Category Archives: Insurers and the Economy

Financial Risk Outlook

We head across the pond today, where the U.K. financial regulator has published its annual Financial Risk Outlook. Amid the continuing slowdown in the economy, the FSA’s 2008 report focuses on the risks arising from the events of the second half of 2007 and specifically warns firms and consumers of the risks that could impact them in a less benign economy. Among the risks identified as priority, the FSA notes that tighter economic conditions could increase the incidence or discovery of some types of financial crime or lead to firms’ resources being diverted away from tackling financial crime. An interesting point, given last week’s  revelation concerning a rogue trader who defrauded French bank Socià ©tà © Gà ©nà ©rale of $7.2 billion. Check out  further I.I.I. info on financial  and market  conditions for insurers.

Bermuda Influence

We have commented before on the key role insurance plays in the U.S. economy. Now, a study from the Association of Bermuda Insurers and Reinsurers (ABIR) highlights the critical role Bermuda insurers and reinsurers play in the U.S. economy. Key facts include that Bermuda firms: employ 9,600 Americans directly in the U.S. and indirectly generate an additional 95,045 jobs; paid $17 billion in property claims in 2005 for hurricane damage, representing 25 percent of total property damages covered; protect (via reinsurance) four out of 10 U.S. homes and businesses with property coverage; provide 40 percent of hurricane and earthquake reinsurance coverage in the U.S.; account for 26 percent of the total U.S. reinsurance market; generate as much as $96 billion of the gross output for the U.S. insurance market; and write 57 percent of the total U.S. crop insurance and reinsurance market. For further I.I.I. info on the insurance industry’s contribution to state, local and national economies, check out the updated edition of our online publication “A Firm Foundation†.  

Firm Foundation 2008

For those of you looking for tangible numbers telling the important story of how the insurance industry contributes to state, local and national economies, look no further. The I.I.I. has just released an updated edition of its online publication “A Firm Foundation†. The 2008 edition again shows the myriad ways in which insurance supports the economy, from offering employment and fueling the capital markets, to defraying the cost of catastrophes and providing financial security and income to individuals and businesses through the payment of claims. State-specific editions also highlight the industry’s role as a key player in a number of state economies, including California, Florida and Texas. The latest state edition focuses on New Jersey and can be accessed on the I.I.I. Web site at http://www.iii.org/static/statepdfs/newjersey.pdf.  

Auto Spend Down

Countrywide average expenditures  for auto insurance declined by 1.3 percent in 2005, the first drop since 1999, according to a September 2007 report from the National Association of Insurance Commissioners (NAIC). That’s good news for the many millions of drivers in the U.S. and underscores the point made by I.I.I. president Dr. Robert Hartwig in his recent commentary on the industry’s first-half 2007 results that falling insurance prices are lowering the cost of driving a car (as well as doing business and owning a home) for most Americans. In our annual auto insurance forecast the I.I.I. has highlighted the slowdown in auto insurance costs over the past several years. Fewer auto accidents due to better drivers and safer cars, crackdowns on fraud and advances in technology are some of the key reasons behind this trend. For state-by-state auto insurance cost comparisons, check out I.I.I.’s auto insurance facts & stats online.

Shareholder Suits Poised to Rise?

The overall trend of lower securities class action filings has continued through the first six months of 2007, but that trend may be reversing. That’s the upshot of a recent study from NERA Economic Consulting. The report notes that from 1998 through 2005 there were well over 200 federal class action filings each year, but filings dropped to 136 in 2006. While this general pattern has continued through June 30, 2007, NERA projects there will be 152 filings in 2007, a 12 percent increase on 2006. In the first half of 2007 there have been 76 filings, a 47 percent increase on the second half of 2006. A few other points of interest: the probability of a corporation facing at least one shareholder class action suit over a five-year period has declined to 6.4 percent; for the first time, all of the top 10 shareholder class action settlements exceeded $1 billion; eight of the top 10 settlements of all time were resolved in 2006/07, with Enron’s $7.2 billion settlement top of the list; excluding the top 10 settlements, average settlement values doubled to $23.2 million in the 2002-2007 period. As for future trends, NERA notes that recent turmoil in the subprime market has led to seven claims in the first half of 2007. For our take on the subprime issue, check out a new paper authored by Dr. Steven Weisbart, I.I.I. vice president and chief economist. Further commentary on the NERA study can be found at The D&O Diary, a blog focused on D&O liability issues.

Marine Matters

The annual gathering of the International Union of Marine Insurers (IUMI) took place in Copenhagen, Denmark this week. One of the featured speakers was I.I.I. president Dr. Robert Hartwig, who gave a presentation focused on issues relating to the global maritime industry. As well as marine insurance trends,  such as  premiums, pricing and underwriting performance, Dr. Hartwig spoke on the economic environment for marine insurers in the context of a relatively healthy global economy and a depreciating U.S. dollar. The important role China is likely to play as a trading partner in the 21st century was another focus of his discussion. Catastrophe loss activity, the energy market and terrorism and liability-related issues in the maritime sector were other topics of discussion. Access the full report on the I.I.I. Web site.  

Aging Infrastructure

As the recovery process continues following the Minneapolis Interstate 35W bridge collapse Wednesday night, many of us have given it more than a passing thought during our commutes via roads, rails, bridges and tunnels. Naturally the collapse is prompting questions concerning the quality of the nation’s transportation infrastructure. The insurance industry plays a vital role in helping individuals and businesses recover from an event like this. It underpins the economic security of individuals and businesses and helps sustain a number of related industries across the country. But maintaining and strengthening the existing outdated transportation infrastructure is a mammoth task that will require public and private input. For insurers, the potential liability exposure is enormous and certainly something to think about. Check out I.I.I.’s publication “A Firm Foundation† for further information on how insurers support the economy.

CA Quake Exposure Update

California is the second leading state for earthquakes, with an average of over 160 earthquakes per year. The majority of the most costly earthquakes in U.S. history occurred in California. So a new study indicating that recent reforms to the state’s  workers comp  system would result in a substantial drop in the potential WC losses arising from earthquakes is welcome news. Based on the assumption of 15.6 million employees working statewide, the Workers’ Comp Insurance Rating Bureau of California study found that the expected annual loss for the state’s WC insurers would be slightly over $180 million, or $11.56 per employee, compared with $418.7 million, or $26.93 per employee, in a similar 2002 study. The updated study also projects the total statewide WC loss in a one-in-100 year quake would be $4.2 billion, and $6.3 billion for a one-in-200 year event. Looking at the 20 counties with the greatest exposure, the study puts Los Angeles County at the top of the list, with 4.25 million employees. While the drop in costs is a positive development, we note that WC is a compulsory  coverage for most businesses  in CA and that earthquake exposure continues to be significant. Check out I.I.I. earthquake facts & stats, workers comp info  and how insurers support the CA economy online. Further info is also available from the Insurance Information Network of California  (IINC).  

Global Trends

The decision whether to operate purely on a domestic basis or to expand globally is a key one for many companies. Cultural, economic, political and regulatory differences can make for a challenging global environment. For those considering a global presence, the good news is that world insurance premium growth in 2006 accelerated, with total premium volume growing by 5 percent, according to a study from Swiss Re sigma. However, the same study indicates the world insurance outlook for 2007 is mixed. While healthy growth is expected to continue in life insurance, boosted by solid development of savings and pensions products, Swiss Re notes that premiums in non-life are expected to stagnate. Overall profitability is set to remain robust. As always, the findings of this annual world insurance report reflect contrasting growth between life and non-life sectors. For example, 2006 saw the life insurance market grow by 7.7 percent, while global non-life business grew by just 1.5 percent. There was also a sharp divergence in performance between the industrialized world and the emerging markets. For non-life the industrialized world saw marginal growth of 0.6 percent, while the emerging markets saw robust growth of 11 percent. For life insurance, industrialized countries produced growth of 6.6 percent, while growth in emerging markets was 21.1 percent. For further info check out I.I.I.’s international insurance site.  

Beyond Insurance

We’ve said before that our industry has a powerful story to tell in terms of the major contribution it makes to state, local and national economies, and a new report from the Insurance Research Council (IRC) highlights this very point. The study shows that property/casualty insurers held investments of more than $320 billion in municipal bonds at the end of 2005, helping fund the construction of schools, roads and hospitals and support a variety of other public sector activities. Nearly one-fourth (23 percent) of those investments funded education-related activities and projects, according to the IRC. Municipal bonds for projects involving public utilities made up 15 percent of the total combined value of all municipal bonds held by p/c insurers, while transportation-related bonds accounted for 12 percent. I.I.I. research dovetails with the IRC report, showing that the industry as a whole (p/c and life) held some $3.5 trillion in stocks and bonds in 2005. For further information on the myriad ways in which insurance supports the economy, check out our online publication “A Firm Foundation†.