P/C Profitability: Strong But Incomplete Recovery

U.S. property/casualty insurers’ full year 2009 results show a strong but incomplete recovery from the recession and financial crisis, according to figures 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 5.8 percent in 2009, up sharply from 0.6 percent in 2008. However, net income after taxes in 2009 totaled $28.3 billion, nearly ten times the $3.0 billion earned in 2008, but less than half the $62.5 billion earned in 2007. Similarly, insurers’ 5.8 percent overall rate of return for last year was less than half the 12.4 percent rate of return for 2007. In his commentary on the results, I.I.I. president Dr. Robert Hartwig observes that the magnitude and speed of the turnaround is truly remarkable given the length and depth of the crisis, though the industry’s profit recovery is incomplete. According to Dr. Hartwig, key factors driving 2009’s recovery include vastly improved investment market conditions in the final three quarters of the year, a 61 percent decline in catastrophe losses and significant releases of prior year reserves. “It is notable that the recovery occurred despite the fact that 2009 was the sixth consecutive year of declining premiums, which fell 3.7 percent last year, and amid recessionary economic conditions that continued to destroy insurance exposure,† he says. Perhaps the most extraordinary sign of recovery was the industry’s rebound in claims paying capacity (as measured by policyholders’ surplus). Policyholders’ surplus increased by $54.2 billion to $511.5 billion or 11.8 percent during the year, up from $457.3 billion at the end of 2008. The reversal is notable and important, according to Hartwig. “The bottom line is that P/C insurance industry capacity came within 2 percent of its all time record high just nine months after reaching its crisis low. Given continued favorable market conditions in the first quarter of 2010, it is quite likely that industry capacity reached a new record high, despite lingering difficulties in the overall economy,† he adds.

Hospital-Acquired Infections Need Urgent Attention

A government study has found that very little progress has been made on eliminating hospital-acquired infections and the problem needs urgent attention. According to the 2009 National Healthcare Quality Report from the Agency for Healthcare Research and Quality, rates of postoperative sepsis and postoperative catheter-associated infections are increasing. The study reported that rates of bloodstream infections increased by 8 percent and urinary tract infections increased by 3.6 percent on the previous year, while rates of selected infections due to medical care increased by 1.6 percent. On a more positive note, there was no change in the number of bloodstream infections associated with central venous catheter placements, and rates of postoperative pneumonia improved by 12 percent. Check out an April 13 New York Times article for more on this. A recent study by Aon found that hospital professional liability claims are on the increase, in part due to claims arising from hospital acquired conditions, also known as “never events.† One out of every four claims and 24 percent of hospital professional liability costs are associated with hospital acquired conditions, such as infections and injuries, medication errors, objects left in surgery and pressure ulcers. Aon’s 2009 Hospital Professional Liability and Physician Benchmark Analysis also noted that the frequency of hospital professional liability claims is increasing after years of declines and is expected to continue increasing at a one percent annual rate. Check out I.I.I. information on medical malpractice.

MarketScout: Workers Comp Watch

Workers compensation is the line to watch, according to the latest analysis on market conditions from online insurance exchange MarketScout. It noted that workers compensation rates were down two percent in March, compared to a decrease of 5 percent in February. “This is a significant month-on-month movement. If workers compensation premiums continue to moderate over the next several months, it will be a clear sign that comp insurers are beginning to increase premiums,† said Richard Kerr, CEO of MarketScout. The upcoming publication of new data from the National Council on Compensation Insurance (NCCI) may give further indications of what can be expected for comp pricing for the rest of 2010, Kerr added. The comments came as MarketScout reported the average property/casualty rate decrease was 4 percent in March, compared to 7 percent a year ago. Directors and officers liability and surety rates were flat with both coverages showing a zero base level, meaning policies were renewed as expiring with no rate increases or decreases, according to MarketScout. Jumbo and large accounts continue to enjoy the greatest rate reductions, while small to medium accounts are receiving only moderate rate reductions. Rates moderated for energy, manufacturing and public entities. All other industry classes maintained the same rate position as in February. Check out I.I.I. information on workers compensation.

Polish Plane Crash

Investigations continue into the plane crash that killed Polish president Lech Kaczynski and some of the country’s top political and military personnel on Saturday. According to reports, the Tupolev 154 aircraft en route from Warsaw to Smolensk crashed as it tried to land in foggy conditions about 1.5 km from Smolensk airport in Western Russia. All 97 people on board were killed, including Poland’s deputy foreign minister, a dozen members of Parliament, the chiefs of the army and the navy and its Central Bank governor.

An April 12‚  New York Times article observes that investigators examining the crash appear to be focusing on why the pilot did not heed instructions from air traffic controllers to give up trying to land in bad weather. The NYT reports: “Their inquiry may lead to an even more delicate question: whether the pilot had felt under pressure to land to make sure that the Polish delegation would not be late for a ceremony on Saturday in the Katyn forest, where more than 20,000 Polish officers and others were massacred by the Soviets during World War II.” A tweet from Reinsurance Magazine, linking to an article at Postonline.co.uk cites reinsurance sources noting the crash is not thought to have been insured in the Lloyd’s market. Check out I.I.I. aviation facts and stats.

Terrorism: A Reemergent Threat

A Qatari diplomat earlier this week triggered a mid-air emergency when he allegedly sneaked a smoke aboard a flight to Denver, resulting in the scrambling of F-16 fighter jets and subsequent passenger delays lasting hours. The incident has sparked numerous stories, including today’s New York Times article titled Few Worry About Overreaction. The gist of the NYT report is that while the possibility of overreaction to perceived threats is by now a familiar problem in the age of terrorism, in this case there was little second-guessing of the broad security alert in response to a situation that ultimately turned out to have posed no significant threat. Just yesterday we published a paper reviewing the reemerging threat of terrorism and its impacts for property/casualty insurers. In it we discuss how recent developments such as the March 29 Moscow subway bombings and the thwarted Christmas Day bombing on board a U.S.-bound flight are propelling terrorism into the headlines once more and reaffirm the risk facing insurers.  The paper  observes that while nearly nine years may have passed since the terrorist attack of September 11, 2001, a number of converging factors point to the fact that terrorism is a reemerging and perhaps growing threat for the decade ahead. The report can be accessed on the Insurance Information Institute (I.I.I.) Web site at www.iii.org/paper/Terrorism-040810/. Check out  I.I.I. facts and stats on terrorism.

The Right State

There are many factors that insurers need to consider when deciding whether to do business or continue to do business in a particular state. A state’s economic condition, legal environment, population growth, and potential untapped markets are just some of the things to consider. A new report from Conning & Co makes the case that personal lines (auto and homeowners) insurers now more than ever need to analyze the key variables between states that affect their potential to make a profit and grow. In Anticipating State Variations in Personal Lines Performance Conning notes that state level factors are always an important part of performance planning in the property/casualty industry, but are increasingly critical in the near-term economic climate. It explains that while the recession has had profoundly different effects on different states, it is very likely the economic recovery will as well. “Exposure growth, pricing, regulatory activity and other key factors have varied widely by state during the recession, and the differences may be dramatic looking forward as well. Some of the hardest charging states prior to the recession were hit very hard, and will take a longer time to climb out, while others may well spike in the coming recovery,† says Conning Research analyst Alan Dobbins in a press release. For more on this story, check out an article by Daniel Hays at National Underwriter. It’s worth noting that insurers play a key role in state economies that goes well beyond their core function of helping to manage risk. Check out state-specific editions of the I.I.I. online publication A Firm Foundation to find out exactly how insurers support the different states.

CSU Ups Hurricane Season Forecast

Colorado State University’s Tropical Meteorology Project team today upped its forecast for the 2010 Atlantic hurricane season, from its December predictions. The CSU team said the predicted weakening of El Nià ±o conditions combined with a very strong anomalous warming of the tropical Atlantic are the primary reasons why it is increasing its forecast. In a season it expects will see above-average activity, the CSU team now expects 15 named storms – including eight hurricanes, four of which are expected to be major (Category 3-4-5) hurricanes. The probability of U.S. major hurricane landfall is estimated to be about 130 percent of the long-period average. There is a 45 percent chance that a major hurricane will make landfall on the U.S. East coast, including the Florida Peninsula, and a 44 percent chance of a Gulf Coast landfall from the Florida Panhandle west to Brownsville. The team also predicted an above-average (58 percent) probability for at least one major hurricane tracking into the Caribbean. The forecast for above-average activity ties in with recent predictions from AccuWeather.com chief hurricane forecaster Joe Bastardi who warned this year has the chance to be an extreme season with 16 to 18 tropical storms, including five hurricanes, two or three of which will be major landfalls for the U.S. Check out I.I.I. facts and stats on hurricanes.

Mining Safety

At least 25 miners have been confirmed dead in an explosion at Massey Energy’s Upper Big Branch Mine in Raleigh County, West Virginia. The tragedy is being described as the worst U.S. mining disaster in more than two decades. Check out Ken Ward’s Coal Tattoo blog at the Charleston West Virginia Gazette for the latest on the Massey disaster. Just a week ago Workers Comp Insider blog had a timely post titled Mining safety: not just for China. It was prompted by the tragic story of 153 Chinese mine workers trapped underground in a flooded mine. In the past two days some 115 of the miners trapped for more than a week in the flooded Wangjialing mine in China’s northern Shanxi province miraculously have been pulled out alive. Sadly latest reports suggest rescue workers searching for survivors have also found five dead. Workers Comp Insider notes that while China’s mining industry is the world’s deadliest the U.S. has made considerable progress in mining safety over the years. It cites Mine Safety and Health Administration (MSHA) figures showing more than 1,000 annual mining fatalities through 1947, dropping to double digits since 1985. Last year – 2009 – was the safest year in U.S. mining history with just 34 mining deaths. Still, some question whether this is enough of an improvement. From insurers’ perspective, in its 2010 Mining Market Review, broker Willis noted that insurance of U.S. coal mines is one of the most challenging and uniquely specialist classes of property insurance requiring specialist knowledge from carriers. “To understand the challenges facing insurers it is clearly important to understand the physical exposures inherent in the very process of coal production – but it is also important to understand the history of the U.S. coal industry and the outside forces beyond the control of the mine operator that can, and have, dramatically impacted the ability of coal mines to withstand loss,† Willis said.

Chinese Drywall: Remediation Guidance

Late last week the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) recommended homeowners remove all possible problem Chinese drywall from their homes because of health and safety concerns related to emissions of hydrogen sulfide from the material. They also released new information showing that the top 10 reactive sulfur-emitting drywall samples were all produced in China. Certain Chinese samples had emission rates of hydrogen sulfide 100 times greater than non-Chinese drywall samples, the agencies said. A full text of the CPSC and HUD interim remediation guidance is available here. An April 3 Wall Street Journal article notes that the announcement could set the stage for Congress to compensate homeowners who face the expense of gutting their homes and replacing the drywall. However, Florida Senator Bill Nelson was quoted in the article saying: “Now the question is: who pays for it? The way I see it, homeowners didn’t cause this. The manufacturers in China did. That’s why we’ve got to go after the Chinese government now.† Just a few months ago Florida Insurance Commissioner Kevin McCarty made clear that in his opinion insurers have no obligation to cover defective Chinese drywall because it is not a covered peril. It’s interesting to note that Florida accounts for more than 90 percent of the more than 3,000 incident reports related to drywall that have been received by the CPSC to-date. Check out I.I.I. background information on Chinese Drywall.

Supreme Court Ruling on Class Actions

In a decision that legal experts say could open federal courts to more class actions, the U.S. Supreme Court yesterday ruled that states do not have the authority to limit the right to sue. The Court ruled 5-4 that a federal court rule – Rule 23 – controls when a class action lawsuit may be filed in federal court. According to SCOTUSblog, the real-world effect of the ruling in Shady Grove Orthopedic Associates, P.S. v. Allstate Insurance Co. seems clear: fewer state laws seeking to limit remedies available in federal court will now fall. The decision revives a class action lawsuit alleging Allstate failed to pay statutory interest penalties on overdue payments of insurance claims owed under no-fault auto insurance policies. Allstate won in the lower courts where the suit was dismissed as outside the scope of federal court jurisdiction. Check out our earlier blog post for more on this. A National Law Journal report via law.com notes that in the end, the decision produced splintered voting and unusual alignments of the justices. In her dissent, Supreme Court Justice Ruth Bader Ginsburg wrote: “The Court today approves Shady Grove’s attempt to transform a $500 case into a $5,000,000 award, although the State creating the right to recover has proscribed this alchemy.† Meanwhile, Forbes On the Docket blog’s take on the decision is that this is a victory for the lawyers. Check out I.I.I. facts and stats on litigiousness.