All posts by James Lynch

In Japan, the public bears most of the risk of earthquakes

The devastation unfolding in Japan will likely generate the largest insured losses for any earthquake, but by far the biggest part of the tab will fall on the Japanese people.

Less than half of residences in the country carry earthquake insurance, according to the 2010 Annual Report of the Japan Earthquake Reinsurance Co. (A pdf in English is available here.)Â   The company, usually called the JER, protects all residences that purchase earthquake insurance.

The standard dwelling policy in Japan does not cover earthquake, but customers can choose to add the coverage. But earthquake insurance covers only up to half the losses that a standard residential policy does.

So a home that is covered for fire losses of, say,  ¥20 million (US$245,000), only has  ¥10 million (US$122,000) cover for earthquake. (Earthquake cover includes tsunami and fires caused by the earthquake.) Personal property coverage is similarly pro-rated.

Claimants recover 5%, 50% or 100% of the earthquake limit, depending on whether the loss is considered a partial loss, a half loss or a total loss. Early reports showed partial losses far outnumbering the other types, but claims are continuing to come in.

Japanese companies offer earthquake cover, but the premium – determined by zone by the Non-Life Insurance Rating Organization of Japan – is routed to the JER. To protect itself, the JER purchases its own reinsurance. JER’s main reinsurer is the Japanese government, but private reinsurers are also involved.

The highest payout the JER contemplates is  ¥5.5 trillion, or $67 billion. That’s well above early estimates of the insured loss, which top out at $35 billion, according to the cat modeling firm of AIR. AIR’s estimate excludes tsunami losses but includes losses to commercial buildings, which are not reinsured by the JER.

Should the maximum loss occur, JER is responsible for the first $1.4 billion. Of the next $65 billion, the Japanese government, would pay around 80%, with private insurers and the JER roughly splitting the rest.

If the loss exceeds JER’s  ¥5.5 trillion limit, the company could pro-rate its payments downward.

I.I.I. is continually updating its web page devoted to the disaster.

Earthquake strikes Japan, triggers tsunami

The tragic earthquake and tsunami that hit Japan earlier today have unleashed a rapidly unfolding catastrophe, as the tsunami crosses the Pacific and as casualty and damage reports mount. The basics, via the U.S. Geological Survey, which monitors earthquake activity worldwide:

  • Magnitude: 8.9 – the largest earthquake since the Chilean earthquake last year, which registered 8.8. Last month’s quake in New Zealand registered 6.3.
  • Date/time: Friday, March 11 at 2:46 p.m. local time. (12:46 a.m. Eastern Standard Time)
  • Depth: 15.2 miles. Shallower earthquakes cause more damage. Last year’s Chilean quake was 22 miles down. The New Zealand quake was   shallow, just 3 miles underground.
  • Location: 38.322Â °N 142.369Â °E – 80 miles east of Sendai, Japan and 231 miles northeast of Tokyo.

I.I.I. has assembled a presentation and a web page on the earthquake and its potential impact on the insurance market. I.I.I. has more information on earthquakes and tsunamis here.

Teen Drivers: Put. The. Phone. Down.

I first got interested in distracted driving one sunny morning when my bored children started counting the number of drivers texting on the New Jersey Turnpike.

They only got to seven or eight, but traffic was light, and it was the New Jersey Turnpike, for crying out loud, so all those texters were going something like 70 miles an hour – unless they were in a hurry.

The risks these drivers were taking shocked me, but I’m behind the times. Two-thirds of Americans surveyed by Consumer Reports National Research Center had seen a driver texting within the past 30 days.

Teen-agers, glued to their media as they seem to be, are an even greater risk. In the survey, younger drivers were less likely to see texting or talking on cellphones while behind the wheel as a danger. Sixty-three percent acknowledged talking on a cellphone while driving, while 30 percent said they had texted.

So, as the Washington Post reports, the U.S. Department of Transportation and Consumer Reports have teamed up to get teen drivers to put their phones down.

Consumers Union has devoted a chunk of its famous April car-buying issue to the distracted-motorist phenomenon, including product reviews of devices meant to address the problem.

The government’s web site devoted to the overall problem,, features videos of young drivers dead because of distracted driving, including this one about the brother of Loren Vaillancourt, Miss South Dakota:

The web site also has a brochure (pdf) directed at parents and educators. Its tips include: Talk to your teen, set ground rules, sign a pledge, educate yourself and spread the word.

But the first tip is: Set a good example – something I hope my kids can see next time we’re on the Turnpike.

I.I.I. has more information on the problem here.

EU bans gender-based insurance rates

In most of the United States, men pay more for auto insurance than women do, and with good reason: Men cost more to insure – especially young men.

The same was true in much of Europe, until last week.

Male drivers didn’t get any better. But the European Court of Justice banned gender-based insurance rates, saying they were incompatible with Europe’s Fundamental Charter of Rights. That document prohibits “any discrimination based on any ground such as sex, race, colour, ethnic or social origin, genetic features, language, religion or belief, political or any other opinion, membership of a national minority, property, birth, disability, age or sexual orientation.”

In the past, insurers relied on a 2004 directive that recognized the strength of the evidence for gender-based rates. The average claim for an 18-year-old male in the U.K. totals  £4,400 ($7,160), vs.  £2,700 ($4,390) for an 18-year-old female.

The net effect: Women will be subsidizing men for auto insurance. One British insurer estimated that women under 25 years could pay 25% more per year – perhaps  £400 ($650).

The ruling affects other types of insurance, too. Women live longer, so they traditionally paid lower rates for life insurance. (The insurer could earn more investment income off the premium while waiting for the woman’s demise.) So women will see life insurance rates rise, perhaps by 20%.

Women will benefit, though, with annuities. Now, women receive lower payouts than men, as they live longer in retirement.

All this was analyzed by the Association of British Insurers (ABI) well before last week’s ruling. (A pdf is here.)

Overall, rates could end up higher than they are now. As the ABI notes, the ruling creates uncertainty, and the less certain the environment, the more insurers are likely to charge.

That will be tough to take in the U.K., where the average auto insurance rate has almost doubled in the past three years, to  £1,332 ($2,167), according to the Independent.

In the U.S. personal auto market, sex “is still taken into account as part of complex formulas,” and plays a big role with younger drivers in particular, a public policy specialist at the National Association of Mutual Insurance Companies told the Wall Street Journal. But it has become less important as insurers have begun turning to credit scores to help peg rates.

Of course, credit scores are not without controversy, an issue I.I.I. has explored frequently.

The ruling takes effect in December 2012.

No D&O at Berkshire Hathaway

Warren Buffett created a bit of a stir last week when he acknowledged in his folksy annual letter to shareholders that the company he built, Berkshire Hathaway, does not purchase directors and officers insurance for its directors.

D&O insurance protects top management in case of negligent acts or or misleading statements that cause the company to be sued. (I.I.I. explores the basics of D&O here.)

In the letter, the Sage of Omaha said the lack of insurance helped “the directors who represent you think and act like owners.”

They receive token compensation: no options, no restricted stock and, for that matter, virtually no cash.   .   .   . If they mess up with your money, they will lose their money as well.   .   .   . Our directors, therefore, monitor Berkshire’s actions and results with keen interest and an owner’s eye.

The insurance trade press perked up, with both Business Insurance and Insurance Journal headlining the fact that Berkshire’s directors “go bare.” That’s in no small part because Berkshire is a significant player in insurance (GEICO) and reinsurance (National Indemnity and General Re). Nearly 40 percent of $19 billion in before-tax income last year came from insurance.

At D&O Diary, though, Kevin LaCroix was less impressed:

Though Buffett highlights this approach to D&O insurance as a corporate strength, don’t expect this practice to catch on widely. No other company can offer an indemnification commitment as substantial as Berkshire’s. Nor could any insurer make an insurance commitment as financially substantial as Berkshire’s indemnification undertaking. Buffett’s views on D&O insurance reflect a unique set of circumstances.

I asked Kevin about this, so he explained further in an email:

D&O insurance provides companies a way to finance their indemnification obligations and to meet those obligations if the company becomes insolvent. Berkshire is certainly not going to become insolvent, and it has no need to resort to third party financing of its indemnification obligations. Moreover, any third party to which it might resort to finance that obligation would be less well capitalized that Berkshire, so the transaction wouldn’t even make economic sense.

In other words, Berkshire is big enough to self-insure any D&O claims that may come its way.

The Wall Street Journal wraps up reaction to Warren’s letter.

Earthquake insurance: Effective when purchased

New Zealand’s earthquake last week occurred almost exactly a year after a massive quake struck near Valparaiso Concepcion, Chile. The anniversary of the latter prompted Aon to publish a retrospective, all of which points up the importance of having earthquake insurance. (h/t Risk Market News)

Both were major events, with the cat modeling firm AIR estimating New Zealand’s losses between $3.5 billion and $8 billion. Losses from the Chilean quake top $8 billion, according to Aon.

Despite significant losses from the quake, the Aon report pointed to important successes in the aftermath of the Chilean event. The insurance system worked effectively. No insurers faced insolvency or bankruptcy. Claims have been handled efficiently – 95 percent of residential claims and 80 percent of commercial claims have been settled. Reinsurers – which sell protection so insurers can hedge their risk – filled their role well.

But challenges remain. Many personal-lines claimants did not understand their policies had deductibles. The sheer volume of claims (nearly 250,000) created bottlenecks, especially since government regulations require registered claims adjusters. There were issues in which different policies had overlapping coverage. And the market lacks a standard policy, complicating the settlement of claims.

Aon also praised the regulatory environment. Regulators require insurers to track their earthquake exposure and purchase reinsurance accordingly, which in this case helped guarantee that insurers could meet their obligations.

And lenders require earthquake insurance on mortgaged property. As a result, 24 percent of residential properties have earthquake insurance. That’s less than New Zealand, where all residential insurance policies include a surcharge for up to $100,000 coverage (in New Zealand dollars – about $75,000 U.S.) in the goverment’s earthquake pool. But it’s twice the take-up rate seen in California.

Last year, a I.I.I. white paper on the state risk pool, the California Earthquake Authority, noted “the percentage of policyholders buying the coverage appears to rise and fall depending on how long ago the last significant earthquake occurred.” In 1996, about one-third of residential policies in the state purchased earthquake cover. Today, 12 percent do.

The out-of-sight, out-of-mind problem isn’t unique to California. Last week, Missouri’s Department of Insurance noted similar drop-offs in St. Louis and counties near the New Madrid fault, site of several massive earthquakes 200 years ago. I’ve put all the information into a chart:

take up rates_4

I got information on California’s take-up rate here.

You can see that California’s take-up rate is considerably lower than the selected Missouri locations. But all of them are declining.

Meanwhile, Missouri’s neighbor to the south, Arkansas, had two sets of widely felt earthquakes in February, according to the U.S. Geological Survey, and California had a notable shake Jan. 8. Thankfully, all were minor.

New Zealand earthquake could be biggest insured disaster since 2008

New Zealand’s second earthquake in five months is a human tragedy – with more than 100 confirmed dead so far, and more than 200 missing. It could also be the worst insurance catastrophe since Hurricane Ike hit Texas in 2008.

nz quake footprintGuy Carpenter published the attached map showing the epicenter and shake zone from this week’s earthquake.

The cat modeling firm AIR estimates insured losses between US$3.5 billion and US$8 billion. JP Morgan estimates $12 billion.

In comparison, Ike cost $12.6 billion in the U.S. alone, and $20 billion including all Caribbean basin countries, with all numbers updated for inflation. Last year’s earthquake in Chile totaled about $8 billion in insured losses.

This week’s earthquake was technically an aftershock from a September earthquake, though all parties appear to be treating them as separate events in terms of insurance coverage. AIR’s original estimate for that event was $2 billion to $4.5 billion. Actual industry losses have come in at the top of that range.

It’s important to note AIR’s estimates exclude demand surge – the phenomenon in which construction costs soar because of shortages in labor and raw materials.

This week’s earthquake was considerably smaller than September’s – magnitude 6.3, vs. 7.1, according to the U.S. Geological Survey, which monitors worldwide seismic activity. But the recent event’s epicenter was just three miles from Christchurch, a city of 400,000 and was relatively shallow, just 2.5 miles beneath the earth’s surface.

New Zealand insures earthquake and other natural disasters through a government-related Earthquake Commission, according to a I.I.I. press release. In existence since 1945, it has built up assets of more than $4 billion in U.S. dollars. It also purchases reinsurance in the private worldwide market, New Zealand Prime Minister John Key told that country’s National Business Review.

A I.I.I. list of the largest natural catastrophes worldwide can be found here.

Lights! Camera! Risk control!

Oscar night creeps ever closer – it’s Sunday – so the drama builds for the magic moment when the envelope opens and we find out which movie is Best Picture.

In the insurance version, though, the drama is over – Fireman’s Fund earlier this month named Salt the riskiest movie of 2010. The Fund insures 80 percent of Hollywood productions, notes the Wall Street Journal, so can be considered an authority on the topic.

Salt tells the story of a CIA agent -Angelina Jolie – who goes on the run after being accused of being a Russian spy. But this is Hollywood, so when she goes on the run, she does a lot more than run – lots of chases, crashes, fights and general femme fatale-ing.

And here’s why it was so risky: Ms. Jolie, reportedly paid more than $20 million for the role, did her own stunts. To get an idea, here’s the action-packed trailer:

So what you see the character Salt do, Ms. Jolie, a daredevil mother of six, actually did:

  • She jumps off a highway overpass! (at 1:19 of the trailer)
  • She leaps from a moving subway! (1:28)
  • She dyes her own hair! (1:25)

And had she, say, broken a leg, it would have been a bigger deal than your typical workers comp claim. Production itself could slow down or stop, but production costs would roll on.

Companies insure against actors’ injuries by purchasing cast coverage, which basically pays for production costs if an important artist is hurt or killed. Other typical coverages protect against loss of props, damage to property while on location, and – my favorite – negative coverage, which involves faulty filming materials, not tabloid stories.

The riskiest scene – not in the trailer – involved filming the actress on a building ledge on a gloomy, windy day. The Fund’s Paul Holehouse (a senior risk specialist) told us: The wire work and climbing outside of the New York building required a massive rigging effort to protect the historical buildings and create a safe catch area with proper flying harnesses.

For fights and scenes with weapons, extra care has to be taken to protect the actor’s face. One unducked punch could close up shop.

On tricky shoots, underwriters work with the creative types to minimize risk while achieving the director’s artistic vision.

Companies seek stronger shelter from D&O storm

Concerned about potential litigation and regulatory investigations, a growing number of companies are seeking more directors and officers (D&O) coverage, according to a Towers Watson survey released today.

D&O insurance protects the directors and officers of an organization against losses in case they are sued for their actions overseeing the organization. According to the survey, 21% of respondents are increasing policy limits, vs. 12% in the prior survey, in 2008. Meanwhile, only 3% seek lower limits.

“Clearly, companies are reacting to the fact that D&O liability exposures facing directors and officers are arguably at an all-time high,† said Larry Racioppo of the executive liability group in Towers Watson’s brokerage business. “Insurance buyers continue to be threatened by an ever-expanding litigation environment and have an increased awareness over regulatory issues they might encounter.†

Here’s what might be on their minds:

Three separate surveys follow class actions and similar filings as a way to benchmark D&O trends – Advisen, NERA Economic Consulting and Stanford Law School/Cornerstone Research. (We touched on NERA’s results a couple of months ago.) They all have their own methodologies, so while the numbers don’t synch up, the overall trends do. They show:

  1. The number of federal securities class actions increased slightly in 2010. NERA estimated an 8 percent increase, while Stanford/Cornerstone pegged it at 5 percent. (Advisen’s counting method makes an apples-to-apples comparison difficult.)
  2. Settlement values are rising. NERA, for example, set the median settlement at $109 million, passing the previous record of $80 million in 2006.
  3. The number of filings in the second half of the year accelerated. Stanford/Cornerstone, for example, counted 104 filings in the second half of the year, 44 percent more than the first half.
  4. Filings related to the credit crisis fell. Filings related to mergers and acquisitions rose, as did shareholder derivative lawsuits (actions brought against the board by shareholders, on behalf of the company). Advisen counts 335 M&A lawsuits last year, vs. 107 in 2006. Two years before that, there were 18.

Plaintiff attorneys also are aggressively pursuing M&A cases, recognizing that “companies often are willing to quickly settle suits that threaten to hold up a deal,† Advisen said in a separate analysis of the M&A phenomenon.

Stanford Law Professor Joseph Grundfest looks at Cornerstone’s M&A numbers and added : “Plaintiff lawyers are scrambling for new business as traditional fraud cases seem to be on the decline. There is little reason to believe that this trend will reverse or slow down; if anything, plaintiff lawyers may well bring an increasing percentage of these claims in federal court in an effort to control the litigation and to share in any fees that might result.†

The studies also report that securities litigation has been rising outside the United States in recent years. That may help explain why, in Towers’ survey, nearly half (47%) of the international companies surveyed purchased a local D&O policy in a foreign jurisdiction. Two years earlier, only 2% had.

The larger the company, the more likely they were to buy.

As always, the go-to site for D&O developments is Kevin LaCroix’s D & O Diary. His analysis of last year’s numbers appears here.