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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.
Monday, March 30, 2015
Posted by Claire under Catastrophes, Insurers and the Economy
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:
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.
Wednesday, December 17, 2014
Posted by Claire under Catastrophes, Insurers and the Economy
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).
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.
Tuesday, November 4, 2014
Posted by Claire under Insurers and the Economy, Terrorism Risk
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.
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.
Wednesday, October 15, 2014
Posted by Claire under Earthquakes, Insurers and the Economy
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.
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.
Tuesday, October 7, 2014
Posted by Claire under Industry Financials, Insurers and the Economy
While low interest rates are likely to continue to present a challenge well into 2015, a stronger economy presents the property/casualty insurance industry’s best opportunity for growth, according to I.I.I. president Dr. Robert Hartwig.
Dr. Hartwig shared his thoughts on the industry’s growth outlook in his Commentary on 2014 First Half Results.
There are two principal drivers of premium growth in the P/C insurance industry he noted: exposure growth and rate activity.
Exposure growth—basically an increase in the number and/or value of insurable interests (such as property and liability risks)—is being fueled primarily by economic growth and development.
Although the nation’s real (inflation-adjusted) GDP in the first quarter of 2014 actually declined at an annual rate of -2.1 percent, economic growth snapped back in the second quarter, as real GDP surged by 4.6 percent.
Dr. Hartwig says:
Growth in key areas of the economy such as new vehicle sales, multi-unit residential construction, and consistent employment and payroll growth are clearly benefitting the P/C insurance industry. For the remainder of 2014 and into 2015, the consensus forecasts call for real GDP growth to hold steady at about 3 percent.”
The other important determinant in industry growth is rate activity. Rates tend to be driven by trends in claims costs, conditions in the reinsurance market, marketing and distribution costs, and investments in technology, among other factors.
Although it’s challenging to foresee the interplay of all of these and macroeconomic factors, Dr. Hartwig says it is certainly possible that overall industry growth in net written premiums could keep pace with overall economic growth in 2014.
In the first half of 2014 the industry’s net written premium growth actually decelerated slightly to 4.0 percent in the first half of 2014, compared to 4.3 percent in the first half of 2013.
But, as Dr. Hartwig concludes:
Premium growth, while still modest, is now experiencing its longest sustained period of gains in a decade.”
Workers compensation is likely to remain the fastest growing major P/C line of insurance in 2014 if economic growth and hiring behave as projected.
Friday, May 30, 2014
Posted by Claire under Auto Insurance, Insurers and the Economy
A report just released by the National Highway Transportation Safety Administration (NHTSA) puts a $277 billion price tag on the economic costs of traffic crashes in the United States in 2010, a 20 percent increase over its 2000 data.
The economic costs are equivalent to approximately $897 for every person living in the U.S. and 1.9 percent of U.S. Gross Domestic Product, the NHTSA says, and based on the 32,999 fatalities, 3.9 million non-fatal injuries, and 24 million damaged vehicles that took place in 2010.
Included in these economic costs are lost productivity, medical costs, legal and court costs, emergency service costs (EMS), insurance administration costs, congestion costs, property damage and workplace losses.
When you add in the $594 billion societal cost of crashes, such as harm from the loss of life and pain and decreased quality of life due to injuries, the total impact of crashes is $877 billion.
The following chart breaks out the economic costs:
Itâ€™s interesting to note that the most significant components were property damage and lost market productivity. In dollar terms, property damage losses were responsible for $76.1 billion and lost productivity (both market and household) for $93.1 billion.
The NHTSA explains that for lost productivity, these high costs are a function of the level of disability that has been documented for crashes involving injury and death. For property damage, costs are mainly a function of the very high incidence of minor crashes in which injury does not occur or is negligible.
Another takeaway from the survey is the impact of congestion, which accounts for some $28 billion, or 10 percent of total economic costs. This includes travel delay, added fuel consumption, and pollution impacts caused by congestion at the crash site.
Thereâ€™s a separate chapter of the NHTSA report devoted to congestion impacts that includes some fascinating data.
For additional dataÂ on motor vehicle crashes, check out I.I.I. facts and statistics on highway safety.
Global insurance markets are seeing stronger growth, thanks to the economic upswing in many industrialized countries, according to an annual study by Munich Re.
Munich Reâ€™s Insurance Market Outlook 2014 finds that rate increases in a number of high volume markets are also having a positive effect on premium growth.
At the global level, Munich Re expects real overall growth in primary insurance premiums at 2.8 percent this year and 3.2 percent in 2015, influenced mainly by stronger growth again in life insurance.
[In 2013, global insurance markets saw restrained growth of 2.1 percent in real terms, with primary insurance premiums in the life insurance segment growing by just 1.8 percent, due to a number of regulatory one-off effects.]
While in recent years dynamic growth in emerging countries has served as the decisive growth driver of global premium volumes, especially in property/casualty insurance, Munich Re notes that it is the industrial countries whose contribution to growth is currently increasing.
Many emerging countries are currently experiencing a cooling of their economies, and this is expected to have a dampening effect on premium growth in 2014 and 2015.
In the long-term however, Munich Re expects that emerging countries will continue to become more important for the global insurance markets.
The emerging Asian countries will see the highest increases, with their share of global premium volume expected to rise by 5 percentage points, from 9 percent in 2013 to 14 percent in 2020.
The Chinese market, already the fourth-largest primary insurance market with premium volume of over â‚¬210 billion in 2013, will more than double by 2020 to become the third-largest market worldwide, according to Munich Re.
Thursday, May 15, 2014
Posted by Claire under Insurers and the Economy, Wildfires
Images of wildfires burning in suburban neighborhoods in Southern California are a reminder of the risk faced by many homeowners.
NearlyÂ 2 million, orÂ 14.5 percent, of the 13.7 million homes in California face severe wildfire risk, according to the most recent FireLine State Risk Report by Verisk Underwriting Solutions.
Some 417,500 of these high-risk homes are located in Los Angeles County, while 239,400 are located in San Diego County.
Check out this snapshot from the Verisk report illustrating Californiaâ€™s wildfire risk:
For the latest information on the wildfires burning in the state go to the CAL FIRE (California Department of Forestry and Fire Protection) site.
I.I.I. facts and statistics on wildfires are available here.
Tuesday, May 13, 2014
Posted by Claire under Insurers and the Economy, Theft
Good news for insurers. Latest data points to a promising decline in the national problem of metal theft, according to the National Insurance Crime Bureau (NICB).
In a new report, the NICB notes that in just three years the number of metal theft insurance claims has declined by over 26 percent from 14,676 in 2011 to 10,807 in 2013.
The report reviews metal theft claims from January 1, 2011, through December 31, 2013.
During this period, 41,138 insurance claims for the theft of copper, bronze, brass or aluminum were handled â€“ of which 39,976 (97 percent) were for copper alone.
The NICB notes that when the number of metal theft insurance claims per month and monthly average copper prices are compared, the number of claims filed is found to have a statistically significant correlation with the price of copper.
Tightening controls on the sale of scrap metal have had a positive impact in local communities, the NICB says.
Ohio still ranks first of all states generating 4,144 metal theft claims in 2013, followed by Texas (2,827), California (2,489), Pennsylvania (2,345) and Georgia (2,067).
New York-Newark-Jersey City, NY-NJ-PA (1,725 claims) was the leading statistical area generating the most metal theft claims.
More on the link between copper prices and incidents of metal theft in this NICB video.