A Greener Big Apple

A plan aimed at improving New York City’s environment has been unveiled by Mayor Michael Bloomberg. Among the proposals, the idea to charge an $8 congestion fee to drivers entering Manhattan at peak hours during the week. A series of cameras would capture license plates, either charging the car’s commuter account or generating a bill. Modeled after a similar congestion charge introduced across the pond in London in 2003, the plan may have significant implications for auto insurers and their policyholders. It’s easy to identify a few potential benefits right away. As the risk of auto accidents increases in areas of high traffic density, a reduction in the number of vehicles on the road could have a positive effect on auto claims. For drivers who decide to leave their car at home and take the train instead, the lower average miles per year driven could reduce the price they pay for auto insurance. What is not so certain and perhaps up for debate is how the new technology under such a scheme might intersect with the auto insurance underwriting process. What are your thoughts?  

Terrorism Factor

Policy options for extending the Terrorism Risk Insurance Act (TRIA) beyond the end of 2007 will be the subject of debate at a hearing before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises scheduled for next Tuesday. We’ve said it before, and we’ll say it again, but a continuing federal role is key to ensuring that terrorism risk insurance remains available to those businesses that want and need the coverage. A study by the American Academy of Actuaries notes that incidents involving chemical, nuclear, biological and radiological (CNBR) incidents in four U.S. cities could result in insured losses in the hundreds of billions of dollars. For example, in New York, a large CNBR event could cost as much as $778.1 billion, with insured losses for commercial property at $158.3 billion and for workers compensation at $483.7 billion. I.I.I. has additional information on terrorism risk online.  

Banner Year

Today, as expected, saw the property/casualty industry report record financial results for 2006. Here are the headline stats: the industry turned in its best underwriting performance since 1949, with a combined ratio of 92.4; profits (net income after taxes) increased by $19.5 billion, or 44.3 percent, to $63.7 billion from $44.2 billion in 2005; the industry’s rate of return on average surplus rose to 14.0 percent in 2006, up from 10.8 percent in 2005 and the best result since 1987. While applauding what is generally an excellent set of results, it’s important to look at  our industry’s financial performance in 2006 in a broader context. As Dr. Robert Hartwig, I.I.I.’s president and chief economist, notes in his analysis  the sharp decline in catastrophe losses from $61.9 billion in 2005 to $9.2 billion last year is too often cited as the primary reason for the surge in profits. Other key factors played a role and the industry’s extraordinary performance during 2006 is unlikely to be repeated for decades.  Ã‚  

D&O Calm?

In our February 8 posting we cited a RIMS Benchmark Survey showing that the Directors and Officers (D&O) line saw some of the largest decreases in premium rates in the fourth quarter of 2006. Now a Towers Perrin survey confirms this trend, noting that the average D&O premium dropped by 18 percent in 2006, after declines of 9 percent in 2005 and 10 percent in 2004. Both reports attribute the softening market to the sharp drop in the number of securities class action suits filed in 2006. While the moderation in prices is good news for D&O insureds and their agents and brokers, the Towers Perrin survey offers this note of caution: “We do not believe that the current improved risk profile will support prolonged soft market premium decreases if underwriters want to write this line profitability.† Indeed, in a speech to the Professional Liability Underwriting Society (PLUS) D&O Symposium earlier this year, John Degnan, vice chairman of Chubb, pointed out that if shareholder derivative claims are included, it appears that overall D&O claim frequency was up, not down, in 2006. Degnan went on to urge D&O insurers to be vigilant, lest the “perfect calm† turn out to be merely the eye of a larger storm. Wise words.

Nor’easter 101

There are 45 days to go until the start of the 2007 hurricane season, but just so we’re clear, nor’easters are not like hurricanes. This is not to say that nor’easters do not have the capacity to cause substantial damage to property and life. In fact, nor’easters get their names from the continuously strong northeasterly winds blowing in from the ocean ahead of the storm and over coastal areas. The National Weather Service defines a nor’easter as a strong low pressure system that affects the Mid Atlantic and New England states and can form over land or over coastal waters. It points out that these winter weather (mid-April?!) events are notorious for producing heavy snow, rain, and tremendous waves that crash onto Atlantic beaches, often causing beach erosion and structural damage. Interestingly, it also notes that wind gusts associated with these storms can exceed hurricane force intensity. After spending the last 24 hours mopping water, I for one, will be asking my agent about flood insurance at this year’s renewal. For more information see the I.I.I.’s flood facts  and catastrophe statistics.

Economic Anchor

In a week in which the availability and affordability of coverage offered by our industry was called into question once again, it’s perhaps time to remind people of the major contribution made by insurers to state, local and national economies. The Insurance Information Institute’s online publication “A Firm Foundation† shows the myriad ways in which insurance supports the economy. State-specific editions also highlight the insurance industry’s role as a key player in the Alabama, California, Florida, Maryland, New York, South Carolina, Texas and Wisconsin economies. From defraying the costs of catastrophes, to providing employment, to fueling the capital markets, the industry’s contribution goes way beyond its core function of helping to manage risk. A story worth telling.  

Annuity Facts

Demystifying the world of annuities — what they are and how they work — remains an ongoing challenge for our industry if the findings of the Employee Benefit Research Group’s 2007 Retirement Confidence Survey (RCS) are anything to go by. According to the RCS, just 11 percent of workers said they are very likely to purchase a financial product or select a retirement plan option that will pay them guaranteed income for life when they retire, while another 39 percent said they will be somewhat likely to do so. However, if the word “annuity† is included in the question the likelihood of purchase drops to 7 percent and  32 percent respectively. As the RCS notes, the likelihood of purchase appears to be lower when the word “annuity† is included in the question, as opposed to the phrase “income each month for the rest of your life† – which is exactly what an income annuity provides. Check out the I.I.I.’s annuities information and other annuity-related facts & stats.  Ã‚  

  

Hill Hearings

Availability, affordability and oversight are the watchwords of two separate hearings on Capitol Hill today. Hearing No. 1. before the Senate Committee on Housing, Banking and Urban Affairs will examine the availability and affordability of property casualty insurance in the Gulf coast and other coastal regions. Dr. Robert Hartwig, I.I.I. president and chief economist, will deliver testimony noting how population growth, rising property values and continued development in vulnerable areas are increasing the cost of property damage inflicted by hurricanes. Current regulatory, legislative and litigation-related obstacles are also raising costs and reducing choices for insurance consumers in hurricane exposed areas. The second hearing before the Senate Committee on Commerce, Science and Transportation will focus on oversight of the property and casualty industry. The industry’s limited federal antitrust exemption under the McCarran Ferguson Act is expected to be the topic du jour.  

Top 50 for Diversity

By our count, five insurers have made it onto the Top 50 Companies for Diversity 2007 list published by DiversityInc magazine. They are: Allstate (40), Blue Cross and Blue Shield of Florida (15), Health Care Service Corp (33), Kaiser Permanente (27) and Prudential Financial (24). If we include banks offering insurance, the list expands by another six or so. A total of 317 companies participated in this year’s survey. Perhaps more compelling is that expressed as a stock index, DiversityInc’s Top 50 outperformed the S&P 500, the Dow Jones Industrial Average and the NASDAQ for the fourth consecutive year on a 10-, five- and one-year basis. Noteworthy mention: Allstate, a top 50 mainstay, also ranked 10th on the Top 10 Companies for African Americans.  

  

ART Info

Alternative Risk Transfer (ART) market mechanisms cover 30 percent of the U.S. commercial insurance market, yet general understanding of them is limited. For anyone grappling with the concept, an I.I.I.-penned chapter in the recently published Handbook of International Insurance hopefully will shed some light. The chapter “An Overview of the Alternative Risk Transfer Market† explains that the concept of ART defies a precise definition in part because the broad range of risk products that can be defined as ART has expanded over time as product innovation continues. The chapter covers the major categories of ART solutions commonly found in the market today, including captives, self-insurance, risk retention groups, finite risk (re)insurance, catastrophe bonds and government programs. I.I.I. also has additional information on captives and other risk-financing options available online.

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