Tag Archives: Economy

More On Employment and Claim Frequency

Earlier this month Insurance Information Institute (I.I.I.) chief actuary Jim Lynch linked teen employment to the spike in claim frequency. I.I.I. chief economist Steven Weisbart responds:

I think Jim’s post draws the wrong inference from the data. Specifically, the slide pairs the drop in the teenage unemployment rate with the rise in overall collision claim frequency. He infers that if teens are not unemployed, they’re employed and, presumably, driving to work.

But the drop in the unemployment rate of this age group isn’t solely—or even mainly—because they’ve taken jobs. To start with, in 2006-07, there were seven million people ages 16 to 19 in the labor force. That began falling in 2008, crossing six million in 2010 and plateauing at about 5.6 million midway through 2011. So in the space of less than five years, about 1.5 million people ages 16-19 disappeared from the labor force.

In contrast, the number unemployed in this age range dropped from about 1.1 million in 2006-07 to about 0.9 million in 2015. So about 200,000 got jobs. Some who had been in the labor force in 2006-07 must have gone to school, joined the military, were imprisoned, or simply gave up looking for a job (and therefore were not considered to be in the labor force).

If, instead, you look at the number in this age group who were employed in this period, it was 6 million in 2006-07, dropped to 4.3 million in mid-2010, rose to 4.5 million by mid-2014, and was 4.75 million in 2015:Q4. So the number of people in this age group who were employed is still 1.25 million below what it was before the Great Recession and subsequently.

I’ve put together a different slide (below), showing the change in employment and the change in claim frequency. As the number of employed falls with the Great Recession, so does claim frequency. And as employment numbers climb, so does claim frequency.

Employment and Collisions

So I’d say that Jim has a good explanation for the spike in the number of claims; more people get jobs, start driving to and from work and unfortunately get into accidents more often.

But it wasn’t just teen workers. It was everybody.

Tianjin: A Reminder of Insurance Need in Developing Countries

The explosions at the Port of Tianjin, China could ultimately become one of the largest man-made insurance loss events worldwide ever recorded, according to Swiss Re sigma.

Based on Swiss Re’s latest estimates, the total insured property loss of the Tianjin explosions is likely to be around USD 2.5 billion to USD 3.5 billion, making it the largest man-made insured loss event in Asia ever recorded.

Tianjin currently ranks as the third largest man-made insured global loss (in 2015 dollars), behind the September 11, 2001, terrorist attacks in New York, Washington and Pennsylvania and the 1988 Piper Alpha oil rig disaster.

Screen Shot 2016-03-30 at 10.09.19 AM

The Tianjin experience highlights the new potential risks facing developing countries with rapidly-developing economies, according to the latest sigma study.

2015 was the third year in a row that the biggest man-made loss globally originated from an emerging market, a reminder of the importance of insurance for developing countries, sigma says.

“The event shows the large loss potential in a country like China, with a fast-growing economy. If further evidence is needed, in 2013 a fire at a major high-tech semiconductor plant in Wuxi, also in China, caused insured losses of USD 0.9 billion.”

Financial protection through insurance is key to restoring business operations and recouping losses, sigma notes.

Accurate assessment of exposures, appropriate coverage terms and adequate pricing are likewise crucial:

“For re/insurers, they need to actively identify monitor and manage exposures in hazard zones and in areas with high asset-value concentrations.”

The complexities of the Tianjin loss have challenged re/insurers, and highlighted the accumulation of risks that can arise from a single large-scale industrial catastrophe event.

While destroyed and damaged vehicles account for most of the Tianjin losses, uncertainties remain as to the types of insurance policies involved.

Property and cargo present major risk accumulation factors in ports, especially in big centers like Tianjin, sigma observes.

The Insurance Information Institute has useful facts and statistics on man-made disasters here.

How Falling Oil Prices Affect Energy Losses

Is there a connection between falling oil prices and insurance claims?

This question is tackled by broker Marsh in a just-released research report: Can Energy Firms Break the Historical Nexus Between Oil Price Falls and Large Losses?

According to Marsh, insured losses in the global upstream energy sector reached a peak in the 1980s, shortly after the price of Brent crude oil fell from $35 to $15 per barrel.

In the late 1990s, this cycle occurred again when the price fell below $10 per barrel and again in the years following the 2008 slump, when the price fell from more than $100 to $32 per barrel.

When oil prices fall, companies face less revenue and more strain on budgets. Already, Marsh notes that oil and gas companies have been canceling projects and making staffing reductions.

But there are other potential cuts that are harder to quantify such as cuts in maintenance, health and safety measures, and employee training.

Cost-cutting decisions such as these appear to have led to increased losses in the past, according to the Marsh report:

Based on past experience, when this pullback in funding occurs, if it hasn’t already, we would expect to see an increase in losses soon after.”

Here’s the chart showing the link between oil prices and insurance claims:

Screen Shot 2016-03-27 at 10.22.07 PM

Despite falling revenues, Marsh urges energy firms to maintain their investment in risk management to reduce the potential for future major incidents and insurance claims.

Marsh also suggests that now is the time for energy firms to take advantage of lower prices in a benign insurance market to push for increased protection in uncertain times.

With the cost of insurance capital at historic lows, the opportunity clearly exists for companies to access cheap sources of capital from the insurance markets, reduce overall insurance premium costs, purchase insurance in areas that were previously omitted due to cost, and renegotiate coverage terms.”

PwC: Incidence of Cybercrime Sharply Higher

Cybercrime has jumped to the second most reported type of economic crime affecting 32 percent of global businesses, according to a just-released survey by PwC.

PwC’s Global Economic Crime Survey 2016 found that while traditional leaders of economic crime–asset misappropriation, bribery and corruption, procurement fraud and accounting fraud–all showed a slight decrease over 2014 statistics, cybercrime is on a steady increase.

In fact over one quarter of the 6,000 respondents to PwC’s survey said they’d been affected by cybercrime.

Despite a sharply higher incidence of reported cybercrime among PwC’s respondents, the survey found that most companies are still not adequately prepared for–or even understand the risks faced.

Only 37 percent of organizations have a cyber incident response plan in place and many boards are not sufficiently proactive regarding cyber threats.

Even though  boards have a fiduciary responsibility to shareholders when it comes to cyber risk in several countries, PwC found that less than half of board members actually request information about their organization’s state of cyber-readiness.

Losses from cybercrime can be heavy, PwC reported. A handful of respondents (around 50 organizations) said they had suffered losses over $5 million. Of these, nearly one-third reported cybercrime-related losses sin excess of $100 million.

Reputational damage was considered the most damaging impact of a cyber breach among survey respondents, followed by legal investment and/or enforcement costs.

According to PwC:

The insidious nature of this threat is such that of the 56 percent who say they are not victims, many have likely been compromised without knowing it.”

This year’s results show that the incidence of economic crime has come down, for the first time since the global financial crisis of 2008-9 (albeit marginally by 1 percent).

Check out  the I.I.I. white paper  Cyber Risk: Threat and Opportunity  for the latest on cybercrime, risks and insurance.

Winter Weather Tops Billion Dollar Insured Cat Losses in 2015

Five of the seven individual billion-dollar insured loss natural disaster events in 2015 were recorded in the United States, according to Aon Benfield’s Annual Global Climate and Catastrophe Report.

The other two billion dollar events were recorded in Europe.

All of the events were weather-related and below the average of eight. The five events in the U.S. were equal to the 2000-2014 average.

Italy’s May 2012 earthquake was the last non-weather billion-dollar insured loss event.

The all-time record of 17 billion-dollar weather events was set in 2011.

The costliest individual insured loss event of the year was a prolonged stretch of heavy snow, freezing rain, ice, and frigid cold that impacted much of the eastern United States in February 2015. That event prompted an estimated $2.1 billion insured loss.

Other billion-dollar insured loss events in the U.S. included a severe thunderstorm outbreak in the U.S. in May and severe thunderstorms and flooding in December. Each of these events cost an estimated $1.4 billion in insured losses.

Another thunderstorm event in the U.S. in April cost $1.2 billion, while the yearlong drought in the West was another $1 billion insured loss event.

The two non-U.S. billion dollar insured loss events of 2015 consisted of the catastrophic December flooding in the UK that cost an estimated $1.3 billion, and European windstorms Mike and Niklas in March and April which resulted in an estimated insured loss of $1 billion.

CostliestInsuredCatLosses2015

Aon Benfield noted that on a global scale disasters caused insured losses of $35 billion in 2015, below the 15-year mean of $51 billion and 14 percent lower than the median ($40 billion).

This was the fourth consecutive year with declining catastrophe losses since the record-setting year in 2011.

The U.S. accounted for 60 percent of global insured disaster losses in 2015, reflecting the high rate of insurance penetration in the country, according to the report.

I.I.I. facts and statistics on U.S. catastrophes are available here.

Disruptive Change to Continue in 2016

U.S. property-casualty insurers face another year of disruptive change in 2016, according to a new report by Ernst & Young.

In its 2016 U.S. Property-Casualty Insurance Outlook, EY says that digital technologies such as social media, analytics and telematics will continue to transform the market landscape, recalibrating customer expectations and opening new ways to reach and acquire clients.

The rise of the sharing economy, in which assets like cars and homes can be shared, is requiring carriers to rethink traditional insurance models.

An outlook for slower economic growth, along with increased M&A and greater regulatory uncertainty, will set the stage for innovative firms to capitalize on an industry in flux in 2016.

EY’s take:

Insurers that stay ahead of these shifts should reap substantial benefits, while laggards risk falling behind, or even out of the race.”

EY reports that competitive pressures in the insurance industry are building as digital technology erodes the advantages of scale enjoyed by established insurers and empowers smaller players to compete for market share through more flexible pricing models and new distribution channels.

It cites the recent launch of Google Compare, which allows customers to comparison shop for insurance, as the start of a larger wave of insurance tech activity in 2016.

Along with this, customer expectations and behaviors are evolving at a rapid pace, often faster than traditional mechanisms can react.

EY observes:

Driven by their interactions in other digitally enabled industries, such as retail and banking, property-casualty customers are increasingly demanding a more sophisticated and personalized experience–including digital distribution, anytime access, premiums accurately reflecting usage and individual risk and higher levels of product customization and advice.”

Policyholders are also seeking coverage of a broader range of risks, such as cybersecurity and under-protected property exposure, according to EY’s outlook.

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

Check out a recent presentation by I.I.I. president Dr. Robert Hartwig titled Insurance, the Sharing Economy, Millennials and More.

Terrorist Attacks, Strategy and Impact

Suicide-armed assaults and bomb attacks may become an even more attractive tactic for terrorist groups to replicate following the November 13, 2015 attack in Paris, France, according to catastrophe modeling firm RMS.

In a blog post, RMS writes that the Paris attacks–which killed more than 125 people and left 350 injured–are the deadliest in Europe since the 2004 train bombings in Madrid, Spain, where 191 people were killed and over 1,800 injured.

The attacks have exposed France’s vulnerability to political armed violence and alerted the rest of Europe to the threat of salafi-jihadists within their domain, according to RMS.

RMS also notes that the chosen strategy in last Friday’s attacks offers greatest impact. For example,  the suicide armed attacks or sieges witnessed at the Bataclan Theater involved a group opening fire on a gathering of people in order to kill as many as possible.

Similar to the Mumbai attacks in 2008, the ability to roam around and sustain the attack, while being willing to kill themselves in the onslaught makes such terrorist attacks more difficult to combat.

From the terrorist’s perspective, these assaults offer a number of advantages, such as greater target discrimination, flexibility during the operation, and the opportunity to cause large numbers of casualties and generate extensive worldwide media exposure.”

Such attacks typically will target people in crowded areas that lay outside any security perimeter checks such as those of an airport or at a national stadium. Probable targets for such attacks are landmark buildings with a large civilian presence, RMS suggests.

Business Insurance reports that victims of the Paris attacks–whether French national or not–can claim compensation for personal injury from Le Fonds de Garantie des Victimes des Actes de Terrorismes et d’Autres Infractions (FGTI), as detailed by France’s insurance industry association Fédération Française des Sociétés d’Assurances on its website here.

France also has a state-backed reinsurer for property losses caused by terrorism, known as GAREAT (Gestion de l’Assurance et de la Réassurance des Risques Attentats et Actes de Terrorisme), which will likely cover any insured property losses resulting from the attacks.

Check out I.I.I. facts and statistics on global terrorism losses here and the latest I.I.I. paper on the renewed and restructured Terrorism Risk and Insurance Program in the U.S.

Women Good for Insurance

We spend a lot of time explaining why insurance is good for individuals, society and the economy as a whole, but a new report reverses that equation.

It focuses on the current and anticipated impact of women on the global insurance market.

Conducted by the International Financial Corporation (IFC), AXA and Accenture, the report estimates that women’s individual spending on insurance premiums will grow to between $1.45 trillion and $1.7 trillion by 2030–half of it in just 10 emerging economies.

That represents a doubling from the current annual premium value of the women’s global market of $770 billion.

The report cites an increased level of education, income, improved socioeconomic status, and a greater need for protection as key reasons that make women a big opportunity for insurers.

This is strongly reflected in a very simple yet telling number: women across the world are willing to invest 90 percent of their income into their households.”

Furthermore, women entrepreneurs now represent one-third of the world’s business owners, and they need protection for their businesses. Just 31 percent of women entrepreneurs surveyed held protection or savings-oriented life insurance, for example.

WomensInsuranceMarketProjections2030

The report also highlights that women’s attitudes to fraud, claims and loyalty, their roles as a trusted source of recommendations, and their relational rather than transactional approach to networks make them a valuable customer and inexpensive brand ambassador for insurers.

Women can act as strong advocates or social marketers for insurers and financial services firms, and are more likely than men to recommend a product or service to their friends and family, the report finds. They are also greatly influenced by the advice of their female peers.

Therefore, women can play a key role in explaining and selling insurance products across customer segments, and especially to other women.

What women want and need from insurance varies by age, income level and lifecycle events, however.

The report urges insurers to abandon the one-size-fits-all approach and instead identify and target segments of women who share common needs and constraints in order to take advantage of this growth opportunity.

Check out I.I.I. facts and statistics on careers and employment to discover what percentage of the insurance industry workforce comprises women.

Tianjin Explosions: One of the Most Complex Losses in History

The explosions at the Port of Tianjin, China are set to become one of the largest insured manmade losses in Asia to-date with potential losses of up to $3.3 billion, according to a new report by Guy Carpenter.

The event, which blasted shipping containers, incinerated vehicles in the port and on an adjacent highway overpass, destroyed warehouses, production facilities and dormitories, and impacted a nearby railway station and residential structures, will also be considered one of the most complex insurance and reinsurance losses in recent history.

Many classes of insurance were impacted by the loss, including: containers; cargo in containers; property; auto; and general aviation.

While access to the site is limited, Guy Carpenter said its satellite-based catastrophe evaluation service known as CAT-VIEW was able to utilize high resolution pre- and post-event satellite imagery to understand what exposures were present at the time of the blast and therefore could contribute to the loss.

The findings come as a new  study published  by Lloyd’s says that manmade risks are having an increasingly significant impact on economic output at risk (GDP).

In its analysis, Lloyd’s City Risk Index finds a total of $4.6 trillion of projected GDP is at risk from 18 manmade and natural disasters in 301 major cities around the world–out of a total projected GDP between 2015 and 2025 of $373 trillion.

However, manmade threats such as market crash, power outages and nuclear accidents are associated with almost half the total GDP at risk.

A market crash is the greatest economic vulnerability–representing nearly one quarter ($1.05 trillion) of all cities’ potential losses, Lloyd’s says.

New and emerging threats such as cyber attack, human pandemic, plant epidemic and solar storm are also having a growing impact, representing more than one fifth of total GDP at risk, Lloyd’s reports.

Governments, businesses and insurers must work together to ensure that this exposure–and the potential for losses–is reduced, according to Lloyd’s CEO Inga Beale.

Lloyd’s research shows that a 1 percent rise in insurance penetration translates into a 13 percent reduction in uninsured losses–a 22 percent reduction in taxpayers’ contribution following a disaster.

Insurance also improves the sustainability of an economy and leads to greater rates of growth. A 1 percent rise in insurance penetration leads to increased investment equivalent to 2 percent of national GDP, Lloyd’s notes.

Check out the I.I.I. publication A Firm Foundation: How Insurance Supports the Economy.

Man-Made Disasters, Global Impact

A New York Times article over the weekend takes a behind-the-scenes look at the recent deadly blasts at the port city of Tianjin in China.

The series of explosions and fire that began at a hazardous chemicals storage warehouse in the Binhai New Area of Tianjin August 12, leveled a large industrial area, leaving at least 150 dead and more than 700 injured.

As reported by the NYT, the lack of safety and oversight at the third largest port worldwide is shocking.

Here’s an excerpt:

As recently as 2013, Chinese academics had warned of many unacceptable environmental risks in the district, citing the growing chance of accidents from the storage of dangerous materials so close to residential neighborhoods and singling out the area where the Rui Hai facility was located. That warning, and others like it dating to at least 2008, were ignored.”

The Tianjin catastrophe points to the fact that man-made disasters can have a major impact on a global scale. Warehouses, buildings, thousands of containers and new vehicles were destroyed in the blasts, according to reports.

An initial estimate from analysts put the potential insurance loss at up to $1.5 billion. Some claims are likely to hit reinsurers, rating agencies say.

The incident also highlights the growth of accumulation risks, particularly in highly industrialized areas, according to Dieter Berg, head of department business development, marine global partnership at Munich Re.

In a recent online post for Munich Re’s publication Topics Online, Berg noted:

We as reinsurers have observed again and again over the past years how such individual events can have regional, or even global impact.”

He  gave examples such as the destruction of a power plant on Cyprus in 2011 that impacted the national economy, as well as floods in Thailand in 2011 that brought conveyor belts to a halt worldwide.

While insurers and reinsurers are focused on the large loss potential arising from natural hazards, such as flooding or hail, losses are often caused by human beings, particularly around industrial facilities, Berg added.

Such losses (from explosion) are difficult to model, but are comparable to modeling terrorism losses. For large port facilities, we thus analyze not only natural hazards such as flooding, earthquake or hail, but also this type of scenario.”

Insurers and reinsurers need to fully understand the value of goods in ports and all potential exposures in order to calculate adequate premiums, he advised.

The Insurance Information Institute (I.I.I.) has facts and statistics on man-made disasters here.