Catastrophe Activity Review

Catastrophes outside the U.S. this year are costing insurers a lot more than domestic disasters – at least so far – with overseas carriers absorbing losses from Chile’s earthquake and the Deepwater Horizon oil spill, according to a Bloomberg report.

The article quotes Insurance Information Institute (I.I.I.) president Dr. Robert Hartwig saying:

“More years than not it’s the U.S. that has the greatest insured catastrophe loss. Global losses dwarfed U.S. losses this year.†

The Deepwater Horizon oil spill has been the defining event for man-made disasters so far in 2010.

Earthquakes in Haiti, Chile and the U.S., winter storms in Europe and the U.S., and severe floods in Eastern Europe are just a few of the events that have defined a very active first six months for natural catastrophes, according to Munich Re.

An overview of U.S. and global natural catastrophe activity for the first six months of 2010 will be jointly presented by Munich Re and the I.I.I. in a webinar to be held Friday July 7.

Munich Re puts insured losses for global catastrophes in the first six months of 2010 at $23 billion – the highest on record for the same time period since 1994, and exceeding the 10-year average of $11 billion.

In contrast, in the U.S., insured losses for the first six months totaled $6.5 billion, in line with the 10-year average of $6.6 billion.

Register here to participate in next week’s webinar.

Alex Strengthens

The National Hurricane Center (NHC) is warning that a dangerous storm surge will raise water levels by as much as 3 to 5 feet above ground level along the immediate coast near and to the north of where the center of Alex makes landfall.

The warning came as the NHC said that Alex — the first named storm of the 2010 Atlantic hurricane season — is moving faster to the north-northwest and is likely to become a hurricane later today:

The surge could penetrate inland as far as several miles from the shore with depth generally decreasing as the water moves inland. Near the coast†¦the surge will be accompanied by large and destructive waves.†

Earlier this morning, the NHC said Alex was about 380 miles south east of Brownsville, Texas and moving NNW at 12 mph, with maximum sustained winds near 70 miles per hour.

The NHC also said Alex is expected to produce additional rainfall accumulations of 5 to 10 inches over portions of northeastern Mexico and southern Texas during the next few days and these rains could cause life-threatening flash floods and mud slides.

A glance at the latest track for Alex looks a lot like 2008’s Hurricane Dolly that made landfall as a Category 1 storm in extreme southern Texas in July of that year.

Dolly caused significant wind and flood damage and resulted in federal disaster declarations in 15 Texas counties. ISO’s Property Claim Services unit put the insured losses from Dolly at $525 million in 2008 dollars.

The costliest hurricane to hit Texas in recent years was Hurricane Ike in 2008. Insured property damage caused by Ike in Texas totaled $9.8 billion, according to ISO. Check out the I.I.I. Texas hurricane fact file for more information.

Financial Services Reform and Insurers

There are articles aplenty about the shape of landmark financial services reform agreed by House and Senate conference committees early Friday and what the impact will be on the insurance and reinsurance industry.

A good place to start is the Wall Street Journal which has a useful interactive showing what’s in the bill (H.R. 4173) for the government, for banks, for consumers and for investors.

An article on BestWire via speaks of optimism among property/casualty insurers that the final language in the bill recognizes that the p/c sector is not a factor in concerns over systemic risk and that it maintains the state guaranty fund system as the resolution authority for the sector.

On a not-so-positive note for the insurance sector, National Underwriter reports on how to offset the $19 billion cost of the bill a tax will be imposed on large financial institutions, including insurers, with more than $50 billion in assets. It quotes several insurance trade groups voicing concern over the levy.

Insurance and Financial Adviser observes that the bill retains most state-based regulation of insurance, even with the creation of a Federal Insurance Office. Under the provisions agreed, the Federal Insurance Office must first seek data from state insurance regulators before seeking information from insurance companies, it explains.

Business Insurance focuses on the aspects of the bill that address surplus lines modernization and streamlining of reinsurance regulation.

The bill is expected to be approved by both Houses of Congress this week and sent to President Obama for his signature before the July 4 Congressional recess, though several reports note that the death of Senator Robert Byrd (D-WV) could jeopardize this plan.

Check out the new I.I.I. policymakers Web site  for information on key issues affecting the insurance industry,  such as regulation modernization.

Tropical Cyclone Watch

We’re nearly four weeks into the Atlantic hurricane season but so far the only storm activity has been in the Eastern Pacific where two hurricanes – Hurricane Celia (now Category 4) and Hurricane Darby (now Category 3) – have formed and continue to track out at sea away from land.

The Eastern Pacific hurricane season begins May 15 – a little earlier than the Atlantic hurricane season – and also ends November 30.

However, the Atlantic season may be about to kick into gear as the National Hurricane Center (NHC) this morning said there is a 70 percent chance that a low pressure system centered between the northeast coast of Honduras and Grand Cayman could become a tropical cyclone during the next 48 hours.

An air force reconnaissance plane is scheduled to investigate the disturbance later today to determine if a tropical cyclone has formed. The NHC reports:

Shower activity has become a little more concentrated this morning†¦and surface pressures are falling. Upper-level winds are gradually becoming more conducive for development†¦and the system is likely to become a tropical depression before it reaches the Yucatan Peninsula in a couple of days.”

Now could be a good time to check out I.I.I. resources such as our hurricane fact files and market share by state and our facts and stats on hurricanes.

Meanwhile, here’s a close-up of that Atlantic low pressure system, via satellite from the NHC:


Rebound in Claims-Paying Capacity Shows Industry Resilience

The fact that property/casualty insurers recovered more quickly and completely than virtually any other segment of the financial industry is concrete proof that subjecting insurers to bank-style regulation would constitute a significant policy error, according to I.I.I. president Dr. Robert Hartwig.

Such a move would needlessly raise insurance costs for hundreds of millions of insurance consumers and would unfairly require insurers to subsidize the reckless lending practices and speculative activities of failed banks, he added.

Commenting  on the industry’s first quarter 2010 financial results, Dr. Hartwig said the rebound in the industry’s claims paying capacity (otherwise known as policyholder surplus) was perhaps the most extraordinary sign of the P/C industry’s resilience over the past year.

Dr. Hartwig noted that policyholders’ surplus increased by $29.2 billion, or 5.7 percent, to $540.7 billion during the quarter, up from $511.5 billion at the end of 2009, although after adjusting for a unique transaction the figure stands at $518.2 billion. He wrote:

The bottom line is that P/C insurance industry capacity is within 1 percent of its all time record high just one year after reaching its crisis low even after excluding the impact of the unique transaction noted previously.

Given increased market volatility in the second quarter of 2010, including a substantial drop in major stock market indices, the pace of growth in policyholders’ surplus will likely be more subdued in the second quarter. The bottom line, however, is that the industry is extremely well capitalized.†

Dr. Hartwig added that from a public policy perspective, the rapid and effectively complete recovery in capacity could not come at a more propitious moment. Congress continues to consider financial industry reform, which could include the imposition of taxes on large financial firms (including insurers) in order to create a fund to resolve those that fail in the future.

However, P/C insurers have been arguing vociferously that they were not the cause of the crisis and that the industry does not pose a systemic risk to the financial system. Dr. Hartwig noted:

No P/C insurer failed because of the financial crisis (compared to 250 bank failures to date), no claim went unpaid and no policy was cancelled. Insurers continued to compete vigorously and introduce new products throughout the crisis whereas most banks radically scaled back their operations and product offerings.†

Medical Marijuana and Insurers

A Los Angeles Times blog post reports that marijuana lollipops were for sale on the Lakers parade route yesterday.

Apparently a food truck, Weed World, was handing out the lollipops for free to customers that had a prescription card allowing them to purchase marijuana.

In addition to the orange and blue marijuana lollipops, the truck carried a variety of marijuana brands, according to the LA Times.

California became the first state to approve medical marijuana in 1996 and this November voters will decide whether to legalize marijuana even without a medical prescription. The liberalization of state marijuana laws is an issue that insurers are monitoring.

A BestWeek article by Meg Green via reports that to-date 14 states have legalized marijuana for medical use, while another 10 states have medical marijuana initiatives on the ballot this year and insurers are playing a key role in this emerging market. BestWeek says:

Billions of dollars are at stake. Marijuana is the biggest cash crop in California, where it brings in $14 billion a year in sales. That’s almost twice the amount brought in by the state’s second-largest agricultural commodity, milk and cream, which brings in $7.3 billion a year, according to the most recent USDA statistics.

As marijuana moves from the counterculture world into the mainstream, a new wave of businesses — including growers, suppliers, manufacturers, transporters and dispensaries — is emerging, and the insurance industry has taken note.†

As well as an emerging market, the legalization of medical marijuana is a growing employment-related issue with potential implications for workers compensation insurers. Fellow bloggers over at Workers Comp Insider have a number of posts on this topic. Check out an earlier post that provides a great overview of some of the key issues.

Meanwhile, over at National Underwriter Susanne Sclafane writes that employment practices liability (EPL) experts see the use of medical marijuana as a growing issue for EPL insurers. Check out her article here.

The National Conference of State Legislatures (NCSL) has an overview of state medical marijuana laws here.

State-Run Insurers Lack Risk-Based Pricing

Most state natural catastrophe programs do not charge premium rates that reflect the full risk of loss, according to a new report by the Government Accountability Office (GAO).

GAO said that six of 10 states charged rates that do not fully reflect risk of loss, potentially discouraging private market involvement.

State natural catastrophe programs in Alabama, California, Florida, Louisiana, Mississippi, North Carolina, New Jersey, South Carolina and Texas were reviewed for the report.

GAO also found that while most states were taking steps to address mitigation, support of public policy goals varied across the programs.

Officials of nine of the 10 state programs reviewed told GAO they are addressing or considering mitigation, including providing mitigation credits or attempting to develop a more effective mitigation plan.

According to GAO, public policy goals are: charging premium rates that reflect the risk of loss; encouraging broad participation; encouraging the private market to provide natural catastrophe insurance; and encouraging mitigation.

GAO also found that some state-run programs do not use reinsurance or capital markets to protect against catastrophic losses because they are structured to post-fund losses. As a result, many of these programs are at financial risk.

The report also identified four proposals contained in past proposed legislation that would increase the federal role in natural catastrophe insurance and could affect the reinsurance industry’s participation in natural catastrophe insurance market.

These proposals include: facilitation of risk transfer; guarantees of state pre- and post-event bonds; a federal lending facility for qualified state natural catastrophe programs; and a federal reinsurance program.

However, GAO found that the proposals would involve trade-offs that would have to be balanced. For example, while these proposals could lower premium rates for and increase public participation in state natural catastrophe programs, they could discourage private market participation and mitigation efforts and increase taxpayer exposure to potential costs.

Check out online articles at National Underwriter and Homeland Security Today for more on this story. Check out the I.I.I. white paper on residual property markets‚  for related information.

Pride Round-Up 2010

June is Pride month and so it’s time for our round-up of the latest news and developments affecting the lesbian, gay, bisexual and transgender (LGBT) community. Here are some of the top stories:

The counting has begun: The 2010 U.S. Census will be the first to report counts of both same-sex partners and same-sex spouses. The Williams Institute at UCLA reports that while the 2010 Census did not ask about sexual orientation or gender identity, LGBT people living with a spouse or partner were able to identify their relationship by checking either “husband or wife† or “unmarried partner† box.

To have and to hold: Same sex marriage is now legal in five states (Massachusetts, Connecticut, Iowa, Vermont, and New Hampshire) and the District of Columbia. In addition, a number of states offer civil unions or domestic partnerships. In California, the outcome of a federal court case will determine the constitutional validity of Proposition 8 (a constitutional amendment passed in November 2008 that restricts the definition of marriage to opposite sex couples). It’s important to recognize that state laws do not extend any of the benefits on a Federal level.

Healthy, wealthy and wise: The MetLife Mature Market Institute has made its publication Planning Tips for LGBT Individuals and Couples available free to the public. Compiled with SAGE (Services and Advocacy for Gay, Lesbian, Bisexual & Transgender Elders), the publication offers guidance and advice to LGBT boomers in the areas of legacy planning, employee benefits, healthcare, financial and retirement planning.

Going to market: LGBT consumers are eager for health insurers to market to them directly. A national survey conducted by Harris Interactive in conjunction with Witeck-Combs Communications found that only 12 percent of LGBT adults were aware of any health insurance provider that currently markets (or has marketed) products to the LGBT community specifically. In addition, 81 percent of gays and lesbians feel it is important to see print advertisements for health care carriers with information specifically intended for them as customers.

Mega-Earthquake Hotspots

A new report from Aon Benfield ranks Cascadia in North America among the top five areas where mega-earthquakes of moment magnitude (Mw) 8+ are most likely to occur in the future.

The other regions most at risk are the Caribbean (Lesser Antilles), Chile, Indonesia (Sumatra), and Japan.

Aon Benfield notes that the last mega-earthquake on the Cascadia Subduction Zone occurred 300 years ago, just before the start of historical records for the region, but:

Whilst the short to medium term probability of a mega-earthquake may be low, there is potential for such an event in the future and insurers should not disregard the associated risks to the cities of the Pacific North West region.†

Aon Benfield goes on to say that insurance penetration in terms of earthquake cover runs at around 30 percent for both commercial and residential property in the Pacific North West.

Pricing is competitive and earthquake cover is probably running at half the cost compared to peak earthquake zones such as California, it adds. It estimates that insurance costs for earthquake cover have fallen by around 5 percent over the last two or three years.

Of course Chile has had the most recent experience of a mega-earthquake. The magnitude 8.8 Maule earthquake that struck Chile on February 27, 2010 caused significant damage and loss of life.

On March 10, Swiss Re estimated total insured losses for the insurance sector for the Chile earthquake to be in the range of $4 billion to $7 billion.

Check out I.I.I. earthquake facts and stats.

Terrorism Insurance: Request for Comments

A newly released I.I.I. white paper observes that recent developments such as the attempted SUV bombing in New York City’s Times Square and the March 29 Moscow subway bombings are propelling terrorism into the headlines once more and reaffirm the risk facing insurers.

With this in mind, we note that the U.S. Department of the Treasury has issued a federal notice seeking comments on the long-term availability and affordability of terrorism insurance.

Hat tip to National Underwriter which reports on the Treasury’s request for feedback here.

In the notice, the Treasury said the Terrorism Risk Insurance Act of 2002, as amended by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (which extended TRIA until December 31, 2014), requires the President’s Working Group on Financial Markets to perform an ongoing analysis regarding the long-term availability and affordability of insurance for terrorism risk.

The working group is required to submit a report to Congress this year and another report in 2013. It is conducting its analysis in consultation with the National Association of Insurance Commissioners (NAIC), representatives of the insurance industry, the securities industry and representatives of policyholders.

These parties have 45 days to submit comments either electronically through the Federal eRulemaking Portal or by mail to the Treasury’s Office of Financial Institutions Policy.

Meanwhile, a new report by Guy Carpenter reveals that as the ninth anniversary of the 9/11 attacks approaches, the threat from terrorism continues to pose a risk to the re/insurance industry. Guy Carp says:

The nature of the threat has changed since 2001, but terrorism remains a constant and serious risk with global recorded terror incidents at historic highs.†