Human Reason vs. Catastrophes

We often quote the seemingly perplexing statistics that despite the significant risks faced only 17 percent of Americans have a flood insurance policy and only 12 percent of homeowners in California buy earthquake insurance. Persuading people to buy coverage to protect them in the event of disaster remains a key challenge. So it was with great interest that we read a February 19 op-ed in the online edition of Newsweek by professors Erwann Michel-Kerjan and Paul Slovic. The article will be printed in Newsweek’s March 1, 2010 international edition. The op-ed starts out by stating that the earthquake in Haiti is an omen of what is to come as we face a growing trend of more frequent and larger scale natural disasters. Yet even as the world becomes more dangerous – more than half of the planet’s 20 costliest catastrophes since 1970 have occurred since 2001 the authors note – it appears that human reason is failing in the face of disaster. Here’s what they say:

Economic analysis helps determine how people will respond to this more dangerous world. But the traditional economic view suggests that human actions can be predicted as if people were always completely informed, perfectly responsive to economic fluctuations, and rational, in the sense of having stable, orderly preferences that always maximize their individual economic well-being. In fact, disasters seriously challenge this view.”

The authors go on to note that the current situation in Haiti highlights three critical elements where behavioral scientists have found the rational predictions of many economists flawed: first, people don’t think disasters will happen to them; second, we fail to learn from others’ misfortunes; and third, humans can’t grasp the full significance of disaster statistics. Suffice to say and without spoiling the authors’ conclusion, understanding human behavior will play a key role in managing catastrophic risk in the years ahead. Something to think about.

Wrynn On NY Insurance Exchange

At Tuesday’s Association of Professional Insurance Women (APIW) luncheon in New York City we were privileged to hear James Wrynn, the New York Superintendent of Insurance give us his 2010 outlook for the Big Apple’s insurance marketplace. For those of you who haven’t heard, a major piece of the puzzle is the revival of the New York Insurance Exchange (NYIE). A few weeks ago, Superintendent Wrynn spoke of plans for the NYIE across the pond before several hundred London market executives. Check out Reinsurance Girl’s blog for a recap of the frisson in the crowd at that event. This time, with home advantage Superintendent Wrynn again spoke enthusiastically about the plan to enhance New York’s image as a world insurance center. He drew comparisons between the NYIE and the Lloyd’s market by saying the aim is to recreate a “Lloyd’s of London in New York,† albeit a smaller version. He paid tribute to Lloyd’s as “the most impressive market on the face of the earth† and noted that Lloyd’s market experts are advising on New York’s plan. Wrynn said he envisages the NYIE having similar attributes to the London platform in terms of flexibility of regulation and efficient use of capital. Other important components will be an advanced technology platform, standardized forms, contract certainty and expeditious claims handling. Types of risks the NYIE will handle include climate change, nanotechnology and cyber security. The exchange will also provide a point of entry for certain types of reinsurance business in the U.S. written on an excess and surplus lines basis, something that Lloyd’s does not provide, he said. Wrynn stressed that this should be an industry-driven initiative. Apparently the response so far has been positive with 75 insurance industry executives including 50 chief executive officers agreeing to participate in the department’s working groups. As we’ve noted before, this is not the first time the idea of a NY-based insurance exchange has been raised. Former New York Insurance Superintendent Eric Dinallo sought input from the industry on this in 2009 after first suggesting the move in 2008. That attempt failed, but the enabling legislation is still on the books. For more on this story check out a February 23 Business Insurance article by Zack Phillips.

Stable P/C Rating Trends

Despite some bumps, rating trends for U.S. property/casualty insurers are stable, according to A.M. Best. In its 2009 Rating Trend Review, A.M. Best says that while the industry’s results are likely to be pressured in 2010, rating actions are not expected to move profoundly in one direction and the number of upgrades/positive outlooks and downgrades/negative outlooks will be fairly balanced over the next year. The comments came as the number of downgrades of Best’s insurer financial strength ratings in 2009 outpaced upgrades for the first time since 2005 even as key financial measures across the  p/c industry improved. Downgrades of p/c insurers totaled 68 in 2009, up from 57 in 2008 and the highest total since 2005 when 76 downgrades occurred among p/c insurers, while upgrades totaled 59, the same as in 2008. However, nearly 20 percent of all downgrades in 2009 were within one organization and its group of companies. “Although downgrades outpaced upgrades, a significant portion of the downgrades were within one organization, one segment and one geographic location,† A.M. Best observed. Upgrades to commercial lines insurers’ ratings outpaced downgrades 36 to 24 while personal lines insurers saw 23 upgrades but 44 downgrades. Of the 44 downgrades in personal lines, 10 or nearly 23 percent occurred within the U.S. subsidiaries of Kingsway Financial Services Inc. (KFSI). No U.S. reinsurer was upgraded or downgraded in 2009, according to A.M. Best. Check out I.I.I. presentations on the outlook for the p/c industry.

Health Insurance and Federal Oversight

Ahead of a bipartisan healthcare summit this Thursday, President Obama today will announce a revised plan for healthcare reform, including a proposal giving the federal government new power to block so-called “excessive† rate increases by health insurance companies. According to Administration officials, the legislation attempts to bridge the differences between the health bills passed by the House and the Senate last year. The focus on expanding federal regulation into the domain of insurance rates comes after health insurer Anthem Blue Cross of California recently announced premium increases of up to 39 percent. Health and human services secretary Kathleen Sebelius last Thursday issued a report sharply critical of the double-digit increases sought by insurers. However, a February 18 New York Times article by Reed Abelson reports that analysts and health economists say the challenging business environment may leave health insurers little choice but to raise prices if they want to protect profits. The article reports:

“The weak economy and the unrelenting rise in the cost of medical care make it increasingly difficult for companies to avoid substantial rate increases – even if those increases provide fresh fodder for Democrats seeking to pass the now-stalled health care legislation in Congress.†

It goes on to discuss a number of topics relevant to the current debate on health insurance reform such as adverse selection (where only those most at risk buy coverage) and mandatory coverage. Meanwhile, over at Managed Care Matters blog Joe Paduda has a timely post on why the focus on health insurer rate increases may be nothing more than a red herring. Check out I.I.I. info on health insurance for tips on how to pick a plan and how to lower health insurance costs.

Hack Attack

Data breaches across a range of industries continue to compromise companies’ cyber defense systems and data and the personal information of their customers. This week’s headline news that more than 75,000 computer systems at nearly 2,500 companies and government agencies around the world have been hacked over the last 18 months is a reminder of this growing exposure. Perhaps even more concerning, in a February 18 Wall Street Journal article security firm NetWitness says that the hacking operation is still running and it isn’t yet clear to what extent it has been contained. The attack comes just a month after reports that the computer networks at Google and around 30 other U.S. corporations had been compromised. Latest reports suggest those attacks have been traced to computers at two educational institutions in China. Javelin Research & Strategy’s recently released 2010 Identity Fraud Survey Report noted that personal identification most likely to be compromised in a data breach continues to be full name (63 percent) and physical address (37 percent). Health insurance information is increasingly being targeted (up 4 percent in 2009), while the percentage of social security numbers compromised decreased to 32 percent in 2009 from 38 percent in 2008. In that same report, Javelin said the number of identity fraud victims in the U.S. increased by 12 percent to 11.1 million adults in 2009. Total annual losses increased by 12.5 percent to $54 billion. However, the report also found that proactive measures by financial institutions, businesses and consumers are helping reduce costs. More than 5,000 U.S. consumers were interviewed for the survey. Check out I.I.I. info on ID theft.

Claims Costs Rise: Economic Impact

The unsettled economy is having a major effect on insurer claim operations, including rising loss costs, increased levels of litigation and higher rates of fraudulent claims, according to a Towers Watson survey of 52 claim officers. As a result, expense management is becoming a major focus for insurers. The survey found that more personal lines carriers noted higher claim frequency than commercial insurers, including homeowners (52 percent) and auto (45 percent). By comparison, one in five general liability (20 percent) and commercial auto (18 percent) insurers saw increases in claim frequency. Turning to litigation, some 30 percent of respondents said general liability lines have been most affected by an increase in litigation, followed by personal auto (22 percent) and commercial packages (20 percent). On a regional basis, some 50 percent of respondents in the Southeast and 32 percent of respondents in the West reported an increase in litigation. As for fraudulent claims, more than half of the survey respondents showed an increase in exaggerated or potentially fraudulent personal lines claims, with auto (62 percent) and homeowners (56 percent) leading the way. Some 33 percent saw an upswing in fraudulent claim activity in workers compensation, while 20 percent of commercial insurers said they were affected by exaggerated claims in other lines. Towers Watson noted that the impact on loss costs is more dramatic in personal lines, where frequency, severity, litigation and fraud are all potentially on the upswing. Check out I.I.I. info on insurance fraud.

Flood Insurance Program Extension Unclear

Insurance Networking News reports that another reprieve for the National Flood Insurance Program (NFIP) is in question after yet another temporary extension to the program was dropped from a jobs bill advancing in the Senate. The development comes less than two weeks before the NFIP is set to expire. Â  The Hiring Incentives to Restore Employment Act would have extended the NFIP until May 31, but this option was dropped as Senate Majority Leader Harry Reid sought to trim the $85 billion legislation to a more politically viable $15 billion package, INN reports. The most recent extension for the program to February 28 came as part of the 2010 Defense Appropriations Bill passed by the Senate in December 2009. Speaking of flood insurance, as the snow melts and looking ahead to springtime showers, now is a good time to purchase an NFIP policy given the 30-day waiting period before flood insurance takes effect. 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.

Marginal Decline in P/C Customer Satisfaction

Customer satisfaction with the property/casualty insurance industry slipped a bit in the fourth quarter of 2009. According to the latest University of Michigan American Customer Satisfaction Index (ACSI), the p/c sector showed a slight drop of 1.2 percent to a score of 80 in Q4 2009. That said, several p/c insurers improved their customer relationships in 2009. Among property/casualty insurers, four of the five measured companies improved (with one steady), but the gains were all small. ACSI data indicates the decline in the industry overall is due to a 3 percent ACSI drop in the aggregate of all other smaller insurers, which are challenged to provide the same rates as their larger competitors, focusing instead on service. In the aggregate, customer satisfaction with the finance and insurance sector (including banks, credit unions, and property, life and health insurance) improved 1.4 percent to an ACSI score of 77.1. Even though some individual banks plunged in customer satisfaction, banks and credit unions as a whole were unchanged from a year ago with ACSI scores of 75 and 84, respectively. Life insurance posted a small improvement of 1.3 percent to a score of 79, while customer satisfaction with health insurance went up 2.7 percent to a record-high score of 75. The index measures customer expectations, perceived quality and perceived value of companies in various industries.

Toyota: Legal Implications

Everywhere you look there’s a story about Toyota and the gathering momentum behind a growing number of lawsuits filed against the company following its now three separate but related recalls of about nine million cars worldwide. An article in the L.A. Times today quotes a number of lawyers and legal experts discussing the legal implications for Toyota. For example, Richard Cupp, a professor at Pepperdine University School of Law is quoted as saying: “This has the potential to be the biggest product liability case in the automotive industry.† Others, like David Owen, a law professor at the University of South Carolina also quoted in the article, suggest that while litigation could tie up Toyota for a number of years the ensuing economic damages will be painful but manageable and the company will survive. Another article in the National Law Journal describes the growing number of lawsuits being filed. The cases appear to fall into three or more categories: personal injury cases filed by or on behalf of individuals injured or killed in Toyota crashes; class actions filed on behalf of consumers due to depreciation or decline in the value of their vehicles in the wake of the recalls; and securities class actions filed on behalf of shareholders who bought stock and are claiming a loss in share value. Time will tell how successful these cases will be. Out of interest, we typed “in defense of Toyota† into Google and came up with this post on the WalletPop blog where Bob Cesca reminds us of Ford Motor Co’s handling of safety concerns related to its Pinto hatchback vehicle in the 1970s and 1980s. It makes for an interesting read. Check out I.I.I. facts and stats on litigiousness.

Investigation into CT Power Plant Explosion

Connecticut Governor Jodi Rell has announced she is forming a panel of state agencies to identify the cause of the Kleen Energy power plant explosion in Middletown on Sunday, including any potential contributing factors such as construction problems, worker safety issues and licensing or permitting matters. A second panel of experts will review the findings and determine whether any changes should be made to Connecticut laws, building regulations and fire codes. The U.S. Chemical Safety Board has also deployed a team to the site of the explosion to investigate and authorities have also launched a criminal probe into the blast. Five workers were killed and at least a dozen injured in the explosion February 7 at the under-construction plant during testing. A February 10 article in the Hartford Courant by Matthew Sturdevant reports that the plant was insured for as much as $877 million under an “all risk† property policy underwritten by a group of international insurers, but the exact amount of the loss may be much less. I.I.I. president Dr. Robert Hartwig is quoted in the article and makes the important point that large-scale industrial accidents are not as rare as people might believe. He notes that five to eight industrial accidents happen in any given year in the U.S. involving a range of facilities including energy plants, factories, mining and major construction projects. It’s not rare for costs to be in the hundreds of millions of dollars, according to Hartwig. Check out a risk report by Guy Carpenter for more on this story.