Containing California Wildfires

As more than 1,400 wildfires continue to burn in California and with July and August yet to come, it’s a timely reminder to homeowners and businesses of the need to prepare an effective evacuation plan and have adequate insurance. In fact 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. Check out I.I.I. wildfire statistics. Further information is also available from the Insurance Information Network of California.  

Retirement Planning Misconceptions

Six in 10 Americans underestimate life expectancy and almost half (49 percent) underestimate the amount of pre-retirement income they’ll need once they retire.

The MetLife 2008 Retirement Income IQ Test also reveals that almost seven in 10 (69 percent) pre-retirees overestimate how much they can draw down from their savings, with an alarming 43 percent saying they believe they can withdraw 10 percent or more each year while preserving their principal. This is despite the fact that most retirement experts suggest a withdrawal rate of no more than 4 percent annually.

MetLife said the lack of understanding is particularly concerning because poor retirement planning assumptions are compounded after retirement by today’s much longer life expectancy. The study findings also point to a gender divide with 65 percent of men vs. 50 percent of women somewhat or very confident that they will have enough money to live comfortably if they live until 85 years of age. 

Exxon Valdez Ruling

A divided U.S. Supreme Court yesterday reduced the $2.5 billion punitive damages award in the 1989 Exxon Valdez oil spill disaster to $500 million. In a 5-3 ruling the justices decided that punitive damages must be “reasonably predictable† and may not exceed what Exxon Mobil has already paid to compensate plaintiffs for economic losses. For more on this story, check out Insurance Journal’s June 25 online article by reporter James Vicini. Further I.I.I. information on the liability system is available online.  

Weak Economy and Insurers

The release of the p/c industry’s first quarter 2008 results yesterday revealed that economic turbulence is having an impact on financial and underwriting performance. The industry’s annualized statutory rate of return on average surplus fell to 6.4 percent during the first quarter down by more than half from 13.2 percent during the first quarter of 2007. The spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the p/c industry were largely responsible. Yet, fundamentally, the p/c industry remains quite strong financially.

In his commentary on the results I.I.I. president Dr. Robert Hartwig notes that while insurers are not immune to economic downturns, the impacts in terms of growth and profitability will be somewhat muted. This is because in terms of revenue, p/c insurers are not as economically vulnerable as other sectors like homebuilders or carmakers. Approximately 98 to 99 percent of insurer exposure growth is tied to renewal business. In contrast, 100 percent of a homebuilder’s or car manufacturer’s growth comes from new business. Dr Hartwig explains: “Insurance is, in effect, an economic necessity, not a discretionary purchase.† Check out Dr Hartwig’s full commentary at:  

Mixed Global Outlook

While 2008 has been touted as a good time to proceed with a global merger and acquisition (M&A) deal, it’s important to bear in mind that the world insurance outlook is mixed. According to the latest world insurance report from Swiss Re sigma, 2008 will see strong life insurance growth but stagnating non-life premiums, at best. Swiss Re projects that as the economic environment and capital markets stabilize, life insurance will resume its strong performance in the medium term, both in terms of growth and profitability. However, non-life premiums are expected to fall in the industrialized economies, though growth in the emerging economies will continue, albeit at a slower rate than in the recent past. Swiss Re notes that a further concern is rising global inflation, which will increase claims costs in liability insurance and other long-tail business lines as well as hamper profitability. The effects of the subprime crisis are expected to be limited. Check out the new edition of the I.I.I. International Insurance Fact Book for other global facts and stats.  

Midwest Floods and Crop Insurers

While it’s too soon to know the extent of insured losses arising from the recent Midwest floods, investment analysts are suggesting that there could be significant losses for multi-peril crop insurers. According to a Lehman Brothers note, some experts are estimating insured losses in excess of $3 billion in Iowa alone. Analyst Jay Gelb warns that growth in the crop insurance market coupled with higher commodity prices could result in the worst crop insurance losses in 15 years. Industry wide gross written premiums for multi peril crop insurance more than doubled to $6.7 billion in 2007, up from $2.9 billion in 2002 (the last year with significant industry losses). Gelb explains that higher input costs associated with crops have caused farmers to purchase more insurance on their harvests through both crop-yield and crop revenue coverage. Check out further I.I.I. info on crop insurance.  

Captive Market

Captives owned by American firms are the most significant contributors to the overall growth of the global captive insurance market. According to a new benchmarking report from Marsh, approximately 75 percent of captives originate from six countries, with U.S. owned captives representing 53 percent. Whereas Bermuda was once the default choice for North American corporations, Marsh notes that many companies are now selecting onshore U.S. domiciles. Over 25 states have put in place some form of captive legislation. With this in mind it’s no surprise that within the survey sample group there is a significant concentration of risk in the U.S. However, in Europe, Middle East and Africa and Asia Pacific regions over 65 percent of the exposure is written on a European or global basis. Marsh says this divergence perhaps reflects the fact that much of the new captive growth in the U.S. has been driven by firms with domestically focused risk financing issues, e.g. Gulf coast exposed property. Check out further I.I.I. info on captive insurers.  


Global D&O Protection Gap

Worldwide U.S. directors and officers (D&O) policies do not provide the global protection that many insureds may believe they have. That’s the upshot of  the latest annual D&O  liability survey by Towers Perrin. It found that only 3 percent of survey participants with international operations have  purchased separate local D&O liability insurance policies for individual countries. This is despite the fact that many countries do not permit non-admitted D&O insurance policies to cover local directors and officers. Towers Perrin warns that many companies are not yet aware of this emerging issue. Given the  increased claim activity outside the United States, this issue is unlikely to go away. By the way, some 43 percent of survey participants indicated that their firms are global. Something to think about.

Insured Coastal Property Values to Double

The insured value of properties in coastal areas of the United States continued to grow at an annual rate of 7 percent in the three years from 2004 through 2007. The finding comes in an updated analysis of insured coastal property values by catastrophe modeling firm AIR Worldwide. Despite the recent weakening of the real estate market in many areas, AIR says the insured value – or the cost to rebuild properties – has maintained an annual growth rate that will lead to a doubling of total value every decade. AIR warns that the significant increase in the number and value of exposed properties over the last decade has and will continue to contribute to increasing hurricane losses for insurers.

A couple of other takeaways: the insured value of residential and commercial properties in coastal counties of Florida and New York passed $2 trillion each, followed by Texas ($895 billion) and Massachusetts ($793 billion); due to the impact of Hurricane Katrina, the total insured value of properties in the coastal counties of Louisiana has grown at the lowest annual rate of all coastal states, at just over 2 percent; Mississippi coastal counties averaged a 5 percent annual increase, the second lowest of all coastal states. Check out related I.I.I. info.

Pride Focus

As June is Pride month, it’s time to review a number of legal and legislative developments with implications for the lesbian, gay, bisexual and transgender (LGBT) community. From next Tuesday same-sex marriages will be legal in the state of California. The change in law follows a May 15 ruling by the Supreme Court of California overturning the state’s ban on gay marriage. California follows Massachusetts where same-sex marriage has been legal since May 2004. California already has a domestic partnership law in place.

A growing number of other states now have civil union or domestic partnership laws, including: Vermont, Connecticut, New Jersey, New Hampshire, Oregon, Maine, Washington, and the District of Columbia. Other trends to watch for†¦ Two cases, one before the Supreme Court in Connecticut  and another about to be heard in Iowa, could bring rulings making same-sex marriage legal. Meanwhile same-sex marriage legislation is being considered by legislatures in both New Jersey and New York. While state laws do not extend any of the benefits on the Federal level, insurers along with other businesses are monitoring these developments.