Victim or Victor?

Amid discussions of how insurers are weathering the financial crisis and economic downturn, a key message emanating from the 13th annual Property/Casualty Insurance Joint Industry forum is that the insurance industry is not doing enough to promote its contribution to society and the economy. The comments came during the experts panel View From the Outside Looking In. Sam Friedman, editor in chief of National Underwriter, noted that too often the industry allows itself to be victimized, letting its detractors dictate message rather than taking them to task. He gave the example of the media focus on the fewer than two percent of claims that were in dispute after Hurricane Katrina rather than the 98 percent of claims that were settled. Connecticut Insurance Commissioner Thomas Sullivan agreed that there is a need to better educate the media and others on insurance issues: an Insurance 101 if you will. Panel moderator Charles Chamness, president and CEO of the National Association of Mutual Insurance Companies (NAMIC) made the point that with all the other challenges facing the industry, it’s tough to fit in public relations as a priority. Do you agree with these comments and what do you think can be done to improve the industry’s reputation with the public? For more on this story, check out National Underwriter’s January 14 online article by Phil Gusman. For more on how insurers’ support of the economy goes far beyond their core function of helping to manage risk, check out the I.I.I. online publication A Firm Foundation.  

Challenging Risks to Global Economy

Deteriorating fiscal positions, a hard landing in China, a collapse in asset prices, gaps in global governance and issues relating to natural resources and climate are the pivotal risks facing the world this year. According to the World Economic Forum’s (WEF) new Global Risks 2009 report, the economic outlook for 2009 is a grim one for most economies, as markets remain volatile, liquidity has not returned, unemployment is rising and consumer and business confidence has fallen to record lows. In this climate, risks become even more potent in their impact. The report notes that the financial crisis has exposed the lack of coordination among policymakers, regulators and supervisors, and that a key lesson to be learned from the crisis is the need to embed better risk governance globally. But while acknowledging the need for better governance globally, it warns against a knee-jerk over-reaction that would increase transaction and compliance costs and ultimately prove ineffective in the face of the next crisis. The WEF report is published in cooperation with Citigroup, MMC (Marsh & McLennan Cos), Swiss Re, the Wharton School Risk Center and Zurich Financial Services.  

Financial Crisis Advisory Group to Meet

The first meeting of the Financial Crisis Advisory Group (FCAG), set up jointly by the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) to consider financial reporting issues arising from the global financial crisis, will take place in London January 20. Yes, that’s inauguration day here in the U.S. Among the issues the group will look into are the findings of the recent Securities and Exchange Commission’s (SEC) study on Fair Value Accounting Standards (a.k.a. mark-to-market accounting). Meanwhile, an organization of major insurers and reinsurers  has said that fair value accounting measurements were a powerful accelerant to the worldwide credit crisis. In a December 4, 2008 comment letter to Robert Herz, FASB Chairman, the Group of North American Insurance Enterprises (GNAIE) said the application of fair value accounting measurements to an inactive, illiquid and disorderly market for structured credit products helped fuel the worldwide credit crisis. Check out an I.I.I. update on proposed international accounting standards.

P/C Joint Industry Forum

Eric Dinallo, New York State Superintendent of Insurance, will be the keynote speaker at the 13th annual Property/Casualty Insurance Joint Industry forum to be held tomorrow at the Waldorf-Astoria Hotel in New York City.

The Forum, sponsored by the 16 leading property/casualty insurance trade associations, was created to provide p/c insurance and reinsurance company leaders with an opportunity to meet with each other and discuss topics of general interest. A panel of experts will first discuss the insurance industry from the perspective of those who regulate, analyze and write about the business. It will be followed by a panel of insurance company chief executives who will discuss general trends in industry services.

For more information on the Forum, contact Loretta Worters at the I.I.I. on 212-346-5545 or  

Soft Market: Beginning of the End

Last November online insurance exchange MarketScout said the soft market was showing signs of winding down after the average property/casualty rate decrease hit single digits in October 2008 for the first time in more than 20 months. Now  MarketScout’s analysis indicates the soft market is over because the property/casualty rate index fell below rate adequacy in the fourth quarter of 2008. However, MarketScout CEO Richard Kerr warned that it may take as much as a year for rates to actually start increasing. MarketScout put the average p/c rate decrease at 9 percent in December, unchanged from November. Commercial property, general liability and commercial auto (each down 10 percent) experienced the largest rate decreases. The line experiencing the smallest rate decrease was D&O liability (down 4 percent). Large accounts ($250,000-$1 million premium) saw an average rate reduction of 9 percent while small accounts (up to $25,000 premium) were down 8 percent, according to MarketScout. Check out the I.I.I.’s latest financial outlook for the industry.  

TVA Coal Ash Spill Hearing

As reported in the Wall Street Journal today Congress will hold a hearing on the December 22, 2008,  coal ash spill from a retention pond operated by a Tennessee Valley Authority (TVA) electricity generating plant  near Kingston, Tennessee. A number of homes were damaged in the spill which covered 275 acres with 5.4 million cubic yards of coal ash. It has been described as potentially the largest environmental disaster in the U.S. Today’s oversight hearing is before the Senate Committee on Environment and Public Works. Insurers are reported to have little exposure to the spill cleanup as noted in National Underwriter’s January 6 online article by Mark Ruquet. However, it is likely that legal action following the event will add to its cost. On December 30, 2008,  a group of landowners filed a lawsuit in a state court seeking $165 million from the TVA in damages related to the spill, for example. Environmental groups are calling for the Environmental Protection Agency (EPA) to classify coal ash as a hazardous waste and for the immediate inspection and monitoring of all toxic coal ash storage and disposal units.

Securities Class Action Filings Up

Securities class action filings in 2008 were at their highest level since 2004, dominated by a wave of litigation against financial services firms. According to an annual report by Stanford Law School and Cornerstone Research, a total of 210 federal securities class actions were filed in 2008, a 19 percent increase over the 176 class actions filed in 2007. Close to half of the 2008 litigation activity, or 103 class actions, involved firms in the financial services sector. The maximum dollar loss (MDL) attributable to all 2008 claims is $856 billion, a 27 percent increase over comparable 2007 data. Financial services firms represented 46 percent of MDL in 2008. A new Litigation Heat Map illustrates the intensity of litigation activity within each industry over time and shows that nearly one third of all large financial firms were named defendant in a securities class action filed in 2008. The financial firms named as defendants in 2008 represented more than half of the sector’s total market capitalization. However, the study predicted that litigation activity against the financial sector may decline next year because the supply of new defendants might be drying up.  

Earthquake Risk to Mortgage Markets

A California earthquake would accelerate the U.S. mortgage meltdown and send shockwaves through the financial and insurance industries, according to a new study from Aon Benfield. The Annual Global Climate and Catastrophe Report: 2008 highlights that the lack of mandatory earthquake insurance in California would result in high levels of mortgage defaults should an earthquake occur. It makes the point that Freddie Mac and Fannie Mae never required homeowners to purchase earthquake insurance for their properties. Approximately 86 percent of Californian homeowners do not have earthquake coverage, despite most of them having mortgaged their homes. (Note: the 1994 Northridge earthquake cost the mortgage industry up to $400 million in mortgage defaults due to foreclosure expenses, property repair costs, lost interest income, write-downs of existing loan balances and other administrative costs.) Given the current housing environment in the Golden state, the study says a potential earthquake would have long-lasting damaging economic effects, as many homeowners walk away from their damaged homes without repairing them, leaving many homes in foreclosure and forcing banks to bear the brunt of the loss in capital. The loss of home ownership could also adversely affect the insurance and reinsurance industries, as incoming capital on homeowner insurance policies would be severely diminished. Check out I.I.I. facts & stats on earthquakes.

Congressional Hearing on Madoff Scheme

Bernard Madoff’s alleged Ponzi scheme and the need for regulatory reform will be the subject of a hearing today before the House Committee on Financial Services. Just to recap, the Wall Street financier and former Nasdaq chairman was arrested December 11, 2008, charged with a $50 billion investor fraud – possibly the largest ever committed by a single individual. All indications are that the scheme’s collapse will fuel litigation on a number of fronts. In fact the D&O Diary has already created a running list of Madoff Investor and Feeder Fund Litigation. On January 14 Nera Economic Consulting is sponsoring a Securities Docket webcast that will address critical questions from this event, such as how much money has been lost and what avenues of possible recovery exist. Also check out I.I.I. background info on the liability system.