Words of Wisdom

In today’s tumultuous financial climate, words of wisdom can be invaluable. Tomorrow Berkshire Hathaway chairman Warren Buffett’s annual letter to shareholders will be released. For those who follow the annual observations of the Oracle of Omaha, the letter comes at a timely moment. Today a revised Bureau of Economic Analysis (BEA) report indicates the U.S. economy contracted at an annual rate of 6.2 percent in the fourth quarter of 2008 — a much more accelerated rate than expected. And forecasters from the National Association for Business Economics (NABE) earlier this week suggested the U.S. economy will remain in the doldrums for 2009, with a meaningful recovery not expected until 2010. So what about insurers? Latest Insurance Information Institute  (I.I.I.) presentations offer key information on the state of the P/C industry amid the financial crisis. The potential impact of the $787 billion stimulus package (the American Recovery and Reinvestment Act) on property/casualty insurers is also the focus of a presentation given by I.I.I. president Dr Robert Hartwig on Wednesday February 25.  

Call for All-Hazards Approach to Risk

Governments need to overcome silo-thinking and take a coordinated approach to risk, according to a new Organization for Economic Co-Operation and Development (OECD) report. “Innovation in Country Risk Management† produced in conjunction with Swiss Re and Oliver Wyman notes that in today’s interdependent societies, it can be unclear where one risk ends and another begins. While government efforts to assess large scale risks often focus on specific types of event, such as a flood or earthquake this form of governance is far from optimal in today’s interconnected world where risks are more complex. OECD’s Jack Radisch warns: “The current financial turbulence is a telling example of how the management of risks we face in society should be coordinated from A to Z.† The countries covered in OECD’s study include: Canada, Japan, the Netherlands, Singapore, the United Kingdom and the United States. All six are making good progress to establish an all-hazard view of potential sources of risk, from natural disasters to terrorism to pandemics, according to OECD. Check out I.I.I. info on catastrophes and insurance issues.  

Expanding Securities Litigation

Securities class actions are only one of a rapidly multiplying array of securities-related suits that are transforming the D&O insurance market, according to a new report from Advisen. Traditional securities class action suits accounted for less than half of new securities litigation in 2008, while suits alleging common law torts, breach of fiduciary duty and violation of previously rarely-cited securities laws have become more common. Advisen says a competitive and newly energized plaintiffs’ bar is testing the boundaries of securities suits with novel theories of liability and far more complex complaints. As a result defense costs are surging as plaintiffs’ lawyers concoct new strategies to avoid dismissals and to prevent suits from being consolidated. The report examines the legal, economic and political forces at work in securities litigation in 2008 and assesses their impact on the D&O insurance market in 2009 and beyond.  

 

2009 Insurance Banana Skins

The insurance industry’s perception of major risks has undergone a near total change amid the volatile financial climate, according to the results of the second Insurance Banana Skins survey from London-based think tank Center for the Study of Financial Innovation (CSFI) and PricewaterhouseCoopers. Investment performance, equity markets and capital availability now head the list of insurance banana skins after not even making the top 10 in the 2007 survey. Just 18 months ago, regulation and natural catastrophes were the top concerns of insurers. The report notes that for life insurers, investment returns are the major threat, while for non-life insurers, capacity and pricing are the big issues along with the problems that tend to come with a macro-economic slowdown – notably a surge in claims and an increase in fraud. This year’s top 10 risks also include: risk management techniques; reinsurance security, complex instruments and interest rates. The updated survey is based on 403 responses from 39 countries.  

Economic Forecast

A pessimistic  outlook on the United States economy has just been offered by forecasters from the National Association for Business Economics (NABE) who expect the recession to continue through mid-year 2009. The NABE panel does not expect a meaningful recovery to take hold until 2010. Notwithstanding the dour U.S. outlook for 2009, the NABE forecasters see the U.S. as the leader in shaking off the recession shroud. When quizzed about the countries that would emerge first from the recession, some 34 percent of responses favored the U.S., followed by China at 28 percent and Canada at 13 percent. Less than 4 percent regarded the United Kingdom and the Eurozone as leaders. Check out latest I.I.I. presentations on the P/C industry strength amid the economic downturn. For more on how insurers support national and state economies, check out the I.I.I. online publication A Firm Foundation.

Rating Actions Slow: P/C Industry Outlook Stable

Despite the impact of natural catastrophes and the financial crisis on property/casualty insurers in 2008, the vast majority (76 percent) of ratings actions by A.M. Best were affirmations. In its 2008 Rating Trend Review, A.M. Best analysis shows that upgrades and downgrades each accounted for 4 percent of rating actions last year. Nevertheless, A.M. Best notes that upgrades barely outpaced downgrades in 2008 after a strong positive trend in 2006 and 2007. Downgrades of p/c insurers totaled 57 in 2008, up from 43 in 2007 but still down sharply from 97 in 2004. Upgrades totaled 59, returning to levels seen in 2004 and 2005 after a sharp spike to 128 in 2006 and 87 in 2007. Upgrades in commercial lines outpaced downgrades 33 to 32, while personal lines insurers saw 25 upgrades and 24 downgrades. Reinsurers saw one upgrade and one downgrade. Rating changes in 2008 were down to 20 percent of all rating actions from about 25 percent over the preceding four years. Check out latest I.I.I. presentations on the state of the P/C insurance industry.  

Stanford Fraud Scheme Probe

Another day, another fraud. The Securities and Exchange Commission (SEC) has charged Robert Allen Stanford and three of his companies for orchestrating an alleged fraudulent, multi-billion dollar investment scheme centering on an $8 billion certificate of deposit (CD) program. This  is the second massive alleged fraud to hit the headlines in a matter of months. It follows the recent charging of Wall Street financier Bernard Madoff in connection with a $50 billion investor fraud. That scheme’s collapse has fueled litigation on a number of fronts. Hat tip to the D&O diary  for details of the first securities class action lawsuit filed by investors in connection with the Stanford fraud allegations. Also check out I.I.I. information on the liability system.  

P/C Customer Satisfaction Remains High

Even as the economy weakened, customer satisfaction with the property/casualty insurance industry remained high in the fourth quarter of 2008, improving over 2007 levels. The latest University of Michigan American Customer Satisfaction Index reveals that the p/c sector saw a 1.3 percent gain to record a score of 81 in Q4 2008. In the aggregate, customer satisfaction with the finance and insurance sector improved 0.7 percent to 76, erasing a corresponding deficit from a year ago (see our February 20, 2008 posting). A gain in ACSI for health insurance (+2.8 percent to 73) and the more modest gain in p/c insurance more than offset a decline in satisfaction with banks (-3.8 percent to 75). Meanwhile, satisfaction with life insurance stayed the same. The finance and insurance sector includes commercial banks and property and life and health insurers, as well as credit unions, a new ASCI entrant. The index measures customer expectations, perceived quality and perceived value of companies in various industries.

Aviation Safety

As investigators begin the task of determining what caused the crash of a turboprop regional aircraft in a Buffalo, New York suburb late yesterday, it seems that weather conditions, rather than birds may have played a role. The plane, a Continental Connection flight operated by Colgan Air, was en route from Newark, New Jersey to Buffalo with 49 people on board when it crashed into a house in the Buffalo suburb of Clarence Center. According to latest reports, the total death toll from the crash is thought to be 50, including one person on the ground. The incident comes  just a  month after the emergency landing of a US Airways Airbus A-320 into New York City’s Hudson River in which 155 people escaped. Despite these two aviation accidents, it’s important to note the strong safety record of the U.S. commercial aviation industry. The number of commercial aviation accidents on scheduled flights with 10 or more seats, stood at less than one per 100,000 flight hours at year-end 2007, according to National Transportation Safety Board (NTSB) data. There were no fatalities on large scheduled commercial airlines in 2007, compared with 50 in 2006. Check out further I.I.I. facts on aviation.  

 

Insurance Regulatory Moves

The future shape of insurance regulation in the United States is one of many topics that elicit a wide range of views within the industry. So insurers will be closely monitoring the  progress of a revised insurance regulatory bill, the National Insurance Consumer Protection and Regulatory Modernization Act, which is expected to be introduced in the House next week. Sponsored by Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif., the bill would create a national office of insurance regulation (OIR). It would also call for a new systemic risk regulator and strengthened consumer protection. For more on this story, check out February 11 online articles at Business Insurance and at National Underwriter. Check out further I.I.I. information on regulatory modernization and the optional federal charter (OFC).