Mind the Gap

Hardly a day goes by without a headline on some environmental issue, whether a catastrophe such as the recent oil spill in San Francisco Bay, or an emerging liability like global warming. While environmental liability is not a new issue, the wide range of environmental problems occurring today underscores that the potential exposures for insurers may be growing. So the latest report from ratings agency A.M. Best on asbestos and environmental exposures makes for interesting reading. It notes that the industry’s unfunded environmental exposure totaled $22 billion at year-end 2006. This is a substantial number and dwarfs the industry’s estimated shortfall of $3 billion for asbestos. Based on A.M. Best’s estimate of $56 billion in ultimate environmental losses, the $22 billion funding gap is significant. A.M. Best’s explanation for the gap is that the industry has been funding its pollution liabilities very slowly based on optimistic assumptions about underlying claim trends. But while annual environmental loss payments have declined, payouts are still significant at $1.1 billion in 2006. Given emerging exposure trends and increasing demand for environmental coverages the question remains whether insurers’ environmental reserves are sufficient.

Postseason Forecast

Continuing our postseason theme, today Colorado State University’s Tropical Meteorology Project issued its summary of the 2007 Atlantic hurricane season. Right off the bat, the team admits that its 2007 seasonal hurricane forecast was not particularly successful. While it anticipated an above-average season, the season had activity at near-average levels. As we noted yesterday, everyone will remember 2007 as the season the U.S. dodged the bullet of two category 5 hurricanes. But as the CSU team reminds us, one hurricane, two tropical storms and one tropical depression did make U.S. landfall this year. While tropical depression Barry and tropical storm Gabrielle did minimal damage, Hurricane Humberto caused an estimated $250 million in insured damage in Texas. Damage from Erin is unavailable. For the record, in total the 2007 season saw 14 named storms, six hurricanes, of which two were intense. The CSU team will issue its first forecast for the 2008 hurricane season December 7. Check out further I.I.I. hurricane facts & stats.

Hurricane Season Closing

The 2007 Atlantic hurricane season ends Friday and while we may afford ourselves a brief sigh of relief, the season synopsis from the forecasters will remind us otherwise. For example, catastrophe modeling company RMS has just estimated its hurricane activity rates for the next five years. RMS says it expects U.S. hurricane landfall risk to remain significantly above the long-term average. It estimates average annual insured losses will be 40 percent higher than those predicted by the long-term mean of hurricane activity for the Gulf Coast, Florida, and the Southeast, and 25 percent to 30 percent higher for the Mid-Atlantic and Northeast coastal regions. RMS’ forecast also underscores the important point that the 2007 season featured 14 named storms, close to the annual average of 14.7 since 1995. According to RMS,  it is the first season ever recorded in which 40 percent of hurricanes reached category 5 status, and the only one in which two maximum strength storms struck land. Of course, the U.S. coast was spared the potential devastation of hurricanes Dean and Felix, but on a different track these storms had the potential to cause catastrophic damage to the U.S. Check out I.I.I. hurricane-related facts & stats.  

Holiday Travel

A record 38.7 million Americans will travel 50 miles or more from home over the Thanksgiving holiday period beginning tomorrow, up 1.5 percent on last year, according to the AAA. Despite record high gas prices, some 31.2 million motorists are expected to hit the road for Thanksgiving, a 1.3 percent increase on last year. Another 4.7 million will travel by air and the remainder by train, bus or other transportation. With that in mind, we note a study just completed by Farmers Insurance. Once again, it finds that seat belts remain the most important protection for drivers. Based on 2006 fatal crash data from the U.S. Department of Transportation, Farmers found that when a driver used a seat belt, the odds of fatality dropped nearly 70 percent compared to a driver who did not. Its analysis incorporates a logistic econometric model with 41 variables, accounting for factors such as road and traffic conditions at the time of the accident, location and time, accident events, vehicle specifics, driver demographics, and safety features. So as you head out for the holiday, remember to buckle up! Have a safe and happy Thanksgiving.

Senate Endorses Terrorism Backstop

The news snuck in just after we had posted Friday, but we should mention that the Senate has approved extension of the federal terrorism risk insurance program. The move would extend the program for a further seven years from December 31. The Senate version is very different to House legislation passed a couple of months ago (see our September 21 posting). However, like the House, the Senate version would expand coverage under the program to include domestic acts of terrorism. Coming just days before Thanksgiving, this is a timely and positive step for the industry. Final consensus on the program will now need to be reached so that it can be reauthorized before year-end. Check out further I.I.I. information on terrorism risk.

Top Auto Safety Picks

Safer cars are just one of the factors contributing to a downward trend in auto insurance premiums. Awards announced this week by the Insurance Institute for Highway Safety (IIHS) confirm a continuing trend of safer vehicle designs. A total of 34 vehicles earned the IIHS top safety pick award for 2008, close to triple the 13 models that qualified at the start of the 2007 model year. IIHS noted that 10 additional vehicles qualified during the year as manufacturers made changes and introduced new designs. Another 11 vehicles have been added to the list for 2008. The award recognizes vehicles that do the best job of protecting people in front, side and rear crashes based on ratings in the Institute’s test. Winners also have to be equipped with electronic stability control (ESC). IIHS research indicates that ESC reduces the risk of fatal single-vehicle crashes by 56 percent and fatal multiple-vehicle crashes by 32 percent. Many single-vehicle crashes involve rolling over, and ESC reduces the risk of fatal single-vehicle rollovers by 80 percent (SUVs) and 77 percent (cars). Check out I.I.I. facts & stats on highway safety.  

Battle of the Bobs

National Underwriter Company’s first virtual conference and expo features a debate at 11am EST this morning between I.I.I. president and economist Dr. Robert Hartwig and J. Robert Hunter, insurance director of the Consumer Federation of America. Topics up for discussion include post-Katrina litigation, credit scoring, federal regulation and industry profitability. Don’t miss it! Registration for the event is free. To register and learn more about the conference, go to: http://events.unisfair.com/rt/nuco~futureofinsurance  

Captive Groups Coordinate IRS Response

Those of you in the alternative risk transfer business may be interested in today’s item. Two prominent captive insurance associations have teamed up to form a coalition to battle a proposed Internal Revenue Service (IRS) rule change that would significantly alter the landscape for captive insurers in the U.S.   Issued September 28, the proposed IRS regulation would eliminate the right of U.S.-sponsored captives to claim reserve deductions against their domestic tax for future claims and losses on consolidated, or related, business. Instead, they would only be allowed to claim deductions when claims are actually paid. The change would essentially result in treating the transaction as non-insurance for tax purposes. We don’t need to remind you that captive insurers are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Use of captives by corporations has grown exponentially during the last 30 years in the U.S. In 2006, the U.S. was the largest captive domicile– with 1,251 licensed captives – followed by Bermuda with 989. If the IRS proposal goes ahead, it seems likely that it would drive more business offshore. The Coalition for Fairness to Captive Insurers (CFCI) has been formed by the Captive Insurance Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA). Those interested in joining the coalition should contact either association. Check out further I.I.I. information on captive insurers.

Subprime Notes

Another day, another broker brief on the subprime market turmoil and its potential impact on insurance markets. Willis has released an alert from the company’s financial institutions practice. It notes that Directors & Officers (D&O) and Errors & Omissions (E&O) insurers have seen a number of claims arising from the subprime issue, though these could be just the tip of a huge iceberg. Other key points from Willis: a worst-case loss scenario for D&O insurers could be in the realm of $3 billion; the downturn in the real estate market resulted in a 52 percent increase in the amount of title insurance claims paid in the second quarter of 2007 as compared to 2006; foreclosure activity in the first half of 2007 was up 55 percent from 2006; foreclosures for the month of July rose 93 percent from the prior July; and 43 states have reported an increase in foreclosure activity in 2007. Willis plans to issue alerts on some insurance coverages that will receive more prominence as a result of the crisis, such as mortgage impairment, foreclosed and forced placed covers, in coming weeks. For I.I.I.’s take on the subprime issue, check out a paper authored by Dr. Steven Weisbart, I.I.I. vice president and chief economist.  

Wellness Benefits

The need for workers to have access to a workplace wellness program has been touted as an essential component in the drive to combat obesity. The 2007/2008 Staying@Work survey released last week by Watson Wyatt indicates that employers are listening. According to its findings, nearly half (46 percent) of employers surveyed currently offer financial incentives to encourage workers to monitor and improve their health or plan to offer incentives next year and by 2009 that number is expected to surpass 70 percent. The survey also found that a healthier workforce makes for a healthier company. Companies with effective health and productivity programs demonstrate superior performance, achieving 20 percent more revenue per employee. They also have 16.1 percent higher market value and deliver 57 percent higher shareholder returns (2004 to 2006 data). Those companies that invest in improving the health and productivity of their workforce also have cost increases that are five times lower for sick leave; four and one-half times lower for long-term disability; four times lower for short-term disability; and three and one-half times lower for general health coverage. Check out further I.I.I. information on obesity and workers comp.

Latest research and analysis