Aviation Losses Drive Market Hardening

The high value of losses and fatalities in the aviation sector has driven the airline insurance market into a far harder position so far this year, according to Aon’s Airline Insurance Market Indicators 2009/10 report.

Lead hull and liability premium rose on average by nearly 20 percent between January and July 2009, and there is little sign that the position will improve during the final quarter when the majority of airline premium is placed.

Despite the market hardening, as a result of the high level of claims, 2009 is likely to be the third consecutive year with little or no profit for underwriters. This means there will be significant pressure to increase prices further, Aon notes. It estimates that the cost of premium is likely to rise by at least a fifth for the rest of the year and into 2010.  From a claims point of view  2009 is set to be the most expensive year in recent airline history due to the very high number of fatalities and value of losses. Aon projects that total claims for the year could reach as high as $2.2 billion, even if there are only an average amount of claims for the rest of the year. Check out I.I.I. aviation facts and stats.

NFIP Minimum Flood Elevation Rules Woefully Inadequate

Just a year since Hurricane Ike – the third most costly hurricane in U.S. history – hit coastal communities in Texas with a powerful storm surge, a new study by the Institute for Business and Home Safety (IBHS) says government minimum flood elevation requirements for Gulf Coast properties vulnerable to storm surge are woefully inadequate. Its report on property damage caused by Hurricane Ike finds that many properties are not built high enough to withstand storm surges. The IBHS study questions the current basis for elevating properties along the Gulf Coast and urges the National Flood Insurance Program (NFIP) to provide greater incentives for building well above the minimum elevations now in place. As well as providing flood insurance, the NFIP establishes base flood elevation (BFE) levels for properties. All but a handful of properties located closest to the coast on the Bolivar Peninsula, Texas and even built to the highest elevation requirements, were washed away during Hurricane Ike. By contrast, the study found that 10 homes on the Bolivar Peninsula designed and built under the IBHS Fortified†¦for safer living program, survived the storm with minor damage. The Fortified homes had outdoor decks at 18 feet that were destroyed, but the homes themselves which were elevated to 26 feet, survived. According to IBHS, most homes in coastal areas are built to or slightly above 100-year BFEs. “A 100-year flood means that the level of flood water has a 1 percent chance of being equaled or exceeded in any single year. However, it is well recognized in the engineering community that coastal homes built to this level have a 26 percent chance of being flooded or demolished over the life of a 30-year mortgage,† says IBHS Chief Engineer Dr. Tim Reinhold. Check out I.I.I. information on flood insurance.

IIHS Celebrates 50th Anniversary

There were 6 percent fewer highway deaths in 2008 than in 1960 despite the fact that last year there were nearly three times as many licensed drivers, four times as many cars and ten times as many miles driven than in 1960, according to I.I.I. president Dr. Robert Hartwig. His comments came in a keynote speech on the occasion of the 50th anniversary of the Insurance Institute for Highway Safety (IIHS). Dr Hartwig noted that IIHS has been on the vanguard in highway and automobile safety for half a century. “Without exaggeration, over the past 50 years, hundreds of thousands of lives have been saved and millions of injuries avoided—or their severity lessened—in whole or in part because of the fine work of this institution,† Hartwig said. While for most of its first 50 years IIHS got its message out primarily through television and the print media, the institute is now competing successfully in the age of the Internet. Hartwig said presently there are: 6.1 million references to the IIHS on the Internet based on a Google search; nearly 52,000 other web sites linking to iihs.org; and 1,640 IIHS crash test videos on Youtube. Check out I.I.I. facts and stats on highway safety.

Medical Liability Reform Pledge

President Barack Obama’s pledge to address medical malpractice liability concerns in his speech to Congress on healthcare Wednesday night has prompted a lot of headlines. In his speech the president proposed moving forward on a range of ideas about how to put patient safety first and let doctors focus on practicing medicine. He directed the Department of Health and Human Services to move forward on the initiative with pilot projects at the state level. “I don’t believe malpractice reform is a silver bullet, but I’ve talked to enough doctors to know that defensive medicine may be contributing to unnecessary costs,† the president said. An article in today’s Wall Street Journal states that programs underway in various states could provide a template for the administration’s initiative. Meanwhile, the New York Times Prescriptions blog cites insurer and doctors’ groups saying the devil is in the details of the plan. Responding to the President’s speech the American Medical Association (AMA) said: “Recognizing the critical need for medical liability reform is an important step toward reducing unnecessary costs. Everyday physicians across the country are forced to consider the broken medical liability system when making decisions, resulting in defensive medicine that adds to unnecessary health costs. We cannot ignore this problem if health-system reform is going to address the growing cost of care.† Check out I.I.I. information on medical malpractice.

Pandemic Risk and Capital Markets

Reports on the H1N1 virus continuing to cause illness, hospitalizations and deaths in the U.S. during the normally flu-free summer months and newly issued vaccination guidelines from the Centers for Disease Control and Prevention (CDC) are raising concerns on pandemic risk. This may prove an area of future growth for the capital markets as life insurers increasingly look to alternative risk financing as a way to raise additional capital and transfer pandemic risk. For example a new report from Swiss Re suggests that securitizations of extreme mortality risk will continue to expand as more large global life insurers and reinsurers adopt these tools to hedge exposure to pandemic risk. Swiss Re notes that the combined volume of extreme mortality bonds issued so far is $2.2 billion, a miniscule amount compared to the face amount of mortality risk insured globally. “It is difficult to estimate precisely the market potential for this type of securitization because it refers only to extreme mortality, but it will likely fall in the range of $5-20 billion by 2019,† Swiss Re says. Mortality securitizations are simpler than other life securitizations and investors are more comfortable with the underlying insurance risk, it adds. Check out I.I.I. information on alternative risk financing options.

Reinsurance Rendezvous

Reinsurance executives gathered in Monte Carlo this past weekend for the sector’s 2009 September Rendezvous and a number of new reports and commentaries on the state of the reinsurance market are in circulation. Here’s a few of the highlights. Guy Carpenter finds reinsurance rates increasing by an average eight percent through the 2009 reinsurance renewals, following declines of six percent in 2008 and 10 percent in 2007. In its annual survey of the global property catastrophe reinsurance market, Guy Carpenter states that the increase was largely a result of the financial crisis and its negative impact on reinsurers’ balance sheets. Meanwhile, ratings agency A.M. Best says two years into the global financial crisis, global reinsurers’ performance can be counted as an achievement, given the state of the financial services industry and the economy. It is maintaining a stable outlook in 2009 for the global reinsurance sector. However, ratings agency Fitch says its outlook on the global reinsurance sector remains negative, noting that global reinsurers may struggle to replenish capital if they suffer large catastrophe losses in the current financial market and economic environment. The agency acknowledged that reinsurers in general have performed better during the financial and economic disruption of the past 12 months than primary insurers. It attributes this to reinsurers’ generally high quality investment portfolios and low asset leverage. Check out I.I.I. information on reinsurance.

I.I.I. Analysis: State-Run Property Insurers

Despite a noticeable reduction in policies and exposure in the last two years, residual market property plans remain major providers of insurance in high-risk coastal areas. According to a newly updated paper from the I.I.I., total exposure to loss in the residual market (FAIR and Beach/Windstorm plans) rose from $419.5 billion in 2005 to $696.8 billion in 2008 – an increase of 66 percent – and since 1990 exposure to loss in the plans has surged by 1,173 percent. Further, many of these state-run plans operate at deficits, or from slim positions of surplus, even in years with little or no catastrophe losses. The study notes that the credit crunch and prolonged economic downturn exacerbated the already volatile financial conditions in certain plans by making it difficult for states to borrow funds. Ill-advised legislative steps over the course of several years also expanded the exposure base of a number of plans yet at the same time curbed the rates they can charge. Such moves put state finances under threat and leave taxpayers facing the potential for increased assessments in the years to come. The I.I.I. also found that legislation passed in several key states in 2009 has started to address some of the problems facing certain plans, while credit markets and bonding capacity have begun to improve.

Erika Forms

A disorganized Tropical Storm Erika – the fifth named storm of the Atlantic hurricane season – is a little weaker with maximum sustained winds of near 45 miles per hour as it approaches the Leeward Islands in the Caribbean, according to the latest report from the National Hurricane Center (NHC). Early today the center of Erika was located about 160 miles east-southeast of the Leeward Islands. Since its formation Tuesday, the storm has been moving generally westward near 7 miles per hour, but it is expected to turn west-northwest at a slightly faster forward speed over the next day or so. Because the 2009 Atlantic  season has featured just one hurricane so far, the temptation is to say danger over. But let’s not speak too soon. Hurricane season activity generally peaks in early to mid-September. Our fellow bloggers over at the Institute for Business and Home Safety (IBHS) Disaster Safety Blog remind us that the trends since 2000, with the exception of 2005, have shown an average of eight additional named storms after August 30. So on this basis, we have at least  four named storms to go and the season is far from over. Check out I.I.I. facts and stats on hurricanes.