Interconnected Risks at Unprecedented Level

Events of the past year have revealed a fundamental need to change thinking on global risks and how they are managed, according to the World Economic Forum’s (WEF) Global Risks 2010 report. Release of the report comes ahead of the WEF annual meeting in Davos-Klosters, Switzerland. With unprecedented levels of interconnectedness between all areas of risk, the report stresses that the need to combat governance gaps globally is greater than ever. Global Risks 2010 identifies fiscal crises and unemployment, underinvestment in infrastructure – especially in energy and agriculture – and chronic disease as the pivotal areas of risk over the next years. Other risks identified as equally systemic in nature and requiring better global governance are transnational crime and corruption, biodiversity loss and cyber-vulnerability. The report notes that the response to the impact of the financial crisis and downturn has been a greater willingness to cooperate on common strategies and develop more effective global governance to address global risks. However, Sheana Tambourgi, editor of the report and director and head of the WEF’s Global Risk Network warned: “The next few months will put the willingness among global decision makers to cooperate on addressing global risks to the test. Simply reverting to ‘business as usual’ could have serious implications in the long term in several risk areas.† The WEF report is published in partnership with Citigroup, Marsh & McLennan Companies (MMC), Swiss Re, the Wharton School Risk Center and Zurich Financial Services.

New Media and Post-Disaster Communications

Whether it’s an earthquake, hurricane or terrorist attack, communicating in the wake of a major disaster can be a serious problem as the breakdown of communications and infrastructure often adds to the devastation and loss of life. After the powerful earthquake that hit Haiti late Tuesday, what’s striking is that mobile communications and social networks are playing an immediate and important role in the disaster recovery efforts. An article in the Seattle Times notes that more than a million Haitians rely on the mobile phone service Voilà   for communications which is provided by Bellevue-based Trilogy International Partners. Members of the Trilogy/Voilà   crisis task force were one of the first aircraft to land at the Port-au-Prince airport yesterday morning to assist on-the-ground efforts. A number of organizations are also using Skype as a key tool for phone communications in the earthquake-disrupted area. Meanwhile a number of informational and relief efforts have sprung up on social networking sites. On Facebook an informational page Earthquake Haiti has been created to allow people to share relevant information to help find family members in Haiti and provide guidance on donating to legitimate relief organizations. It already has more than 90,000 members. The American Red Cross is posting Haiti updates to  both Facebook and Twitter  to spread information about donating to relief efforts by texting “Haiti† to 90999. On Twitter “Help Haiti†, or #Haiti, are among the most popular trending topics and are providing an important space where people can tweet calls to support various relief efforts. Twitpic  and Flickr have also become main venues for sharing photographs from Haiti, according to media reports. The business oriented networking site LinkedIn already has at least one group set up for Haiti earthquake disaster relief efforts. And a word-press powered blog Haitifeed is providing first-hand accounts as well as worldwide status reports on the earthquake. There are many more examples, but what is clear is that post-disaster recovery efforts have taken on a new meaning in the new media age.

Haiti Hit by Earthquake

Initial reports suggest the magnitude 7.0 earthquake that hit Haiti around 5pm Eastern Time yesterday has caused widespread damage, with large loss of life expected. The quake struck about 10 miles southwest of the island nation’s capital Port-au-Prince, according to the U.S. Geological Survey. According to reports, a magnitude 5.9 aftershock followed shortly afterwards some 30 miles further west, followed by a 5.5 aftershock closer to the location of the first quake. Haiti is a member of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a multinational insurance pool developed by the World Bank. Funded by premiums paid by participating countries, the facility provides early payout to members after a major earthquake or hurricane. In  recent years the CCRIF paid out approximately $500,000 each to Dominica and St. Lucia after a 2007 earthquake, and $6.4 million to the Turks and Caicos Islands in the aftermath of Hurricane Ike in 2008. Check out I.I.I. facts and stats on earthquakes.

Aviation Losses Outweigh Premiums in 2009

Despite a relatively safe year for the airline industry, aviation insurers paid out an estimated $2.3 billion in total losses in 2009 – making  it the second most costly year on record. According to Aon’s January 2010 Airline Insurance Market News, the total lead hull and liability premium for 2009 was around $1.9 billion, up from $1.6 billion in 2008, but still far short of the $2.3 billion in total claims. This means 2009 is the third consecutive loss making year for aviation underwriters. However, Aon cautions readers to look beneath the headlines for the real story. With average lead hull and liability price increases of around 20 percent during 2009, the airline book of business began to look attractive again despite the high level of claims, it notes. This means that prices are likely to continue to rise in 2010, but, unless there is a major loss, the increases should slow somewhat. “Looking ahead is difficult, but the direction of the market is likely to be set by the level of claims in the early stages of 2010. If claims are average, then the level of competition in the airline insurance market should keep price increases at a manageable level. If there are major losses, capacity could hold back and the price of airline insurance could continue rising at the current rate or higher,† Aon adds. Check out I.I.I. aviation facts and stats.

P/C Joint Industry Forum

The 14th annual Property/Casualty Insurance Joint Industry Forum will be held tomorrow at the Waldorf-Astoria Hotel in New York City. The Forum, sponsored by 16 leading property/casualty insurance trade associations, was created to provide p/c insurance and reinsurance company leaders with an opportunity to meet 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. This will be followed by a panel of industry CEOs who will discuss general trends in industry services. A reception and dinner that evening will feature an address by Kimberley Strassel, a member of the editorial board and columnist at The Wall Street Journal. For more information on the Forum, contact  Loretta Worters at the I.I.I. on 212-346-5545.

The Need for Employment Practices Liability (EPL)

If ever there was a time for a business to buy employment practices liability (EPL) insurance it’s now, according to latest data on workplace discrimination claims released by the U.S. Equal Employment Opportunity Commission (EEOC). The findings show that 93,277 workplace discrimination charges were filed with the EEOC during fiscal year 2009 – the second highest level ever – and monetary relief obtained for victims totaled over $376 million. As in previous years, race and retaliation were the most frequently cited types of employment discrimination in 2009, each accounting for more than one-third (36 percent) of charges filed with the EEOC, while sex-based discrimination charges were the third most frequently filed (30 percent). Bear in mind that multiple types of discrimination may be alleged in a single charge filing. A closer look at the numbers reveals some key takeaways. For example, the number of charges alleging discrimination based on disability rose by 10 percent to 21,451 – the highest level ever. At 22,778, the number of charges alleging age-based discrimination also reached the second-highest level ever. Charges of discrimination based on national origin also rose by 5 percent to 11,134. A range of factors, including economic conditions, increased diversity and demographic shifts in the labor force and employees’ greater awareness of their rights under the law, contributed to the near-historic level of total discrimination charge filings, the EEOC said. Check out I.I.I. information on  EPL insurance.

New York’s Global Insurance Exchange Plan

Yesterday New York Governor David Paterson spoke of plans to revive a global insurance exchange in New York. The New York Insurance Exchange (NYIE) would bring buyers and sellers of complex commercial insurance closer together, providing increased transparency and security for everyone in the process. “The exchange will reaffirm our status as the hub of international trade and finance and it will also curtail the unregulated transactions that devastated the global economy,† Governor Paterson said. This is not the first time that the idea has been raised. Former New York Insurance Superintendent Eric Dinallo sought input from the industry about reviving the exchange in early 2009 after first suggesting the move in 2008. The exchange would operate in a similar way to Lloyd’s of London, Governor Paterson said, and would enhance New York’s status as the world’s financial center stimulating the economy by increasing the flow of capital and insurance premiums to New York. Hard-to-insure risks and the economic benefits resulting from them generally find a home in offshore jurisdictions like Bermuda, Ireland, Switzerland and Lloyd’s. In the process, New York loses jobs and tax revenue, he said. It is estimated that an additional $7 billion to $10 billion in premium dollars could be generated by an efficient, revitalized exchange. We like the timing of this announcement, compared to last year. Reviving the exchange could lead to greater coverage choices for buyers of insurance and increased competition in the market as well as stimulating economic growth in New York. At the same time, capital funding for such an exchange is likely to be easier to come by than it would have been two years ago or even last year. However, from the perspective of buyers and risk managers it remains to be seen what specific market  need the exchange  would address and how successful it would be compared to well-capitalized and established markets catering to complex risks. A New York Times article by Mary Williams Walsh notes that it would be easier for New York to create an insurance exchange than other states because it attempted to start one in the 1980s. That attempt failed, but apparently the enabling legislation is still on the books.

Securities Class Action Filings: The Numbers

Another report on securities fraud class action activity has revealed a sharp drop in the number of securities class action lawsuit filings in 2009 compared to 2008. According to the annual report prepared by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, a total of 169 federal securities class actions were filed in 2009, a 24 percent decline from 223 in 2008, and 14 percent below the average of 197 filings observed between 1997 and 2008. Litigation activity related to the credit crisis declined even more markedly from 100 filings in 2008 to only 53 in 2009, a 47 percent decrease. Only 17 of those filings occurred in the second half of 2009. “As predicted in last year’s report, the rate of litigation overall and particularly against financial firms declined from the financial crisis-fueled levels observed in 2008. Plaintiffs simply ran out of financial firms to sue, and the rising stock market made it harder for plaintiffs to assert claims,† said Stanford law school professor Joseph Grundfest. Just last month NERA Economic Consulting issued a report also revealing a decline in credit crisis-related suits, but showing a higher overall lawsuit count than the Stanford study. Over at the D&O Diary blog, Kevin LaCroix offers some thoughts about the differences in the numbers between the two reports. Meanwhile, the Wall Street Journal law blog ponders whether the golden era of securities class-action suits is coming to an end.

Reinsurance Rates: Disciplined Softening

Reinsurance rates across most property/casualty lines were lower at January 1, 2010 renewals, according to the latest round of broker reports. A briefing from Guy Carpenter found that its world catastrophe rate on line (ROL) index declined by six percent at January 1, as the reinsurance market recovered and swiftly recapitalized in the wake of the global financial crisis and large reduction in catastrophe losses. Rates for U.S. property catastrophe business were down by an average of six percent and by as much as 11 percent, according to Guy Carpenter. Rates for U.S. casualty business fell by as much as 10 percent. Meanwhile Aon Benfield noted that the remarkable recovery of both insurer and reinsurer capital translated into a catastrophe reinsurance renewal market for January 2010 that was focused on rate decreases in the market’s peak zones of U.S. hurricane and U.S. earthquake. Capacity for the global catastrophe reinsurance market has been restored to near its all time peak of December 2007 and is meaningfully higher than the levels witnessed throughout the January 2009 renewal season, according to Aon Benfield. In another report, Willis Re said strong underwriting profits, a recovery in the global investment markets and a lack of premium growth for primary underwriters have resulted in a disciplined softening of reinsurance pricing at January 1 renewals. The disciplined rating approach, says Willis Re, reflects reinsurers’ concern that the excellent 2009 underwriting results are less due to attractive pricing than a below average pattern of natural catastrophe and man-made losses. Check out I.I.I. information on reinsurance.

Airport Security: More Questions Than Answers

After the attempted Christmas Day bombing and resulting ramp up in airport security it was with some apprehension that I headed to London’s Heathrow airport for my return flight to the U.S. this past weekend.

New airport security rules were in effect for flights going to the U.S. and extra screening of passengers and hand baggage at the gate could be expected. The manual search was painstaking as every one of the more than 250 passengers was patted down and had the contents of their bags and footwear reviewed. As our flight finally departed some two hours later than its scheduled take off, I had to question the effectiveness of this risk management process.

Wouldn’t the use of advanced equipment  such as a  body scanner or extra questioning of passengers be more relevant? There were some changes on board the aircraft too. The use of blankets and pillows by passengers during take off and landing were restricted. Also, as we approached the U.S. the in-flight video navigation system was turned off and we were told that no information on the status of our flight was available.

An article in the New York Times over the weekend made the point that the extra security measures cannot be sustainable from an operational point of view on an ongoing basis. It also described practical steps taken by one airline captain who walked down the aircraft aisle before his flight left from Europe, greeting each passenger to see who wanted to make eye contact and to check that everyone was acting vaguely normal. Just yesterday Obama administration officials announced intensified screening for passengers from 14 nations who are flying to the U.S. However, for American citizens and most others not flying through these 14 nations, extra security steps will be relaxed.

The shifting nature of these additional security measures and the contrasting methods taken to airport security around the world appear to suggest that no one system has the answer. And this in turn raises more questions for air passengers and airport security officials in the days and weeks ahead.