrophes, insurers endured at least five separate billion-dollar insured loss events (all weather-related), according to Aon Benfield’s just-released Global Catastrophe Recap: First Half of 2015.

None of the events crossed the multi-billion dollar loss threshold ($2 billion or greater) and four of the five were recorded in the United States, Aon Benfield said.

The costliest event for the insurance industry was an extended period of snow and frigid temperatures in the U.S. during February ($1.8 billion in insured losses). (See our earlier post on first half winter storm losses here).

Other billion-dollar insured loss events in the U.S. included an early April severe thunderstorm outbreak ($1 billion), a severe thunderstorm and flash flood event at the end of May ($1.2 billion), and projected losses arising from the ongoing drought across the West ($1 billion and counting).

The sole billion-dollar insured loss event to be recorded outside the U.S. during the first half of 2015 was Windstorms Mike and Niklas in Western and Central Europe at the end of March/early April. Niklas became the first billion-dollar insured loss windstorm event in Europe since Xaver in December 2013, Aon Benfield said.

Note: the loss totals, which include those sustained by public and private insurance entities, are preliminary and subject to change.

If you’re wondering about the difference between economic and insured loss totals, the 7.8 magnitude earthquake that hit Nepal on April 25 (and subsequent aftershocks) is a good example.

From an economic loss standpoint, the Nepal earthquake ranks as the costliest global natural disaster during the first half of 2015, Aon Benfield reports.

Total damage and reconstruction costs throughout the impacted areas were estimated as high as $10 billion (subject to change), with reconstruction costs in Nepal alone put at nearly $7 billion.

Despite having a multi-billion-dollar economic cost to Nepal with overall economic effects poised to equal more than one-third of the country’s entire GDP, only a very small fraction of those losses – about 2 percent – was covered by insurance.

Check out Insurance Information Institute (I.I.I.) facts and statistics on global catastrophes here.

As my kids head off for their snowy-themed day at camp, the statistic that jumps off the page in the 2015 Half-Year Natural Catastrophe Review jointly presented by Munich Re and the Insurance Information Institute (I.I.I.) is the record $2.9 billion (and counting) in aggregate insured losses caused by the second winter of brutal cold across the Northeastern United States.

As Munich Re illustrates in the following slide, a total of 11 winter storm and cold wave events resulted in 80 fatalities and caused an estimated $3.8 billion in overall economic losses in the period from January 2015 to the end of winter:

USNatCatLosses2015

But the $2.9 billion in insured losses goes higher still when you factor in 2014’s contribution to winter storm losses.

As Munich Re America notes in a press release, if the harsh U.S. winter of 2014/15 is taken as a whole, then the insured losses rise to $3.2 billion and overall economic losses to $4.3 billion.

And this figure does not include indirect losses due to delayed flights, power failures and business interruptions.

As Tony Kuczinski, president and CEO of Munich Re America, says:

The fact that, once again, tens of thousands of people were temporarily left without electricity shows that the U.S. simply must invest in stronger, more weather resilient, infrastructure.”

And when you consider that losses from snow, ice, freezing and related causes typically cost insurers between $1 billion and $2 billion annually, as noted by Dr. Robert Hartwig, I.I.I. president, the impact of the exceptionally cold winter of 2014/15 really starts to bite.

Insurance Information Institute (I.I.I.) chief actuary James Lynch explains how insurance float works and the impact it has on insurance rates. 

Asked for the secret to his success, famed Berkshire Hathaway CEO Warren Buffett often points to insurance float, “money that doesn’t belong to us but that we can invest for Berkshire’s benefit.”

He is talking about premium and loss reserves, the funds that any insurer holds while waiting for claims to settle. That money gets invested, and the investment income is an important revenue source for insurers. It also lowers insurance premiums, since actuaries take investment income into account when setting prices.

But these days float isn’t so buoyant, as you can see from the accompanying chart, which shows the net new money yield – what insurers typically obtain when they invest the float, adjusted for inflation. The National Council on Compensation Insurance (NCCI) estimates the yield, and we at I.I.I. made the inflation adjustment.

USPCNewMoneyVsCPI

The chart goes back decades, and it is easy to see the steady decline in yields. Thirty years ago the float yielded 5 percentage points above the inflation rate.

Yields have fallen inexorably. In recent years, the float has struggled to beat inflation. The post-recession peak has been 2009, when new money yields beat inflation by 2.6 percentage points, but in four of the past six years the net new money yield was negative.

Insurers differ in their investment strategy, but taken as a whole, the industry has suffered from the loss in yield. As a result, insurers have had to deliver better underwriting results in order to be as profitable as they were 10, 20 or 30 years ago.

Last year the property/casualty industry wrote a combined ratio of 97, and delivered an 8.2 percent return on equity.  The industry had a similar ROE in 1983 – 8.3 percent — but ran a combined ratio of 112, thanks in no small part to the tailwind provided by investment yields nearly 8 percentage points above inflation.

Put another way, rates have to be about 15 percent higher today to achieve the same return as a generation ago, and that’s before considering inflation or any other changes in the marketplace.

Insurance Information Institute (I.I.I.) chief actuary James Lynch is on the road.

Spring is heavy conference season. I type this from an Orlando hotel room on May 14, after day one of the Annual Issues Symposium put on by the National Council on Compensation Insurance (NCCI). Ahead are trips to Colorado, Philadelphia and Atlanta, as well as two meetings close to home, in New York.

The NCCI conference is perhaps best known for president and chief executive officer Steve Klingel’s summary of the workers compensation line in a single word or phrase. This year: Calm now . . . but turbulence ahead. With premium up 4.6 percent and the combined ratio (98) at its lowest since 2006, workers comp results have been good, but outside pressures could make the ride bumpy.

One pressure is low interest rates. Years can pass from the time an insurer collects premium and injury claims get paid, and insurers in the meantime invest that premium, with the proceeds helping pay for claims and bolstering profits.

Interest rates have been so low for so long that the industry can’t rely on interest rates to deliver results anymore.

Another is the sharing economy. As Dr. Robert Hartwig, president of the I.I.I. and an economist, noted later that day, the smartphone has made it easy to summon people to do ad hoc jobs, with the best known being Uber’s ride-sharing battalion.

Those workers are independent contractors (though that has been challenged) and as such don’t get traditional benefits, including workers comp coverage. As the sharing economy grows, workers comp could shrink.

The third is a series of attacks on the basic principles of workers compensation. News reports suggest workers comp doesn’t compensate injuries equitably; lawsuits suggest the line has violated the Grand Bargain that gives up a big tort payoff in exchange for a steady flow of benefits; and a nascent movement would let employers opt out of the workers compensation system altogether.

But workers comp has survived a lot in the century since it took hold in the United States and seems well-equipped to handle the, well, turbulence.

“While I am confident that we will work our way through these challenges,” Klingel said, “it is important to be realistic about current conditions and to recognize that the current positive results may not last.”

The I.I.I. has more workers comp facts and statistics available here.

As the death toll from Saturday’s devastating 7.8 magnitude earthquake in Nepal continues to rise, we’re reading about the health threat facing survivors.

In addition to the injured, an estimated 2.8 million people have been displaced by the earthquake as many are afraid to return to their homes.

The United Nations (UN) has launched an urgent appeal for $415 million to reach over 8 million people with life-saving assistance and protection over the next three months.

Its report offers insight into the scale of the unfolding humanitarian disaster:

According to initial estimations and based on the latest earthquake intensity mapping, over 8 million people are affected in 39 of Nepal’s 75 districts. Over 2 million people live in the 11 most critically hit districts.”

And:

The government estimates that over 70,000 houses have been destroyed, Over 3,000 schools are located in the 11 most severely affected districts. Up to 90 percent of health facilities in rural areas have been damaged. Hospitals in district capitals, including Kathmandu, are overcrowded and lack medical supplies and capacity.”

Strong tremors have damaged infrastructure, including bridges and roads and telecommunications systems. Transport of fresh water has been interrupted and fuel is running low in many areas.

The UN also reports that an estimated 3.5 million people are in need of food assistance, of which 1.4 million need priority assistance, while 4.2 million are urgently in need of water, sanitation and hygiene support.

While it’s far too early to know if these estimates will hold, clearly the Nepal earthquake is as catastrophe modeling firm RMS says: “shaping up to be the worst natural disaster this calendar year, particularly because Nepal is remote, economically challenged, and not resilient to an earthquake of this magnitude.”

Indeed, the earthquake is expected to inflict at least $5 billion in total economic losses – that’s more than 20 percent of Nepal’s gross domestic product – and could end up exceeding the country’s GDP.

Not surprisingly, insurance penetration in what is one of the world’s poorest nations is extremely low, as the I.I.I. explains here.

Information on the most deadly and the most costly world earthquakes is posted here.

A major hurricane or earthquake hitting a densely populated metropolitan area like Miami or Los Angeles will leave insurers facing losses that far exceed their estimated 100 year probable maximum loss (PML) due to highly concentrated property values, a new report suggests.

In its analysis, Karen Clark & Company (KCC) notes that the PMLs that the insurance industry has been using to manage risk and rating agencies and regulators have been using to monitor solvency can give a false sense of security.

For example, it says the 100 year hurricane making a direct hit on downtown Miami will cause over $250 billion insured losses today, twice the estimated 100 year PML.

Insurers typically manage their potential catastrophe losses to the 100 year PMLs, but because of increasingly concentrated property values in several major metropolitan areas, the losses insurers will suffer from the 100 year event will greatly exceed their estimated 100 year PMLs.”

Instead, the report suggests new risk metrics—Characteristic Events (CEs)—could help insurers better understand their catastrophe loss potential and avoid surprise solvency-impairing events.

The CE approach defines the probabilities of a mega-catastrophe event based on the hazard rather than the loss and gives a more complete picture of catastrophe loss potential.

Rather than simulating many thousands of random events, the CE approach creates events using all of the scientific knowledge about the events in specific regions.

This information is then used to develop events with characteristics reflecting various return periods of interest, such as 100 and 250 year, which are then floated to estimate losses at specific locations.

To protect against solvency-impairing events, the report suggests insurers should monitor their exposure concentrations with additional metrics, such as the CEs and the CE to PML ratio.

KCC estimates that overall U.S. insured property values increased by 9 percent from 2012 to 2014, faster than the general economy.

The state with the most property value is California, followed by New York and Texas. The top 10 states account for over 50 percent of the U.S. total.

U.S. vulnerability to hurricanes and other coastal hazards continues to rise because of increasing concentrations of property values along the coast.

Of the $90 trillion in total U.S. property exposure, over $16 trillion is in the first tier of Gulf and Atlantic coastal counties, up from $14.5 trillion in 2012, KCC estimates.

 

The amount of financial loss caused by catastrophes not covered by insurance is growing, according to the latest Swiss Re sigma report.

This so-called global insurance protection or funding gap totaled $75 billion in 2014.

The rate of growth of total losses has outpaced the growth of insured losses over the course of the last three decades, Swiss Re notes:

In terms of the 10-year moving average, insured losses grew at 10.7 percent between 1979 and 2014, and total losses by 11.4 percent.”

Here’s the Swiss Re visual showing global insured vs. uninsured losses from natural catastrophes and man-made disasters from 1970 to 2014:

CA8oVonUUAAcllL

Lack of insurance cover clearly remains an issue in many countries.

Swiss Re gives the example of low pressure system Yvette last May which brought very heavy rain in Europe to Serbia, Bosnia and Croatia – in some areas the heaviest downpour in 120 years. Yvette resulted in 82 fatalities, the largest loss of life from a natural catastrophe in Europe in 2014, and total losses were estimated to be $3 billion – mostly uninsured.

Areas of the United States are also underinsured, sigma reports. Last August’s South Napa earthquake caused structural and inventory damage of $0.7 billion, particularly in the numerous local wine barrel storage facilities. However, the insured loss was just $0.16 billion.

As Lucia Bevere, co-author of the sigma study, notes:

In spite of high exposure to seismic risk, insurance take-up in San Francisco County and California state generally is still very low, even for commercial properties. That’s why insured losses, in certain areas, can be surprisingly low when disaster events happen.”

Meanwhile, the economic cost of natural disasters continues to rise due to economic development, population growth, a higher concentration of assets in exposed areas and a changing climate.

Without a commensurate increase in insurance penetration, the above will likely result in a widening protection gap over the long term, sigma concludes.

I.I.I. has more facts and statistics on global catastrophes available here.

Natural catastrophes and man-made disasters cost insurers $34 billion in 2014, down 24 percent from $45 billion in 2013, according to just-released Swiss Re sigma preliminary estimates.

Of the $34 billion tab for insurers, some $29 billion was triggered by natural catastrophe events (compared with $37 billion in 2013), while man-made disasters generated the additional $5 billion in insured losses in 2014.

Despite total losses coming in at below annual averages, the United States still accounted for three of the most costly insured catastrophe losses for the year, with two thunderstorm events and one winter storm event causing just shy of $6 billion in insured losses (see chart below).

sigma_prel_cat_estimates_fig1

In mid-May, a spate of strong storms with large hail stones hit many parts of the U.S. over a five-day period resulting in insured losses of $2.9 billion – the highest of the year.

Extreme winter storms at the beginning of 2014 caused insured losses of $1.7 billion, above the average full-year winter storm loss number of $1.1 billion of the previous 10 years, sigma said.

Total economic losses from disaster events in 2014 reached $113 billion worldwide, according to sigma estimates, and around 11,000 people lost their lives in those events.

Ongoing events and revisions to estimates for previous ones may further change the 2014 loss outcomes, sigma noted, as this data includes updates to source data made by 28 November 2014 only.

More on global catastrophe losses from the I.I.I. here.

It’s Election Day and as you head to the polls the insurance issue that remains at the top of mind for most is the future of the Terrorism Risk Insurance Act (TRIA).

In a new paper the Insurance Information Institute (I.I.I.) says the question of what happens if the federal act is not renewed by Congress is no longer a theoretical one:

Since insurance policies negotiated during 2014 extend beyond the imminent December 31 expiration date of the program, the negative consequences of non-renewal are already being experienced by businesses across America and their insurers.”

The private sector simply does not have the capacity to provide insurance or reinsurance for terrorism risk to the extent currently provided by the federal program, the I.I.I. says. As a result, in the absence of the act, terrorism risk insurance would be less available and less affordable.

Over at WGA InsureBlog, David Bardelli, senior vice president and casualty practice leader for William Gallagher Associates, notes that with Congress not back in session until mid-November, the clock is ticking for lawmakers to come up with a solution before the end of the year.

Bardelli writes:

A lame duck Congressional session could pass an extension, which has been the case with previous versions of the bill. With House Democrats and Republicans at odds over the latest version of the House Committee’s proposal, it looks like the November elections will have the biggest impact on what happens with TRIA.”

Insurers are not alone in their concerns over the future of terrorism risk insurance. Just on Friday, the Real Estate Roundtable reported that while senior commercial real estate executives see a continuing recovery in the markets, they remain concerned about the lack of clear direction in many federal policies, primarily terrorism risk insurance.

Roundtable President and CEO Jeffrey D. DeBoer, said:

Without a long-term reauthorization of TRIA when policymakers return in November, financing for CRE projects will be directly threatened, job creation will suffer as it did after 9-11, and businesses can expect a general slowdown as many financing contracts will be found to be in technical default without terrorism insurance.”

Congress will return November 12 for the “lame duck” session.

Some 25 years after the Loma Prieta earthquake, the San Francisco Bay area faces increased risk of a major quake, two separate studies suggest.

A study published online in the Bulletin of the Seismological Society of America says that sections of the San Andreas fault system—the Hayward, Rodgers Creek and Green Valley faults—are nearing or past their average earthquake recurrence intervals.

It says the faults ‘are locked and loaded’ and estimates a 70 percent chance that one of them will rupture within the next 30 years. This would trigger an earthquake of magnitude 6.7 or larger, the study’s authors say.

A second study by catastrophe modeler RMS says the next major quake could be financially devastating to the Bay Area economy in part because of low earthquake insurance penetration.

RMS warns that a worst-case 7.9 magnitude earthquake on the San Andreas fault could cause over $200 billion in commercial and residential property losses, yet only 10 percent of households currently have earthquake insurance.

Dr. Patricia Grossi, earthquake expert at RMS says:

The Bay Area has made significant progress in terms of infrastructure preparedness and retrofitting, but without significant earthquake insurance penetration to facilitate rebuilding, the recovery from a major earthquake will be considerably harder.”

Without insurance, homeowners may walk away after a quake if the residual value of their property is less than the outstanding value of their mortgage, RMS notes. Even those with insurance are likely to struggle to meet high deductibles, potentially leading to significant blight and disrepair in badly damaged neighborhoods.

Despite low earthquake insurance penetration, a magnitude 7.0 earthquake rupturing on the Hayward fault could produce $25 billion in insured loss across residential and commercial lines of business, RMS concludes.

BayAreaEarthquakeRisk

A glance at the economic context shows that since the 1989 Loma Prieta earthquake, population in the Bay Area has increased 25 percent, while the value of residential property has jumped by 50 percent, reaching $1.2 trillion.

The Bay Area is also the most productive economy in the U.S. with a gross domestic product of $535 billion, ranking 19th in the world compared to national economies, RMS says.

Check out I.I.I. facts and stats on earthquakes.