Crumbling Infrastructure – Again

Spare a thought for San Francisco commuters who face their second day of rush-hour delays following the closure of the San Francisco-Oakland Bay Bridge after a major repair failed Tuesday night bringing down several pieces of steel on to passing vehicles. The incident raises questions about the strength of the bridge in the event of an earthquake. The state of the nation’s crumbling infrastructure has been a growing concern ever since the levee failures in New Orleans after Hurricane Katrina in 2005 and the Minneapolis Interstate 35W bridge collapse in 2007. Last year a report by the American Association of State Highway and Transportation Officials (AASHTO) warned that within the next 15 years almost half of America’s bridges will be over 50 years of age, exceeding the life span for which they were designed. One in four of the bridges are rated as deficient, either in need of repair or in need of widening to handle today’s traffic. In its 2009 Report Card for America’s Infrastructure the American Society of Civil Engineers (ASCE) assigned a grade of D to the nation’s infrastructure and warned that $2.2 trillion in repairs and upgrades is needed over the next five years to meet adequate conditions. It’s worth noting that insurance dollars play a vital role in helping rebuild private and public infrastructure in the wake of disaster. Check out the I.I.I. online publication A Firm Foundation for more on how insurers support the U.S. economy.

Flying While Distracted (FWD)

By now it’s old news that pilots of a Northwest flight that overshot its Minneapolis destination by 150 miles a week ago were looking at their laptops. Yesterday the Federal Aviation Administration (FAA) said it had revoked the licenses of the pilots. They have 10 days to appeal the decision to the National Transportation Safety Board (NTSB).

According to a Wall Street Journal article, federal safety rules prohibit laptops in cockpits below 10,000 feet, but allow them during cruise. However, it cited a statement from Delta (now merged with Northwest) that the airline expressly forbids pilots from using laptops at any time or engaging in personal activity that could distract from flight duties.

Just a few weeks ago the U.S. Department of Transport held a Distracted Driving summit which highlighted the growing dangers of driving while distracted by texting or cellphone use. The Northwest incident underscores the point that whether it’s a car, an aircraft, a train or indeed any piece of machinery or equipment, their safe operation requires the full attention on the part of the operator.

Distraction is one part of the problem. An over-reliance on automation is another. An investigation into the June collision of two Washington D.C. Metrorail trains that left nine dead and about 80 injured focused at least partly on the fact that the moving train was operating in automatic mode, meaning that it was primarily controlled by a computer.

The use of technology has led to safer roads, skies, and workplaces to name a few, but if computers are in control, how much attention on the part of the driver or pilot or machine operator is required? Needless to say there are growing insurance implications and potential liabilities arising from these incidents. I.I.I. president Dr. Robert Hartwig recently observed that the problem of distraction is not confined to cars but is part of a greater problem associated with “distracted equipment operation†. This is leading to an epidemic of occupational injuries and workers compensation claims, he warned.  Insurers will be monitoring this  emerging issue.

Risk Appropriate Rates Key to Avert Homeowners Crisis

A homeowners insurance crisis in the next decade will only be prevented if regulators and state lawmakers allow insurers to charge a rate commensurate with the risk, an annual report from Aon Benfield has warned. Aon Benfield’s annual Homeowners ROE Outlook says the prospective return on equity (ROE) for homeowners insurance fell to 6.1 percent in August 2009, from 6.5 percent a year ago and is now far less than the increased cost of insurer capital resulting from the global credit and liquidity crisis. Countrywide, for insurers to attain an ROE of 14 percent homeowners rates would need to increase 26.4 percent. However, a number of states, including those prone to hurricanes, would require far higher rate increases. For example, Florida would require an average rate increase of 93.5 percent, Rhode Island 51.2 percent, and Massachusetts 44.6 percent for insurers to achieve an ROE of 14 percent, according to Aon Benfield’s analysis. “Homeowners insurers continue to struggle through the labyrinth of state rate making laws, regulations, consumer price protections, rate making process delays, and market disruptions from lightly financed and competitive state funds to recover their increasing costs of capital – and they lost ground during the last year even though they paid billions in catastrophe claims to policyholders in recent years,† Aon Benfield says. The inability to earn reasonable returns from writing homeowners insurance discourages the participation of private capital in the market, leaving states to attempt to finance the highly volatile risks of their constituents and then look to the federal government for aid. For more on this story, check out National Underwriter’s October 26 article. Check out I.I.I. facts and stats on homeowners insurance.

Inflation Threat

The potential impact of inflation on insurers and reinsurers is a growing concern among industry commentators. On Friday, Towers Perrin warned that future inflation may damage reinsurers’ profitability on all lines of business, with casualty lines hardest hit, leading them to reduce the business they write next year. Towers Perrin estimates that an inflation rate of 3 percent would mean a $1 million claim today could cost a reinsurer $1.113 million on average tomorrow. A five percent inflation rate could result in a claim of $1.195 million – 119 percent of the original claim size. Towers Perrin makes the point that because several years often elapse between rates being set and claims being paid out under reinsurance contracts, inflation is a potential threat and can become a real problem. In addition to claim severity, inflation can also have a knock-on effect on frequency. Periods of high inflation generally correspond with greater numbers of claims. Looking at historical loss ratios for casualty lines, Towers Perrin says the impact of inflation can be seen with a two-year lag. An inflation high point of 3.4 percent in 2000 was followed by a loss ratio of 99 percent on casualty lines in 2002. Conversely, an inflation low point of 1.6 percent in 2002 saw loss ratios fall to 73 percent in 2004. Check out I.I.I. information on reinsurance.

ID Theft Rules: House Passes Limited Exemption

Our fellow bloggers at Workers Comp Insider tipped us off that this week is Protect Your Identity Week, so it seems fitting to end it with a post on ID theft. This is a timely reminder that fast approaching is the November 1 deadline by which financial institutions and creditors have to comply with the Federal Trade Commission’s (FTC) so-called “red flags rule† which requires them to develop and implement written identity theft programs. Regular readers will remember that the FTC has delayed enforcement of the new rule a number of times. Now an October 21 online article at Lawyers USA by Kimberly Atkins reports that earlier this week the House passed H.R. 3763, a bill that would amend the Fair Credit Reporting Act to exempt certain businesses from the red flag guidelines. Under the bill, healthcare, accounting and legal practices that employ fewer than 20 people would automatically be exempt from the red flags rule. Atkins also mentions that officials at the American Bar Association, which has filed suit to have attorneys exempted from the red flags rule, are urging the Senate to extend the protections to all lawyers. Check out I.I.I. facts and stats on Identity Theft.

Brokaw to Speak at Industry Charitable Foundation Gala

NBC’s Tom Brokaw will be the special guest speaker at the annual dinner of the New York division of the Insurance Industry Charitable Foundation (IICF) being held on December 9 at the Waldorf-Astoria Hotel in New York City. Pierre Ozendo, chairman and CEO of Swiss Re America Corp and the 2008 honoree will serve as this year’s dinner chair. IICF will honor Brokaw’s commitment to philanthropy with a grant to the Youth Program of the International Rescue Committee, where he serves on the board of overseers. Proceeds from the event will provide significant grants to other children’s charities in the New York tri-state area such as Boys Hope Girls Hope and the Starlight Children’s Foundation. For Gala information, including ticket sales, please contact the IICF Benefit Office at 212-763-8593 or According to a Conference Board survey, the insurance industry ranks among the top 15 contributors when it comes to charitable donations. The insurance industry’s contributions to U.S. beneficiaries totaled $211.1 million in 2007, up from $147 million in 2006. Check out I.I.I. information on corporate social responsibility.

A Matter of Trust

The rhetoric surrounding the insurance industry’s limited exemption from federal antitrust laws that has been in place for 64 years under the McCarran-Ferguson Act is reaching fever pitch. Today an announcement is expected from Senate Majority Leader Harry Reid (D-NV) and Senator Patrick Leahy (D-VT), chairman of the Senate Judiciary Committee re the antitrust exemption as it applies to health insurers. It comes as the House and Senate continue to debate healthcare reform legislation. An Op-Ed in today’s Wall Street Journal by Scott Harrington, a professor of healthcare management and insurance and risk management at the University of Pennsylvania’s Wharton School explains why repealing the insurance industry’s antitrust exemption won’t lower the cost of health insurance or medical malpractice insurance or prevent future malpractice insurance crises. Instead, a repeal would tend to reduce rate accuracy and undermine competition in already fragile malpractice markets, Harrington says. Over the years the property/casualty insurance industry has faced numerous attempts to repeal its limited antitrust exemption. Most recently, Senator Leahy introduced the Health Insurance Industry Antitrust Enforcement Act seeking a tailored repeal of the exemption for health insurers and medical malpractice insurers. Just two years ago in the wake of Hurricane Katrina, Sen. Leahy, along with then Sen. Trent Lott sought a much broader repeal of the McCarran Ferguson Act. In March this year, Rep. Gene Taylor (D-MS) and Peter DeFazio (D-OR) also introduced the Insurance Industry Competition Act of 2009 which would remove the federal antitrust exemption from the entire insurance industry. As we’ve noted before McCarran-Ferguson does not include a blanket exemption from antitrust laws, but a targeted exemption for certain limited insurance activities. This narrow antitrust exemption allows insurers to pool historic loss information so that they are better able to project future losses and charge an actuarially based price for their products. The act also does not exempt insurers from state antitrust laws, which explicitly prohibit insurers (and all businesses), from conspiring to fix prices or otherwise restrict competition. Check out further I.I.I. information on the McCarran Ferguson Act and medical malpractice insurance.

Global Warming Litigation Update

A few weeks ago we blogged about a decision by the Second U.S. Circuit Court of Appeals in New York that would enable public nuisance claims to proceed against businesses for their contributions to global warming. Two similar cases have now been decided that offer starkly different opinions in the area of climate change litigation. On Friday the Fifth U.S. Circuit Court of Appeals in New Orleans reversed the dismissal of a climate change class action brought by Mississippi property owners who claim that greenhouse gases emitted by oil and gas companies contributed to global warming that added to the ferocity of Hurricane Katrina that caused damage to their properties. Hat tip to the Wall Street Journal Law Blog for its post on the decision which cites J. Russell Jackson, a partner at law firm Skadden Arps saying that at a minimum the ruling will invite more climate change litigation in future. Then in another ruling made public last week, a judge on the U.S. District Court for the Northern District of California dismissed a public nuisance lawsuit brought by the Alaskan coastal town of Kivalina against 24 energy and utility firms. An article in the New York Times by Jennifer Koons of Greenwire notes that the ruling in Native Village of Kivalina v. Exxon Mobil Corp. explicitly broke from the Second Circuit’s take on whether companies could be held liable for greenhouse gas emissions that contribute to global warming. Appeals are expected in all three cases. Check out I.I.I. information on climate change and insurance.

Microinsurance Heads Up IAIS Agenda

“Insurance as a Means of Socio Economic Development† is the main theme for the 16th annual conference of the International Association of Insurance Supervisors (IAIS) which  opens this Wednesday in Rio de Janeiro, Brazil. A growing number of insurers are tapping into markets in developing countries through microinsurance projects which provide low cost insurance to individuals generally not covered by traditional insurance or government programs. The opening session at the IAIS will address challenges in identifying appropriate regulation and supervisory tools to facilitate access to insurance without distorting the market. Speakers will also discuss regulation and supervision of alternative providers of insurance and proportionate regulation of microinsurance providers. Check out I.I.I. facts and stats on microinsurance.

Litigation Rises Amid Economic Downturn

U.S. companies are seeing a litigation wave that corporate counsel expect to swell next year, according to the Sixth Annual Litigation Trends Survey from international law firm Fulbright & Jaworski. As predicted last year some 42 percent of in-house counsel at U.S. firms expect an increase in the number of legal disputes their companies will face in the next 12 months, up from 34 percent of last year’s respondents, while 83 percent report that lawsuits have already commenced against their companies. Fulbright reports that large-cap companies have the highest expectation of litigation, with 52 percent forecasting an increase in legal disputes, while 47 percent of public company respondents foresee a jump in disputes. The economy was cited as the key reason for the rising litigation. Regulatory investigations and whistleblower allegations are expected to eat up litigation resources in the year ahead. Looking to 2010, 16 percent of all respondents (and 23 percent of large-caps) say they expect the number of internal investigations involving their company to increase. Industry-wise, approximately 20 percent each of financial services, insurance and technology companies expect internal investigations to rise in the coming year. This tracks expected increases in whistleblower cases with 24 percent of all respondents (and 31 percent of large-caps) expecting an increase in claims brought by whistleblowers. Check out a recent I.I.I. paper on The Tort Threat.