Wrapping up 2009 – Part II

Legal decisions have a big impact on the insurance industry, so it’s fitting that we see out the year with a couple of great round-ups from the legal experts.

Music fans will enjoy the tribute to pop legend Michael Jackson in Thriller: 9th Annual Review of the Year’s Ten Most Significant Insurance Coverage Decisions by attorney Randy Maniloff of law firm White and Williams LLP. Maniloff’s new rendition of the MJ classic “Beat It” may just reach the top of the insurance charts. His accompanying 2nd annual Coverage for Dummies special report also makes for an entertaining read with its summary of the not-to-be-believed behavior that causes injury and the filing of a lawsuit, followed by the inevitable insurance claim. U.S. Supreme Court decisions have the ability to change the course of entire categories of litigation and with them the fortunes of insurers.

Over at Lawyers USA, Kimberly Atkins summarizes some of the top Supreme Court rulings of 2009. Among them, Wyeth v. Levine, a decision with significant ramifications for product liability litigation we wrote about here, and Gross v. FBL Financial Services an age discrimination ruling we wrote about here.

Meanwhile, the National Law Journal’s (NLJ) spotlight on the decade’s biggest legal stories brings out some top insurance stories too. This decade saw the war on terror test the limits of law and accounting scandals flood the courts, stories which rank first and third respectively on the NLJ list.

Wrapping up 2009 – Part I

As the end of the year approaches, it’s a good time to review the most significant events of 2009 for the insurance industry.

Among the various year-end musings offered by our fellow insurance bloggers, National Underwriter’s Sam Friedman reminds us that 2009 could have been worse. Some of the positives? The property/casualty insurance market, while still soft on the commercial lines side, at least began to stabilize. Insurers were also spared any major natural or man-made disasters compared to the multi-event years seen far too often in this decade, Friedman notes. And despite the coverage crisis headlines, Chinese drywall is far from becoming the next asbestos.

In a similar vein Business Insurance’s Rodd Zolkos offers a not-so-fond farewell to a tough, testing year noting that another item on the plus side of this year’s ledger was the mild hurricane season, the calmest in 12 years, according to the I.I.I. From the buyers’ perspective Zolkos points out that another positive was that expectations of a market hardening in the fourth quarter of 2009 never came to fruition.

Meanwhile, Alex Ferguson of Reinsurance Magazine’s blog-re.com gives us his good year/bad year take on 2009 from the reinsurance perspective. And Risk Management magazine takes a look back at some of the year’s most captivating risk-related images, describing 2009 as a year marked not by any one event but by trends that will have lasting repercussions for years to come.

Rebound in Profitability for P/C Industry

Solid evidence of a substantial and sustained rebound in profitability for property/casualty insurers in the wake of the financial crisis that began in mid-2007 has emerged in the first nine month 2009 results just released by ISO and the Property Casualty Insurers Association of America. The industry reported an annualized statutory rate of return on average surplus of 4.5 percent through the first nine months of 2009, up sharply from 1.1 percent during the same period in 2008. In his commentary on the results, I.I.I. president Dr. Robert Hartwig noted that as recently as the first quarter of 2009 the industry recorded a negative rate of return. Moreover, stable investment market conditions and modest catastrophe losses since the end of the third quarter through late December guarantee that full-year profitability in 2009 will be much higher than the 0.5 percent return recorded in 2008. In another sign of recovery capacity in the industry (as measured by policyholder’s surplus) rebounded for the second consecutive quarter after two years of decline. Policyholder’s surplus increased by $27.8 billion to $490.8 billion or 6.0 percent during the quarter, up from $463.0 billion at the end of the second quarter. Hartwig observes that the reversal is notable and important given that P/C insurance industry capacity had plunged by an alarming $84.7 billion or 16.2 percent over the previous five quarters from the pre-crisis peak of $521.8 billion at the end of the second quarter of 2007. The recovery of asset markets, while welcome, is a leading indicator of economic recovery and does nothing to salve the impact of the ongoing six-year-old soft market as well as a significant reduction in demand for insurance driven by a deep global recession. “The weak pricing environment and the sharpest contraction in the economy since 1982 sent net written premiums tumbling by 4.5 percent, despite a long awaited return to economic growth,† Hartwig notes. While insurers remain cautious about the economy and financial market conditions, there is guarded optimism that both will continue to improve as the industry moves into 2010, he adds.

Another Two Month Extension for NFIP

With all eyes focused on passage of healthcare reform legislation, it’s good to see that a short term extension of the National Flood Insurance Program (NFIP) was passed by the Senate in the 2010 Defense Appropriations Bill over the weekend, albeit for just another two months. The program is now set to expire on February 28, 2010. The move keeping the NFIP in place was applauded by the advocacy trades, but they cautioned that a longer term solution will be required to address the program’s financial troubles. In a statement, the Property Casualty Insurers Association of America (PCI) said it looks forward to working with the House and Senate in 2010 to advocate a long-term extension ensuring the program’s fiscal soundness that protects homeowners. Similarly, the National Association of Mutual Insurance Companies (NAMIC) called on members of Congress to use the latest short term extension to complete reforms to the NFIP. In a press release NAMIC said: “While it’s important that the NFIP remain in place for the next two months, Congress needs to stop kicking the can down the road and start working on meaningful reforms.† At the end of 2008, the NFIP had some 5.7 million policies in force and losses paid by the program totaled $2.6 billion that year. The average premium for an annual flood insurance policy is around $542, yet a 2008 poll by the I.I.I. found that only 17 percent of Americans have a flood insurance policy. Flood damage is excluded under standard homeowners and renters insurance policies. Check out I.I.I. info on flood insurance.

Winter Storm Watch

A major winter storm barreled up the East coast over the weekend, blanketing states from the mid-Atlantic to New England bringing record snowfalls to some regions. According to reports, the storm caused widespread power outages, treacherous driving conditions, and was blamed for at least six deaths. It’s easy to forget that winter storms can pack a powerful punch, for insurers in particular. According to Insurance Information Institute (I.I.I.) research winter storms result in about $1 billion in insured losses annually and are the third largest cause of catastrophe losses, behind hurricanes and tropical storms and tornadoes. Melting snow can inflict significant damage to property. From 1999-2008, winter storms resulted in more than $7 billion in insured losses. Winter storms also account for a large proportion of homeowners claims each year. In 2007, water damage and freezing accounted for approximately 22 percent of all homeowners claims in the country. So what are the coverage issues for policyholders? Standard homeowners policies cover property damages caused by burst pipes, ice dams, wind and hail and damages from weight of ice or snow. However, property damage caused by flooding (water that comes into the home from the ground up) is typically covered by a separate flood insurance policy. Check out I.I.I. info on flood insurance.

Securities Class Action Filings Remain High

While the credit crisis continued to drive securities class action litigation in 2009, the pace of these cases has declined gradually throughout the year. AÂ  recently released report by NERA Economic Consulting finds that over 60 credit crisis cases were filed through November 30 but that credit crisis filings in the first half of 2009 outnumbered second-half filings by approximately two to one. To date in 2009, some 30 percent of cases filed were related to the credit crisis, compared to over 40 percent of cases in 2008, NERA says. Securities class action filings in total are expected to reach 235 cases in 2009, down from 253 filings in 2008, but still high compared to the 130 filings in 2006, before the start of the credit crisis. A new source of securities class actions is also emerging. According to NERA a new litigation phenomenon in 2009 is a wave of filings on behalf of investors in various exchange-traded funds (ETFs). In these cases, investors typically allege that the defendants failed to disclose risks and the probability of potential losses associated with the investments. Some 13 ETF-related securities class action cases were filed between August and November 2009, NERA says. Further analysis of the NERA findings can be found at Kevin LaCroix’s D&O Diary blog.

What’s On State Legislative Agendas in 2010?

Insurers make key contributions to state, local and national economies, so it’s worth taking a look at the annual list of the most pressing issues on state legislative agendas from the National Conference of State Legislators (NCSL). It forecasts that fiscal conditions will continue to dominate state legislative sessions in 2010,  as balancing state budgets and creating revenues top the list. “Economic conditions have forced many states to continue looking at cutting or scaling back programs, increasing taxes and implementing hiring freezes and furloughs. But these actions may not be enough for some state budgets,† NCSL said. Some 35 states and Puerto Rico currently project a cumulative budget gap of $55.5 billion in fiscal year (FY) 2011. At least five states report that an official gap estimate is unknown, but indicated that a gap in FY 2011 is expected, while 16 states do not currently project a gap for FY 2011. Managing health costs and coverage and lowering unemployment rates round out the top three issues on state legislative agendas in 2010. Meanwhile, developing clean energy alternatives ranked as the eighth most important issue on the list. NCSL noted that some 29 states now have requirements for renewable electricity, while six more have renewable energy targets. Distracted driving is another issue that states will be monitoring during the 2010 legislative session. According to NCSL, some 19 states and the District of Columbia prohibit drivers from text messaging while driving; 12 of those laws passed in 2009. Florida and Kentucky have already pre-filed texting ban bills for the 2010 legislative session. Check out the I.I.I. online publication “A Firm Foundation† to see the myriad ways in which insurers support national and state economies.

Spotlight on Judicial Hellholes

Start spreading the news. New York City has emerged as a so-called “judicial hellhole,† or one of the nation’s most unfair civil court jurisdictions, according to the eighth annual Judicial Hellholes report just released by the American Tort Reform Association (ATRA). ATRA reports that the Great Gotham spent more settling slips and falls, medical malpractice, car accident and school-related claims than the next five largest American cities combined. After several years on the watch list, New Mexico’s appellate courts also made the cut as a first-time judicial hellhole. This year the New Mexico Court of Appeals even rejected the “baseball rule,† which has long recognized spectators’ inherent risk of being hit by a batted ball, ATRA notes. The two join perennial judicial hellholes South Florida, West Virginia, Cook County, Illinois and New Jersey. Not coincidentally, the local or state economies in many of these hellhole jurisdictions have suffered more than most during the latest recession, according to ATRA. The report includes a couple of special sections such as “Rogues’ Gallery† which is designed to remind policymakers – especially those in Congress – that there are influential plaintiffs’ lawyers who have stretched ethics rules and criminal laws beyond acceptable bounds. Another special section, “Fueling the Fire,† focuses on several troubling trends in some courts that could lead to costly expansions of civil liability and even an erosion of public health and safety. Check out further I.I.I. information on the liability system.

Medical Malpractice Litigation: Tort Threat

Medical malpractice litigation and fallout from the financial crisis could fuel future growth in U.S. tort costs, according to the latest update from Towers Perrin. The warning came as Towers Perrin reported that U.S. tort costs are expected to increase by 3 percent in 2009, and a further 4 percent in 2010 and 6 percent in 2011. Looking beyond 2009 and probably 2010, Towers Perrin said medical malpractice is very susceptible to a quick change given its costs. “This area of tort costs could see a return to the growth rates seen in the mid-1970s, mid-1980s and for a brief time, earlier in this decade,† it observed. That said, despite the chaos in the financial markets in 2008, U.S. tort costs remained relatively benign, rising by $2.7 billion (1.1 percent) in 2008. This was due to several factors, including a decrease in miles driven, which kept personal auto and commercial auto costs in check. Medical malpractice costs also decreased slightly in 2008, according to Towers Perrin. Check out a recent I.I.I. paper on the Tort Threat and information on medical malpractice.

Heeding Hurricane Forecasts

The long-range forecasts for next year’s Atlantic hurricane season are out and come with a slew of caveats re their forecast accuracy. Colorado State University’s Tropical Meteorology Project team calls for an above-average Atlantic basin tropical cyclone season in 2010 with above-average probability of U.S. and Caribbean major hurricane landfall, but cautions: “Although these early December forecasts have not shown recent-year real-time forecast skill, we believe our new early December forecast scheme will begin to demonstrate forecast skill in the coming years.†   Meanwhile, London-based consortium Tropical Storm Risk (TSR) predicts an active Atlantic hurricane season in 2010, but warns: “Users should note that the precision of TSR’s extended range outlooks for Atlantic hurricane activity between 1980 and 2009 is low.† All this leads to the obvious question of how useful these forecasts can be this far out. Over at bnet.com’s finance blog Ed Leefeldt makes the case that insurers should still pay attention, even though hurricane predictors have been wrong most years since 2005 when making predictions way ahead of the season. For one thing, Leefeldt notes that a Category 4 hurricane could do some serious damage, especially if it were to hit a city like Miami. Secondly, hurricane predicting is getting better. As a result, any storm warning should be heeded. We couldn’t have said it any better. Check out I.I.I. hurricane facts and stats.