General Liability Losses and Expenses to Rise

Just how the recession will affect different lines of insurance is a common topic of discussion these days. A new study by Conning Research and Consulting suggests that the general liability line of insurance will see accelerating growth in losses and expenses in the next couple of years due in part to the recession. According to Conning, the general liability insurance line has produced industry-wide combined ratios below 100 percent for the past two years, but this profitable underwriting performance is unlikely to continue. While premium reduction is expected to moderate and even see a modest increase by 2010, Conning says losses and expenses are forecast to grow more quickly, with combined ratios expected to reach 107 percent by 2010. A press release quotes Stephan Christiansen, director of insurance research at Conning: “History has shown us a cyclical increase in general liability losses in periods following recessions. At the same time, longer term secular trends point to an increase in both smaller claims and larger mega risks.† To meet the challenges to profitability Conning suggests insurers will need to monitor trends in costs – particularly losses – and demand. Longer term, the best prospects for general liability insurers may come from an expanding specialist focus. Check out I.I.I. facts and stats on litigiousness.

Securities Class Action Settlements Decline: Reversal Expected

An absence of approved settlements in excess of $1 billion in 2008 contributed to a more than 50 percent decline in the average settlement value of federal securities class actions to $31.2 million in 2008, from $62.7 million in 2007. According to an annual report by Stanford Law School and Cornerstone Research, there have been nine settlements in excess of $1 billion over the previous 10 years and the third largest securities class action settlement in history (Tyco International) was reported in 2007. The report found that the total number of settlements also declined by a more modest 10 percent to 99 in 2008, from 110 in 2007. However, future damages are expected to rise as increased litigation activity arising from the financial crisis works its way through the judicial system. A key takeaway from the report is the discussion on settlements of pending actions against TARP recipients. As it explains, these will raise novel public policy issues: “Taxpayer dollars will, one way or another, fund these settlements. This simple fact could set off a debate about whether taxpayers should pay for these settlements, and about the effectiveness of the class action litigation mechanism altogether.† An interesting point.  

Top Insurance Complaints 2008

Delays (19.1 percent), denial of claims (18.4 percent) and unsatisfactory settlement offers (14.2 percent) were once again the top three reasons consumers filed formal complaints against their insurance companies in 2008, according to data just released by the National Association of Insurance Commissioners (NAIC). Premium/insurance rating issues (4.7 percent) and policy cancellations (4.0 percent) rounded out the top five, regulators said. By type of coverage, the top three complaints in 2008 were: accident & health (36.9 percent); auto (36.7 percent); and homeowners (11.8 percent). The good news is that the total number of complaints declined for the fifth consecutive year in 2008. A total of 195,669 confirmed consumer complaints on insurers were reported via the NAIC’s Complaint Database System (CDS) in the 2008 calendar year. States voluntarily report “closed† complaints via the CDS. A closed complaint is a complaint that has been investigated and resolved to the satisfaction of the state or jurisdiction in which it is filed.  Ã‚  

American Dream on Pause

While the American dream is still alive in 2009, sweeping changes in the economy have led to a reevaluation of priorities for most Americans. The third annual MetLife study finds that amid the economic crisis individuals are placing a premium on financial protection and stability. Across generations, eight in 10 say having a personal safety net will be more important this year than last. However, nearly 74 percent admit to not having an adequate safety net in place. MetLife found that Americans count auto insurance (60 percent), health insurance (57 percent), life insurance (46 percent), homeowners’ insurance (45 percent), a retirement savings plan such as a 401(k) (40 percent), and cash on hand for 3-6 months (35 percent) as the top six components of their safety net. Among those who do not feel they have adequate protection, nearly two-thirds (62 percent) desire cash on hand for 3-6 months as the product they would most like to have in their safety net. The MetLife study also reveals that some 84 percent of individuals believe the U.S. economy is heading in the wrong direction, up from 64 percent in November 2006. More than nine in 10 believe that it will take at least 12 months for the economy to recover. To help put your financial house in order, take an inventory of your financial situation with free software from the  I.I.I. Check it out at http://www.myfinancialhouse.org/

Market Turn Led by Major Insurers

Online insurance exchange MarketScout said the average property/casualty rate decrease was 8 percent in February 2009, compared to a double-digit rate decrease of 14 percent a year ago. According to its analysis a slow moderation in rate decreases continues as insurers evaluate their 2008 results and the impact of a slowing economy in 2009. MarketScout founder and CEO Richard Kerr observed: “Four large insurance companies are drawing a line in the sand and demanding rate stabilization. If it sticks, we will see a further flattening of reductions very soon.† General liability and business owners policies (BOPs) experienced the largest rate decreases at 9 percent. The line experiencing the smallest rate decrease was D&O liability (down 4 percent). Large accounts ($250,000-$1 million premium) saw an average rate reduction of 9 percent while small accounts (up to $25,000 premium) were down 8 percent, according to MarketScout. Check out latest I.I.I. information on the industry’s financial outlook.  

Cheers to Lotto Win etc

It would be remiss of us to end the week without giving a resounding cheer to the 10 Chubb colleagues who hit the jackpot this week with a $216 million (or $140 million one-time payout) Mega Millions lottery win. Now what are the odds of that? The lucky 10 have been working in Chubb’s IT department in Whitehouse Station, New Jersey from seven to 30 years.  We’re happy for their win. And finally a blog update: those of you who read us regularly will be aware that you can now sign up to follow us on Twitter. Just click on the Twitter button on the lower right-hand side to begin tweeting. Another way to follow the blog is via my network on LinkedIn – again click on the button on the right to join my network.  

Wyeth Decision: Impact

Yesterday’s widely-anticipated decision by the U.S. Supreme Court in Wyeth v. Levine on the issue of federal preemption has huge significance for product liability litigation. In a 6-3 opinion, the Court decided that federal approval does not preempt consumer complaints in state courts, effectively opening the floodgates to a wave of potential product liability tort suits against pharmaceutical companies at the state level. We’re not lawyers, but a variety of commentaries by others hint at the significance of this decision for the broader business community, including insurers. Among many others, check out: the Wall Street Journal Law Blog, an editorial opinion in the New York Times, SCOTUSBLOG, and the BLT: the blog of Legal Times. Check out our earlier postings on preemption here and here.

Energy Market: Uncertain Times

Is Gulf of Mexico windstorm risk still an insoluble risk management problem? This is the question posed in the latest annual Energy Market Review from Willis. The report notes that fallout from a major Gulf of Mexico windstorm is once again casting a shadow over the energy insurance market in the wake of Hurricane Ike. A full consensus has yet to emerge as to the best way to offer the product, and in the meantime the market for Gulf of Mexico windstorm risk is more confused, volatile and expensive than ever before. Meanwhile, the energy industry is faced with a changing world, Willis says. The financial market meltdown and global economic recession have led to rapidly cooling commodity prices and left the energy industry now facing a very different challenge of maintaining profitability in the face of plummeting demand. As a result energy insurers must find new ways of making up for income shortfalls and sharp decreases in investment incomes in 2008. An increased focus on underwriting profitability is the inevitable result. However, any drive towards a harder market is being tempered by the fact that with little or no withdrawals from the market in January 2009, capacity levels for energy risks have actually increased by about 5 percent from last year, according to Willis. A big question mark therefore hangs over 2009: will competitive pressures take their toll on market discipline as the year progresses? Check out I.I.I. facts & stats on the 2007 and 2008 Atlantic  hurricane seasons.

D&O Costs Skyrocket

Directors’ and Officers’ (D&O) liability insurance costs for financial institutions increased 50 percent in the fourth quarter of 2008 compared to that of 2007, according to the Quarterly D&O Pricing Index from Aon Corp’s Financial Services Group. This is the first time year-over-year price increases were found in over five years. Aon said a number of unprecedented events contributed to the significant price increases, including: reports of more than 1 million job losses in Q4 2008; Bernard Madoff’s alleged Ponzi scheme; a substantial decline in major stock indices; and federal securities class action lawsuits activity in 2008. Aon’s D&O Index also shows that the average price for $1 million in coverage limits increased 3.15 percent from Q4 2008, compared to Q4 2007. This is the first time since 2003 that price increases in the financial sector have been significant enough to move the entire index. So will there be more? “In the short term, we expect to see D&O pricing for the financial sector continue to rise,† said Mike Rice, managing director of Aon’s Financial Services Group and author of the Index in a press release. “It is possible, however, that a tough underwriting environment could emerge for all public companies as the economy continues to negatively impact both financial results and stock prices.†Ã‚  

Winter Storm Focus

With a major winter storm barreling out of the Southeast and up into the Northeast United States overnight, it’s a good time to revisit some winter storm facts and stats. According to Insurance Information Institute (I.I.I.)  research, winter storms result in about $1 billion in insured losses annually and are the third-largest cause of catastrophe losses, after tropical cyclones and tornadoes. Melting snow can inflict significant damage to property. From 1988-2007, winter storms resulted in more than $24 billion in insured losses. Winter storms also  account for a large proportion of homeowners claims each year. In 2006, water damage and freezing accounted for approximately 20 percent of all homeowners insurance claims in the country. For homeowners preoccupied with the economy, the good news is that standard homeowners policies cover property damages caused by burst pipes, ice dams, wind and hail, and damages from weight of ice or snow. However, property damage caused by flooding (water that comes into the home from the ground up) is  typically covered by a separate flood insurance policy. Check out I.I.I.  flood insurance  facts & stats.  

Latest research and analysis