Long-Term View

It strikes us that the property/casualty industry can’t win when it comes to reporting its financial results. If profitable, insurers are always accused of being greedy at consumers’ expense. But what is the alternative? Take the first-quarter 2007 results just released by the industry. The industry’s net income after taxes dipped to $15.8 billion in Q1 2007 from $16.7 billion in Q1 2006, and its rate of return fell to 12.9 percent from 15.5 percent. The decline in profitability occurred despite the fact that the industry turned in one of its best underwriting performances ever, with a combined ratio of 91.7, down from 92.4 at full-year 2006. As I.I.I. president and chief economist Dr. Robert Hartwig noted in his commentary, the financial performance of the P/C industry during the first quarter was generally excellent, but it also provided confirmation that the industry is now past its cyclical peak in profitability of 14.0 percent achieved in 2006. “The only question that now remains is how long the decline in profitability will last and how many years it will take to get to the bottom,† said Dr. Hartwig. Whether or not you agree with this depiction, the fact remains that insurers cannot meet their objectives unless they are financially successful. Another key challenge facing insurers (unlike other industries) is that the largest portion of their expenses involves losses that are difficult to predict. Check out Dr. Hartwig’s full commentary at https://www.iii.org/media/industry/financials/2007firstquarter/.  

Flood Risk Defenses

Flood events during the past fortnight in the U.S. and U.K. illustrate the scale and impact of this type of disaster and also underscore the point that flooding is not just a coastal issue. In central Texas more than 18 inches of rain have fallen in the space of two days in the Marble Falls area northwest of Austin. In fact record rains in Texas and Oklahoma in the course of the past two weeks have resulted in 11 fatalities. Meanwhile, severe floods in England and Wales have caused at least four fatalities and left more than 600 injured. We note that among the most seriously affected areas are the inland counties of Cambridgeshire, Derbyshire, Gloucestershire, Nottinghamshire, Shropshire and Staffordshire. Of course a key difference is that homeowners and business insurance policies in the U.K. do cover flood damage, while in the U.S. flood insurance is available mainly through the National Flood Insurance Program (NFIP). That said, the Association of British Insurers (ABI) has made clear that U.K. insurers will only continue to be able to offer flood insurance if defenses are adequately maintained. With that in mind, we leave the final word to the head of the U.K.’s Environment Agency, Baroness Young. Describing the U.K. floods as “a one in 150-year event†, Baroness Young called for more investment in flood defenses and for people to think hard about building on flood plains. Hear, hear. Check out I.I.I.’s flood statistics for more information.

Room For Growth

For traditional insurers looking to recapture some of the business lost to the alternative market, specifically the captive market, all bets are off. Or at least the going may be getting tougher. Despite increased competition and soft pricing, growth in captive insurers remains strong, and a new study from Aon indicates there is room for further growth – substantial growth at that. According to Aon, contrary to popular belief, over half (53 percent) of the world’s top 1500 companies (G1500) do not currently own a captive. Regionally there is considerable room for captive growth. Even in a mature market like the U.S., captive ownership by G1500 companies is at just 42 percent. In markets like Asia that traditionally have not been extensive captive users, the percentages are lower. Only 14 percent of Japanese G1500 companies have a captive for example. Captives are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Direct access to reinsurance markets, tailored coverage, and greater control over claims are just some of the reasons why corporations form captives. Cost or lack of coverage in the traditional market is another. Check out I.I.I. info on captives and alternative risk transfer mechanisms online.

Tahoe Fire

Early news reports indicate a wildfire near Lake Tahoe, California, continues to burn after destroying at least  220 homes and forcing around 1,000 people to evacuate. I.I.I. research shows that most of the large fires with significant property damage have occurred in California, where some of the fastest developing counties are in forest areas. Amid the warnings of increased wildfire risk for the West and Southeast this year, this is a timely reminder to homeowners and businesses of the need to prepare an effective evacuation plan and have adequate insurance. I.I.I.’s free home inventory software can help residents better protect their property ahead of disaster. Further information on the Tahoe wildfire is available from the Insurance Information Network of California  (IINC).  

Industry Performance Metrics

It’s long been acknowledged that claims handling and service are key to customer satisfaction in the insurance industry, so the findings of an inaugural carrier evaluation survey conducted by Willis are worth reading. As part of the survey, more than 2,500 Willis Associates were asked to rank carrier groups on a scale of 1 (lowest) to 10 (highest) against four categories: underwriting; policy administration; claims; and service. The results show that while all insurers were ranked above the mid-point, they need to do more to further differentiate themselves through service and performance. For example, underwriting was overall the highest rated category, with a mean score of just under 7, but when it came to policy administration, claims and service, there was a much wider variation in opinions about the performance levels of carriers. Claims (e.g. attitude, settlement and technical support) and service (e.g. loss control, risk assessment and post placement services) actually received the lowest overall category ratings. Interestingly, the survey respondents were highly experienced, with 62 percent having more than 10 years of industry experience. Now we’re just a bit curious as to what a similar evaluation of brokers by carriers might reveal.

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†.  

Mercury Exposure

A late in the day news item spurs this posting on antiques and potential mercury exposure. The Centers for Disease Control and Prevention (CDC) has warned that antique or vintage items such as clocks, barometers, mirrors and lamps, are liable to mercury releases. Apparently the problem arises when seals age and these items are dropped, damaged or moved improperly. The CDC study cites six case reports of antique-related mercury releases in New York state between 2000 and 2006. Although none of these spills resulted in symptoms or acute health effects, the CDC notes that they required remediation to prevent future mercury exposure. The agency says the findings underscore the need for caution when handling antiques containing elemental mercury and the need for proper remediation of spills. We’ve heard of exposure to mercury  from eating fish, but could this  be something to watch? For further info on mercury  check out  the Environmental Protection Agency (EPA) site.

TRIA Hearing

Legislative solutions to extend the Terrorism Risk Insurance Act (TRIA) will be the focus of a hearing scheduled this Thursday before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. As with many issues in our industry, there are different viewpoints on what any extension legislation should look like. While there is general agreement a continuing federal role is key to ensuring that terrorism risk insurance remains available to those businesses that want and need the coverage, the devil’s in the detail. Key points under discussion right now include: the length of any proposed TRIA extension; trigger/deductible levels and potential extension of coverage under TRIA to include domestic acts, group life losses and chemical, nuclear, biological and radiological (CNBR). Check out I.I.I.’s additional information on terrorism risk online.  

Pride Awareness

June is Pride month, so it’s time to highlight a few recent developments affecting the lesbian, gay, bisexual, and transgender (LGBT) community that may be of interest. We’ve blogged before about how a more diverse company is a better performing company and another study from research and advisory group Catalyst supports this theory. Titled “Making Change: LGBT Inclusion – Understanding the Challenges† the report explores how LGBT issues are a key component of any comprehensive diversity and inclusion strategy in business. Meanwhile, a growing number of states in the northeast (CT, VT, NJ, ME) and west (CA, HI, WA) now have civil union or domestic partnership laws in place and  same-sex marriage has been legal in Massachusetts since May 2004. New Hampshire recently signed into law a civil union bill and Oregon will soon join the list. It’s important to recognize that the laws in each state are different and offer varying legal protections to same-sex couples. Also, the state laws do not extend any of the benefits on the Federal level. Nonetheless, these developments perhaps point to an underlying trend with a potential impact for many businesses, including insurers. We welcome your thoughts.

Averting Obesity Suits

An interesting announcement by the world’s largest cereal maker today. Kellogg Co. is raising the nutritional value of the cereals and snacks it markets to children and will no longer promote foods in TV, radio, print or online ads to children under age 12 unless a single serving of the product meets the following standards: no more than 200 calories; no trans fat; no more than 2 grams of saturated fat; no more than 230 milligrams of sodium; no more than 12 grams of sugar. The company is also introducing new front-of-pack nutrition labeling. The move, which comes amid growing concerns on childhood obesity, effectively averts a lawsuit that had been threatened by parents and nutrition advocacy groups in January 2006. A recent Federal Trade Commission (FTC) study found that highly sugared cereal accounts for 84 percent of children’s exposure to ads for cereal, while candy accounts for 52 percent of children’s exposure to ads for desserts and sweets. Check out I.I.I.’s report on Obesity, Liability and Insurance and info on the liability system.  Ã‚