Cat Bond Activity Accelerates

Speaking of capital markets solutions as an alternative†¦Mainstream, rather than alternative is how the catastrophe bond market can now be described, according to Guy Carpenter. Its sixth annual review of the market reveals a phenomenal level of transaction activity in 2007, even as rates softened for traditional reinsurance capacity. At year-end, cat bond risk capital outstanding reached $13.8 billion, a 63 percent increase over 2006’s record-setting year-end total of $8.5 billion. Cat bond risk principal now accounts for 12 percent of property limits in the U.S., and 8 percent on a worldwide basis. A couple of other highlights: publicly disclosed cat bond issuances totaled $7 billion in 2007, a 49 percent increase over the record $4.7 billion in 2006; some 27 transactions were completed in 2007, up from 20 in 2006 and nearly tripling the 10 placed in 2005. Check out further I.I.I. facts.  


Global Reinsurance Still Stable

Ratings agency A.M. Best’s continuing stable outlook for the global reinsurance sector is good news for the entire industry. It goes without saying the reinsurance sector plays a critical role by increasing capacity in the global insurance marketplace, and offering protection against catastrophic losses. In fact, despite facing enormous loss potential from natural and man-made catastrophes, the reinsurance market is remarkably robust. In affirming the sector’s outlook, A.M. Best cited generally strong balance sheets, continued improvements in enterprise risk management (ERM) and general earnings momentum through 2007. However, it added that price deterioration, competition and increased cedant retentions are drivers of concern relating to the sustainability of the sector’s long-term operating performance. Other challenges remain in light of the increased capacity of industry participants, new entrants and forms of capital. For example, A.M. Best noted that it is no longer easy to ignore the reality of the capital markets as an alternative. Check out further I.I.I. info on reinsurance.  

Contaminant Threat to National Parks

Numerous airborne contaminants, including heavy metals and pesticides have been detected at measurable levels in ecosystems at 20 western U.S. and Alaska national parks from the Arctic to the Mexican border. That’s the upshot of a six-year federal study funded primarily by the National Park Service (NPS). Some 70 contaminants were found at detectable levels in snow, water, vegetation, lake sediment and fish, according to the study. The three contaminants of most concern for human and wildlife health were mercury, and the insecticides dieldrin and DDT. The eight core national park areas studied were: Glacier, Mount Rainier, Olympic, Rocky Mountain, Sequoia and Kings Canyon, Denali, Gates of the Arctic, and Noatak. Something to think about as we admire the views on our next visit to one of these national parks.  

Mitigating Hurricane Risk

U.S. hurricane losses will continue to increase unless action is taken to address the growing concentration of people and properties in coastal areas. That’s the key finding of a study just published in Natural Hazards Review. It reports that while 2004 and 2005 were exceptional from the standpoint of the number of very damaging storms, there is no long-term trend of increasing damage from hurricanes in the period 1900 to 2005. Rather, societal factors such as the rising population and wealth on the nation’s coasts are a major influence in shaping trends in damage related to hurricanes. It points out that on average hurricanes in the U.S. have caused annual damage of about $10 billion for the last 106 years. The current trend of doubling losses every 10 years suggests that a storm like the 1926 Great Miami hurricane could result in perhaps $500 billion in damage as soon as the 2020s. What do you  make of this prognosis? I.I.I. has additional hurricane facts & stats available online.

Nevada Quake

The magnitude 6.0 earthquake that struck a rural area of northeast Nevada yesterday is a reminder of the fact that earthquakes can strike anywhere, even in areas where the probabilities are relatively low. In fact, since 1900, earthquakes have occurred in 39 states and caused damage in all 50. About 5,000 quakes can be felt each year. Standard homeowners and business insurance policies in the U.S. do not cover earthquakes, but coverage is available via an endorsement. Still, persuading people to buy the insurance remains a challenge. In California, the U.S. state most commonly associated with earthquakes, only about 12 percent of homeowners buy the coverage. What can be done to change this stat? Check out further I.I.I. info on earthquake risk.  

IRS Reprieve for Captive Insurers

A happy development for the domestic captive insurance industry today, with the news that the Internal Revenue Service (IRS) has dropped a proposed regulation that likely would have driven more business offshore. Issued September 28, 2007, the proposed IRS regulation would have eliminated 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 (see our November 14, 2007 posting). Apparently the IRS decided to withdraw the planned rule change after considering all the written comments received. The Coalition for Fairness to Captive Insurers has welcomed the move, saying it removes the uncertainty that has hung over the captive industry since the IRS regulation was proposed last fall. Check out National Underwriter’s February 20 online article by Caroline McDonald for more information on the decision. As many of you know, 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. Check out further I.I.I. info on captive insurers.  


P/C Customer Satisfaction High

Customer satisfaction with the property/casualty insurance industry reached its highest level in over a decade in the fourth quarter of 2007. According to the latest University of Michigan American Customer Satisfaction Index, the p/c sector improved 2.6 percent to record a score of 80. However, in the aggregate, customer satisfaction with the finance and insurance sector dropped 0.7 percent to 75.5, a retreat from the gains of the previous year that had put the sector at its highest level since 1994 (see our Feb 22, 2007 posting). The sector includes commercial banks and property and life and health insurance. Amid rising health care costs, customer satisfaction with health insurers also slipped 1.4 percent. The index measures customer expectations, perceived quality and perceived value of companies in various industries.  

Manage The Cycle

Managing the cycle is the most important issue for the insurance industry in 2008, according to the latest annual underwriter survey from Lloyd’s. Some 67 percent of Lloyd’s underwriters believe the industry made insufficient progress on managing the cycle in 2007 and 93 percent believe the industry is currently in a softening stage of the cycle. Containing operating costs and recruiting and developing talent in the industry are the next most important issues for the industry, the survey reveals.

Meanwhile, the instability of global financial markets is seen as the most significant factor impacting the industry during 2008, followed by changing global dynamics and emerging markets, and the growth of corporate liability. Interestingly, some 62 percent of underwriters believe that insurance buyers need to do more to prepare for the impact of liability risk on their business, and over one-half believe that the growth of the compensation culture is out of control. Check out further I.I.I. info on the U.S. liability system.

Human Toll on Seas

Large areas of the east coast of North America and the Caribbean Sea are among the oceans in the world most heavily affected by human activities. That’s the upshot of a global study from the University of California at Santa Barbara this week. According to its findings, more than 40 percent of the world’s oceans are heavily affected by human activities, such as fishing, climate change and pollution, and few if any areas remain untouched. By overlaying 17 different maps of human activities, researchers came up with a composite map of the toll exacted by humans on the seas. Other ocean areas most severely affected include the North Sea, the South and East China Seas, the Mediterranean Sea, the Red Sea, the Persian Gulf, the Bering Sea, and several regions in the western Pacific. The least affected areas are largely near the poles.

Hollywood Land Sale

News from Los Angeles that the mountaintop property just west of the iconic Hollywood sign is for sale is rightly sparking debate among city council officials and residents concerned that building homes on the peak will ruin one of the city’s most famous views. The 138 acres of land was listed for sale Wednesday by a Chicago investment group with a breathtaking price tag of $22 million. Apparently city officials and conservationists tried two years ago to buy the property and make it a part of Griffith Park but their fundraising attempts were unsuccessful. A February 13 article in the LA Times tells more on this unfolding story. But apart from spoiling the view, let’s not forget the wildfire risk. As has been widely reported, Griffith Park suffered two wildfires last year that burned about 950 acres of land. The wildfire risk only increases as people move into high risk areas. What do you think? Check out further I.I.I. facts and stats about California wildfires.