With Florida and Louisiana regulators declining to certify the use of five-year models in the underwriting process, catastrophe modelers must be feeling a little like Albert Einstein who once observed of the disconnect between science and the world beyond the lab: Ã¢â‚¬Å“Science is a wonderful thing if one does not have to earn oneÃ¢â‚¬â„¢s living by it.Ã¢â‚¬ Of course catastrophe models have come under a lot of scrutiny since the record hurricane loss seasons of 2004 and 2005, and itÃ¢â‚¬â„¢s important to recognize that they are just one of the many tools that help insurers, reinsurers and risk managers more accurately analyze, write and price for catastrophe risk. The output from a given catastrophe model is also only as good as the data embedded in it and subject to the different variables of an individual insurerÃ¢â‚¬â„¢s book of business. That said, todayÃ¢â‚¬â„¢s models are increasingly sophisticated and constantly being fine-tuned to incorporate the latest technologies and data. Models have also been developed for a wide range of catastrophic risks beyond hurricanes, including earthquakes, tornadoes, floods and terrorism. The use of computer technology in the underwriting process is not new, and in the case of catastrophe models thereÃ¢â‚¬â„¢s no doubt that with this tool, underwriters are better placed to more accurately analyze and evaluate catastrophe risk going forward. But given recent concerns, clearly there is more to be done in better explaining how the models actually work.Ã‚ Check outÃ‚ I.I.I.’s catastrophe modeling update.
So, the 2007 hurricane season is upon us. And on the eve of the official start, Colorado State UniversityÃ¢â‚¬â„¢s Tropical Meteorology Project released its latest forecast. Similar to its earlier prediction, the call is still for 17 named storms, 9 hurricanes, 5 of which will be intense (Category 3-4-5). The probability of a major hurricane hitting the U.S. coastline is at 74 percent, while there is a 50 percent probability of a major hurricane hitting the East Coast, including the Florida Peninsula, and a 49 percent chance of the same for the Gulf Coast. All these figures are well above the long-term averages. As the season progresses, check out I.I.I.’s catastrophe update and flood insurance facts for further information. The vital role played by the industry in defraying the cost of catastrophes is also detailed in the InstituteÃ¢â‚¬â„¢s online publication Ã¢â‚¬Å“A Firm FoundationÃ¢â‚¬ .Ã‚ The I.I.I.’s disaster information Web site is another useful resource.
While weÃ¢â‚¬â„¢re on the subject of regulation, today weÃ¢â‚¬â„¢re responding to a readerÃ¢â‚¬â„¢s request to blog about the bill introduced on Capitol Hill last week by Republican Senator John Sununu and Democratic Senator Tim Johnson. The National Insurance Act of 2007 would create an optional federal charter for insurers. The measure is similar to a bill introduced by the two Senators in April 2006. Those of you familiar with I.I.I. will be aware that the Institute does not lobby, leaving that role to our advocacy trade colleagues. The state system of insurance regulation in the U.S. began when the Constitution gave Congress the right to regulate commerce among the states. However, the question of state versus federal regulation has been bubbling ever since. As with many of the issues we tackle, this is one that elicits a range of viewpoints and there are pros and cons of both systems. So, with that in mind we welcome your comments and tip you to the I.I.I.Ã¢â‚¬â„¢s online update on modernizing insurance regulation.Ã‚
Insurers around the world are slipping on one major banana skin that is costing them dearly, according to the results of a new survey from London-based think tank Centre for the Study of Financial Innovation (CSFI) and PricewaterhouseCoopers. That is: too much regulation. More than 100 respondents to the 2007 survey say that excessive regulation is endangering the industry by loading companies with costs, distracting management and creating barriers to competition and innovation. This finding is linked to concern about growing political interference, particularly in markets where governments regulate insurance products and prices. Apparently the view is widespread, with responses from 21 countries showing it to be a major issue in North America, Europe, South Africa and the Asia pacific region. Other banana skins high on the list for property-casualty insurers include natural catastrophes and climate change. The main risks facing the life industry include growing human longevity and the soundness of assumptions underlying the pricing of life policies. What are your top insurance banana skins in 2007? Check out I.I.I. info on rates and regulation.
As public health officials in the U.K. continue to investigate an outbreak of the lesser strain of Avian flu (H7N2) on a farm in north Wales, we bring you I.I.I.Ã¢â‚¬â„¢s update on this topic from our resident bird flu expert and economist Dr. Steven Weisbart. His latest report indicates that some 186 people have died from the H5N1 flu virus and 307 have been confirmed infected since December 2003, the start of the current outbreak. Further, in the four months since his January 30, 2007 update (see ourÃ‚ Jan 31Ã‚ posting), 37 more people have been confirmed infected with Avian flu, of which 22 have died. In 2007 alone there have been 44 infections and 28 deaths (64 percent). This is roughly the same pace of infections and deaths as in 2006 (69 percent death rate). Human infection is still believed to be mainly from birds to humans, basically from very close contact with infected chickens and similar birds in home environments. Virtually all of the cases continue to be under 40 years old. There are still no cases of birds or people in the U.S. with this flu virus.
With just over a week until the start of the 2007 hurricane season, the forecast put out by the National Oceanic & Atmospheric Administration (NOAA) is another reminder that an above average season is on the cards and that we should prepare for the worst. According to NOAA, there will likely be 13 to 17 named storms this season, with seven to 10 becoming hurricanes. Of those, three to five hurricanes are likely to grow into at least Category 3 storms. This means they will have winds of 111 to 130 mph and possible storm surges ofÃ‚ 9 to 12 feet, NOAA notes. Bear in mind an average Atlantic hurricane season brings 11 named storms, of which six become hurricanes, including two major hurricanes. The NOAA forecast is similar to the one released by Colorado State UniversityÃ¢â‚¬â„¢s Tropical Meterorology Project (see our April 4 posting) that also predicted 17 named storms andÃ‚ nine hurricanes,Ã‚ five of which will be intense. Check out I.I.I.Ã¢â‚¬â„¢s catastropheÃ‚ update and hurricane stats for more information.Ã‚ Ã‚ Ã‚
WeÃ¢â‚¬â„¢re delighted to report on the three insurance leaders announced by the International Insurance Society (IIS) as the 2007 winners of the Insurance Hall of Fame awards. Two of the three, Robert Clements and Frederic Reiss (1924-1993), are renowned as pioneers in the alternative risk transfer (ART) field. Mr. Clements, now chairman of insurance broker Integro as well as interim chairman and co-founder of post-Katrina Bermuda start-up Ironshore Insurance Ltd, is considered the father of the Bermuda insurance market where he led the development of ACE and XL. Frederic Reiss, founder of the International Risk Management Group, coined the term Ã¢â‚¬Å“captive insurerÃ¢â‚¬ and was the first person to popularize the insurance captive movement. In doing so he helped establish Bermuda as a center for captive domicile companies. Last but certainly not least, the third 2007 Hall of Fame inductee is JosÃƒ © Manuel MartÃƒ nez, chairman and chief executive officer of MAPFRE, SpainÃ¢â‚¬â„¢s largest insurance group and now the largest non-life insurer in Latin America. During his tenure, MAPFRE evolved from a local market leader to a large international group. For further info, check out a recent presentation on the worldÃ‚ of captive insuranceÃ‚ fromÃ‚ I.I.I. president and chief economist Dr. Robert Hartwig. Also, the I.I.I.’sÃ‚ International Fact Book.
ItÃ¢â‚¬â„¢s been a big week in the Big Apple for climate change, with a number of key initiatives unveiled at the C40 Large Cities Climate Summit 2007. First, the announcement of a major partnership between 16 of the worldÃ¢â‚¬â„¢s largest cities, five banks, four multinationals and the Clinton Foundation to retrofit buildings in urban areas and reduce carbon emissions. Funded by a hefty $1 billion from the banks itÃ¢â‚¬â„¢s hoped the use of more energy efficient products in retrofitting existing buildings will lead to energy savings of 20 to 50 percent. A second initiative announced yesterday will see Microsoft team up with the Clinton Foundation to develop online tools to help cities more accurately monitor, compare and reduce their greenhouse gas emissions. These new software tools, available by year-end, will be developed in conjunction with the ICLEI Ã¢â‚¬“ Local Governments for Sustainability, and the Center for Neighborhood Technology. The idea is for Microsoft to develop a single Web solution to allow cities to clearly understand their environmental footprint so they can improve their energy efficiency and reduce carbon emissions. An interesting step. For our industryÃ¢â‚¬â„¢s part, the Summit included a speech by Swiss ReÃ¢â‚¬â„¢s Roger Ferguson, who spoke of a public/private partnership approach to climate change.Ã‚
A hearing down on Capitol Hill today titled Ã¢â‚¬Å“Liability Reform and Small BusinessÃ¢â‚¬ highlights the growing litigation risk faced by small businesses and the need for good liability risk management and adequate insurance. The hearing before the House Small Business Committee includes testimony from the president of the U.S. Chamber Institute for Legal Reform (ILR). The ILR has just released two studies showing the impact lawsuits can have on small businesses. According to the studies, the tort system in the U.S. cost small businesses $98 billion in 2005. The threat of lawsuits also alters the way small business owners make decisions, with 62 percent saying they make business decisions to avoid lawsuits. These decisions can have significant effects on the business, such as making products and services more expensive, or making a product or service unavailable to customers. For more information on insurance and risk management for businesses, check out I.I.I.Ã¢â‚¬â„¢s new insuring your business website.Ã‚
While weÃ¢â‚¬â„¢ve purposely stayed away from the topic of gun liability or risk management lessons to be learned from last monthÃ¢â‚¬â„¢s shootings at Virginia Tech, an article in the Chicago Sun-Times detailing how a father obtained a gun license for his 10-month-old son forces us to visit this contentious issue. According to the May 13 article, the infantÃ¢â‚¬â„¢s father applied on his behalf for the license after his grandfather bought him a shotgun as an heirloom. The application for the license was approved on the third go, after being turned down twice due to technicalities. While the father fully expected the application for the license to be rejected due to his sonÃ¢â‚¬â„¢s age, it appears that in the state of Illinois there are no age restrictions on issuing a firearms ownerÃ¢â‚¬â„¢s identification card (FOID). At risk of stating the obvious, we note that 16 remains the age at which a teen, subject to successful completion of driver education, can apply for a driverÃ¢â‚¬â„¢s license in Illinois.Ã‚ AsÃ‚ many states have legislation in place that restricts or prevents lawsuits against the gun industry, the question is should we be concerned? Following the Virginia Tech tragedy and given the lawsuits targeting Ã¢â‚¬Å“Big TobaccoÃ¢â‚¬ , and more recent suits against the alcohol industry and fast food industry, could we be looking at a potential rise in claims under liability coverages? What are your thoughts? Check out further I.I.I. info on the liability system.