NCCI on Workers Comp: Host of Challenges

The workers compensation insurance industry is in a precarious position and facing a host of challenges in 2010, according to the annual “State of the Line† report from NCCI Holdings Inc. The pace of economic recovery, the long-term impact of the new federal healthcare law and the potential change in the nation’s financial regulatory system are among the unknown factors affecting the line, NCCI said. It reported that the workers compensation calendar year combined ratio was 110 in 2009 – up 9 points from 101 in 2008. NCCI chief actuary Dennis Mealy observed:

After the prior three years of an underwriting profit followed by two years of minor underwriting losses, the combined ratio for workers compensation shot up 9 points in 2009, the largest single year increase since the mid 1980s. The line was one of only two (in addition to ‘other liability’) that had an increase in combined ratio for 2009 over 2008.

These deteriorating underwriting results, combined with the record low interest rate environment left the line at only slightly better than breakeven after investment income is considered.†

However, NCCI added that 3 points of the combined ratio increase was due to reserve strengthening by a single carrier. Excluding that, the industry combined ratio would have been 107, still a significant deterioration from 2008. NCCI said deteriorating underwriting results combined with the record low interest rate environment left the line at only slightly better than breakeven after investment income is considered. Check out I.I.I. president Dr. Robert Hartwig’s presentation on Insurance in the Obama Era  from last week’s NCCI annual issues symposium.

MarketScout: Energy Rates to Rise

Energy rates are going to increase, especially for offshore accounts in the wake of the explosion, fire and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico. In its latest analysis of market conditions online insurance exchange MarketScout says the oil spill disaster is huge and will have an immediate impact on all offshore energy placements. Onshore insureds with offshore exposures may also be impacted. Richard Kerr, CEO of MarketScout observed:

British Petroleum is largely self-insured; however, energy underwriters across the globe will participate in this loss via either excess placement insurance on the non-operators (investors), drilling contractor or blowout prevention manufacturer. The non-operators, Anadarko and Matsui Oil, have extensive insurance placements, as does the drilling contractor, Transocean. It may take years to calculate the total insured loss from this disaster but premiums will increase immediately for offshore energy accounts.†

The comments came as MarketScout reported the premium and corresponding rates for all lines of commercial property and casualty business in the United States were down four percent for the month of April 2010. D&O Liability, EPLI, fiduciary, crime and surety were the coverage classes experiencing the smallest decreases in April (down 1 percent), while general liability experienced the largest rate decrease at 6 percent. Check out the I.I.I. backgrounder on offshore energy facilities and insurance considerations.

Expert: Gusher of Insurance Claims

The number of lawsuits being filed over the Gulf of Mexico oil spill is reportedly rising, as are the estimated losses expected from the event. Before we get ahead of ourselves, Randy J. Maniloff of law firm White and Williams offers his perspective on the spill and its insurance coverage implications in a May 4 article titled Gulf Oil Spill: Gusher of Insurance Claims.

Maniloff observes that while the claims picture is currently much more speculative than certain, one thing is sure – efforts will be made to place as much of the tab for the losses as possible at the feet of insurance companies and insurers are well-prepared to handle the claims.

Maniloff goes on to note that the BP oil spill is likely to give rise to a host of claims under first- and third-party insurance policies. His observations include:

  1. Third-party claims: Maniloff notes that oil companies and owners and manufacturers of oil rigs tend to have very complex insurance programs, including self-insured components. These companies likely have unique policies and perhaps policies that are specifically designed to address pollution exposures. It remains to be seen what the limits of these policies are and whether all of those limits are applicable to the relevant claims.
  2. First-party claims: Impending first-party claims offer more predictability, according to Maniloff, because businesses that are covered by commercial property and business interruption insurance often have policies that are written on standardized forms published by ISO. Maniloff predicts a lot of activity surrounding business interruption claims, but points out that under business interruption policies the suspension of the insured’s business operations must be caused by direct physical loss or damage to the insured’s property. This is likely to be a significant issue, he says, given that the consequences of an oil spill can be far reaching without any need for the oil itself to actually reach those affected.
  3. Another dynamic at work in the claims picture, according to Maniloff, is that history has shown that when there is a large-scale societal problem that requires significant funding to solve it, insurers’ policy language faces pressure to become more malleable than what was intended. As a result, sometimes the insurance industry finds itself being required or pressured to pay more than its appropriate share.

Maniloff concludes that on the one hand, both the litigation and insurance claims arising out of the BP explosion are in the opening minutes of a very long play. On the other hand, it’s one that we’ve all seen before.

Oil Spill: Developing Story

The Wall Street Journal reports that lawyers are descending on the Gulf coast and preparing lawsuits over the oil spill from the sunken Deepwater Horizon rig. It notes that the regime for compensating those hurt by offshore oil spills is complex:

Individuals can file traditional lawsuits in court and receive money by proving liability. Or injured parties can make use of a claims process established under the 1990 Oil Pollution Act, in which the federal government makes payments from a fund collected through a tax imposed on the oil industry.†

Meanwhile the New York Times  reports  that while President Obama has called the spill “a potentially unprecedented environmental disaster† and doomsday predictions abound about its impact, the spill is not unprecedented nor yet among the worst oil accidents in history.

Its ultimate impact, according to the NYT, will depend on a long list of interlinked variables, including the weather, ocean currents, the properties of the oil involved and the success or failure of the frantic efforts to stanch the flow and remediate its effects.

Both articles reflect an important point. From the liability and environmental standpoint, it’s simply too soon to  tell how this spill will develop and what its final impact will be. As insurers know, these kinds of events take many years to unfold.

Check out I.I.I. information on major oil spills in history. For the latest on the response to the disaster, check out a collaborative multimedia Web site being maintained by BP, Transocean and various government agencies including the U.S. Coast Guard and NOAA.

Renewed Terrorism Threat

The thwarted car bomb attack in New York City’s Times Square on Saturday night is the latest in a series of incidents (such as the March 29 Moscow subway bombings and the thwarted Christmas Day bombing on board a U.S.-bound flight) that are propelling terrorism into the headlines once more and reaffirm the risk facing insurers.

The Wall Street Journal reports that counterterrorism experts say the car bomb attempt and other recent plots against U.S. targets may indicate a shift to small-scale strikes that are harder to detect in advance. While investigators have said the crude explosives don’t indicate much explosives expertise, the WSJ article cites counterterrorism experts saying that the construction of the car bomb was similar to that used in an attempted attack on a British nightclub in 2007 and also bears resemblance to plans for further al Qaeda-linked attacks using vehicles packed with gas cylinders.

A New York Times article cites research by the terrorism response center in Maryland showing that from 1970 through 2007, terrorists used car bombs at least 1,495 times. The center tracked 876 in the Middle East and North Africa, 212 in Western Europe and 163 in South Asia.

The reemerging threat of terrorism and its impacts for property/casualty insurers is the subject of a recently released Insurance Information Institute (I.I.I.) paper. It observes that while nearly nine years may have passed since the September 11 terrorism attack, terrorism is a reemerging and perhaps growing threat for the decade ahead. Check out further I.I.I. facts and stats on terrorism.