All posts by James Lynch

Wildfire evacuation: What to take?

Two wildfires in California are spreading today (Oct. 27), fanned by high winds overnight, forcing tens of thousands to evacuate.

If you are forced to evacuate, here is a list of what to take, culled from a III article on evacuation planning:

  • Prescriptions and other medicines
  • First aid kit
  • Bottled water
  • Flashlight, battery-powered radio and extra batteries
  • Clothing and bedding (sleeping bags, pillows)
  • Special equipment for infants or elderly or disabled family members
  • “Comfort items,” such as special toys for children
  • Computer hard drive and laptop
  • Cherished photographs
  • Pet food and other items for pets (litter boxes, leashes)

From the same article, here is a list of key documents:

  • Prescriptions
  • Birth and marriage certificates
  • Passports
  • Drivers license or personal identification
  • Social Security cards
  • Insurance policies — homeowners, auto, life and any others
  • Recent tax returns
  • Employment information
  • Wills and deeds
  • Stocks, bonds and other negotiable certificates
  • Financial information such as bank, savings and retirement account numbers and recent tax returns
  • Home inventory

Unfortunately, though, if you are told to evacuate it will be too late to search the house for all this stuff. When authorities tell you to leave you must leave immediately. The fire could be on you in moments.

How TRIA Would Handle Another 9/11

The Insurance Information Institute’s new white paper, “A World Without TRIA: Incalculable Risk,” shows how the market for terrorism insurance has evolved since the 2001 terrorist attacks – from the early days in which there was effectively no market (insurers avoided covering terrorism wherever they could) to today, where the market is stronger but by all accounts unable to shoulder the entire burden without government backstop.

The 9/11 attacks generated by far the most insured losses of any terrorism event. We wanted to see how the government program the Terrorism Risk Insurance Act (TRIA) created in its wake would handle financially a repeat of that awful day.

If that happened, the government’s net payout would be less than zero, as it would recover more from mandatory surcharges to insurance policies than it would reimburse insurers for a portion of their losses.

Meanwhile, the net payout by insurance companies would be nearly $20 billion. Repeating the exercise in the future, the insurer contribution would steadily grow, assuming the law was renewed with the same terms under which it is set to expire at the end of next year. The share borne by policyholders through the surcharge increases more dramatically.

These estimates come from a mathematical model created by the Reinsurance Association of America to increase understanding of how the law operates.

The RAA created the model around the time of the first reauthorization of TRIA in 2005. It is widely regarded as a credible look at how the federal program would react to various scenarios. It has been shown to organizations as diverse as the Federal Insurance Office, the National Association of Insurance Commissioners, the Government Accountability Office, ratings agencies and business groups with a stake in the program, like the U.S. Chamber of Commerce.

“Our intention is to be inclusive so that all of the interested groups vested in the program understand the statute,” said RAA President Frank Nutter.

At the request of the Triple-I, the RAA created four scenarios, each replicating the insurance losses stemming from 9/11. The years modeled were 2019, 2020, 2029 and 2030. Losses were adjusted using the Consumer Price Index. Insurer premium – an important input – was adjusted by a 4 percent compound rate of growth, which is close to what the Congressional Budget Office projects as the growth in nominal Gross Domestic Product over the next decade.

The original program has been modified each time Congress has reauthorized it: 2005, 2007 and 2015. The program has a number of parts, and the RAA model shows that each reauthorization has increased the burden on insurance companies and decreased the burden on the government.

The Triple-I estimates that adjusted for inflation, 9/11 this year would generate insurance losses of $45.7 billion. According to the RAA model, the government would contribute $6.6 billion. It would front another $19.3 billion but recover $27.0 billion from a mandatory surcharge that would be placed on the insurance purchased in all lines of business that the program covers. Netting all that out means the government would pay less than zero. Insurers would be responsible for $19.7 billion, or 43 percent of the total insured loss.

By 2030 9/11 would be a $58 billion event. The government would contribute nothing. It would front $29.6 billion but recover $41.5 billion from policyholders due to the recoupment and surcharge. Insurers would be responsible for $28.4 billion, or 49 percent of the total insured loss.

The main drivers of the changes:

  • Beginning in 2020, the law makes the size of the industry marketplace retention a function of insurers’ aggregate premiums, so the marketplace retention grows as the industry’s premium does.
  • Also in 2020 the government’s co-payment shrinks to 80 cents per dollar insurers pay above their deductible, down from 81 cents in 2019.
  • The amount of losses subject to policyholder surcharges grows to $29.6 billion from $19.3 billion, shrinking the federal support.

The work “is a reminder under the current statute, policyholder and company retentions go up over time,” said RAA President Nutter. “In 2020 this becomes effective in a way that changes retentions of the private sector. It also shows a vanishing federal share.”

The RAA model can show the impact of any proposed changes to the program. It also has the ability to show how the federal program would handle specific major events, including 25-ton truck bombs, chemical or biological events, industrial sabotage and port bombs, using information from two major catastrophe modeling firms, RMS and AIR. It also can tailor results to individual cities; car bombs in New York and Baltimore, for example, will generate different levels of loss.

The modeling firms’ data show “just how big some of the [nuclear, biological, chemical and radiological] events are,” said Scott Williamson, the RAA vice president who developed the model. “The workers compensation exposure is really very large.”

 

The evacuation dilemma: stay or go?

As of Saturday evening, Hurricane Dorian is making a big right hand turn, moving the storm’s threat north.
So now it seems Georgians and South Carolinians are facing the evacuation dilemma: stay or go?
I’ve been there. In 1992, Hurricane Andrew was heading arrow straight for the border between Broward and Miami-Dade counties. We lived a mile north of that.
We boarded the house up as best we could, moved our valuable stuff (a lamppost, a stereo, a rocker we bought on our honeymoon) into the downstairs bathroom, where it would be best protected. And we sat on our couch and cried. We knew what we owned was junk, but it was our junk. It was everything we had, and we knew we would never see it again.
Then we left.
Too many people take the chance and stay behind. Travelers Insurance surveyed people living in hurricane-prone states. The survey found:

  • Men (23%) were more likely than women (11%) to ignore a mandatory evacuation order.
  • Millennials (21%) were more likely to ignore an order than Gen Xers (16%) or Baby Boomers (11%).
  • People in the most cane-prone states (Florida, Louisiana, Texas’ Gulf Coast) were the stubbornest. Georgians, Alabamians, Mississippians, Virginians and North Carolinians were most likely to heed the order.

Back in 1992, my wife and I were lucky. Hurricane Andrew drifted south, and we returned to a home intact.

Even so, we made the right decision, and I’d urge anyone in the same position now to leave. After all, insurance can help you recover the stuff you’ve lost. But no one can replace you.

I.I.I. has some tips for what to do when a hurricane threatens.

Earthquakes: More links from Insurance Information Instititute

We posted this look at insurance coverage and earthquakes earlier today. More important links about earthquakes and insurance:

 

Ridin’ with the Waymos

In Phoenix last week, I did what insurance folks do in Phoenix. I hunted down an autonomous vehicle. I even took a picture:

The ‘W’ on the rear window stands for Waymo, the Google/Alphabet division that is probably the leader in developing driverless technologies.

Depending on which insurance thought leader you talk to, driverless vehicles will revolutionize our business or destroy it. I’m a skeptic: We will have driverless cars; everyone will use them, but not for another 20-plus years; and they will not be the death of auto insurance.

Google’s not-so-secret testing facility is just south of Phoenix, in Chandler. I couldn’t find it on Google Maps (it’s a secret, surprise surprise), but I could find Chandler City Hall. In an adjoining lot sat three or four bubble-headed Waymos. They are eerily identical Chrysler Pacifica minivans. Each is white. Each has the same bubble brain on the same spot of the hood and the same aqua-and-sea-green W logo. And, though they are white, the desert sun reveals no hint of grime.

I parked across the street and began my stake-out. Continue reading Ridin’ with the Waymos

Assignment of Benefits and Hurricane Loss Creep

We’re putting the finishing touches on a major research project on the assignment of benefits problem in Florida, a phenomenon in which a quirk in that state’s laws becomes a lever with which the less-than-scrupulous can supersize a claim settlement.

Our paper looks at how the problem has spread across lines of business – from no-fault insurance to homeowners to auto physical damage claims – and across the state – what started in South Florida has metastasized into the Interstate 4 corridor. Even far west on the Panhandle,  Escambia County (Pensacola) has had 346 assignment of benefits lawsuits this year through November 9. Five years ago it had 20.

Our research focused on the growth from one line of business to another and the spread of the problem over time. Artemis.bm has an interesting take on the knock-on effect from the way the problem is rolling through Hurricane Irma claims. Artemis is a website that is expert in alternative sources of insurance capital like catastrophe bonds, collateralized reinsurance and industry loss warranties.

That marketplace is fretting, in part, because after one major event, the capital that insured (or reinsured) that event is locked up. It can’t be used to insure against a second event until it is clear that it won’t be needed for the first.

And losses from Irma, a 2017 storm,  keep rising. In August, four insurers raised their loss estimates more than $1 billion.  The total  this month passed $11 billion, according to Florida’s Office of Insurance Regulation. More than 76,000 remain open.

What is causing the creep? Assignment of benefits issues are a prime suspect. Unscrupulous contractors dupe policyholders into letting the contractor settle directly with their insurance company – without letting the insurance company know. The insurer gets the news in the form of a bill to pay – never having had a chance to ensure the repairs were appropriate or done competently.

Disputes often go to court, where if the insurer loses, it must pay the plaintiff’s legal costs as well as its own.

As Irma’s loss estimates grow, reinsurers and alternative capital sources worry that the same thing will happen to Hurricane Michael claims. Michael struck six weeks ago, but the number of claims is accelerating.

Artemis cautions against overreacting to Irma’s situation, but notes that reinsurance markets may need to price for loss creep (read: charge more for reinsurance), which ultimately pushes homeowner premiums higher.

 

 

Leadership In All Its Forms

We’re excited here at the Insurance Information Institute about our annual Joint Industry Forum in January (details here) and our keynote speaker, Gen. Stanley McChrystal.

Gen. McChrystal is perhaps best known as commander of Joint Special Operations Command in Afghanistan and renowned for his ability to lead and his exploration of the puzzle that is leadership.

His latest book, “Leaders: Myth & Reality,” takes an intriguing look. Here is a snip from the Wall Street Journal review of his latest book, Leaders: Myth and Reality:

Gen. McChrystal … studies six peculiar pairs of leaders, searching for lessons: the irascible but brilliant creative entrepreneurs (Walt Disney and Coco Chanel); the geniuses (Albert Einstein and Leonard Bernstein); the zealots (French revolutionary Maximilien Robespierre and Jordanian terrorist Abu Musab al-Zarqawi); the heroes (15th-century Chinese admiral Zheng He and American abolitionist Harriet Tubman); the “power brokers” (New York’s Boss Tweed and Margaret Thatcher); and the reformers (Martin Luther and Martin Luther King Jr.).

Quite the dinner party, no? But it does speak to the truth that one can lead by inspiration (MLK) or by intimidation (Robespierre). What makes it all work is at the heart of McChrystal’s book and should make for fascinating listening at our event next January.

Sleep and insurance

I came across this from Swiss Re around 2 a.m., which helps explain why it caught my (sleepy) eye:

Consider these two facts: Firstly, two out of three man-made losses worldwide are due to human failure. Based on Swiss Re’s sigma research, this would mean that people trigger a loss volume of around USD 3 billion per year.

Secondly, life insurance generated premiums of USD 2.6 trillion in 2017. These two facts are linked because tired people make more errors and insomniacs are at a greater risk of dying earlier than would otherwise be the case.

That’s right – the insurance angle on sleep.

The lack of sleep is associated with increased rates of heart attacks, strokes, obesity and other diseases. Sleeping less can also contribute to the development of Alzheimer’s. And recent research found that chronic sleep restriction increases risk seeking behaviour.

If these trends change the loss patterns in property and casualty or mortality rates, this could have a multi-billion dollar impact on the insurance industry in the long run.

The lack of sleep has caused some high profile accidents, the most notable in my world being a New Jersey Transit train that  in 2016 crashed into Hoboken terminal because the engineer, suffering from sleep apnea, zoned out at a crucial moment. One woman died, dozens were injured.

Swiss Re posits that society, ever accelerating, robs us of ever more sleep. The less we sleep, the woozier we become. And the more errors we make.  (Our bodies wear out faster too, becoming susceptible to the maladies Swiss Re mentions above.)

A good dose of resilience helps here. New York area railroads are installing (by federal mandate) positive train control systems, which automatically stop trains in any sort of peril, including that of a tired engineer. The illustration above describes how the system works.

As for my own struggles – an e-book of white text on black background, and perhaps a cup of chamomile tea.

Auto Results: Ups and Downs

While the spike in auto accident rates appears to have eased in the past year or so, increases in claim size continue to present challenges. The folks at Gen Re weigh in:

Industry loss ratios suggest that many carriers are still playing catch-up. With ultimate liability loss ratios above 70% and combined ratios several points above 100%, the industry still has work to do.

Here at I.I.I. we note that for the first half of the year, liability loss ratios have fallen 3 percentage points for personal auto, to 64 percent, but risen 4 points for commercial auto, to 70 percent.  (This comes from NAIC data sourced from S&P Global Market Intelligence. Q3 data isn’t out yet.)

Physical damage loss ratios have fallen 5 percentage points, to 60 percent. Physdam results don’t get split between commercial and personal auto on financial statements until year-end, but the improvement is probably weighted to the personal auto side, since personal physdam is more than 90 percent of total volume.

So the landscape seems to be improving for personal auto but not so much for commercial . . .

. . . Which explains why the Council of Insurance Agents and Brokers reports that commercial auto rates are 7 percent higher than a year ago. It’s the 29th consecutive quarter (more than seven years) of rate increases.

Gen Re spotlights the following trends, most of which transcend personal and commercial lines:

  • Economic Recovery and Miles Driven – The improvement in the unemployment rate puts more cars and a worse mix of drivers on the road.

  • Driver Shortages – The trucking industry estimates a shortage of over 50,000 drivers by year-end, which leads to reliance on inexperienced drivers entering the industry.

  • Distracted Driving – Cognitive distractions and smartphone addiction have contributed to higher accident severity, with statistics often being underreported.

  • Drugged Driving/Marijuana – Studies from Washington, Colorado and Oregon find that accident frequency increased in the years after marijuana was legalized, and more states have since enacted similar legislation.

  • Escalating Repair Costs – Advances in vehicle safety systems, including cameras and sensors, have grown repair costs significantly.

  • Litigation/Jurisdiction – An active plaintiff’s bar, restrictive medical records laws, cost shifting, and litigation funding can drive up settlement values substantially.

We’ve seen similar trends at I.I.I. and highlighted them in this presentation last March in Chicago. The key graphic from that presentation is atop this article. We add speed to the mix, because as cars get more powerful, people drive faster.