Commercial Insurance Prices Remain Flat

A fragile global economy, excess capacity in virtually every line of commercial insurance and a quiet 2009 catastrophe year combined to keep commercial insurance prices flat during the first quarter of 2010, according to Towers Watson’s most recent Commercial Lines Insurance Pricing Survey (CLIPS).

The latest results mark the fifth consecutive quarter of little or no price increases after nearly five years of steady decreases.

Data for most lines indicate flat or small increases in prices, offset by price reductions in commercial property, directors and officers liability (D&O), and employment practices liability (EPL), according to Towers Watson.

Looking at D&O, it observed that price increases seen in the past year due to the financial crisis have disappeared, and pricing seems to be reverting back to pre-crisis levels.

CLIPS preliminary findings also indicate that accident year to date 2010 loss ratios deteriorated 5 percent relative to year to date 2009. Early estimates of claim costs through the first quarter point to somewhat higher inflation than that observed in 2009, which contributes to the larger loss ratio deterioration.

The Towers Watson survey compared prices charged on policies underwritten during the first quarter of 2010 to the prices charged for the same coverage during the same quarter in 2009. Survey data were contributed by 37 participating insurers, representing approximately 20 percent of the commercial insurance market (excluding state workers compensation funds).

Its findings come just a week after the latest market barometer from online insurance exchange MarketScout revealed the premium and corresponding rates for all lines of commercial property and casualty business in the United States were down three percent in May 2010.

Check out I.I.I. information on the industry’s financial results and market conditions.

Funding Liabilities

The Wall Street Journal reports on the Obama Administration’s plans to ask BP to establish a fund to compensate victims of the Deepwater Horizon oil spill.

The fund would be independently administered, in effect taking some of the decisions about compensation out of BP’s hands. The WSJ article notes:

White House officials on Sunday said they wanted BP to put “substantial† funds into an escrow account to cover claims by Gulf Coast businesses and residents affected by the spill.

President Barack Obama plans to bring up the idea at a White House meeting Wednesday with top BP executives, including Chairman Carl-Henric Svanberg.†

The WSJ goes on to quote a spokesman for BP saying that the company expects to discuss the proposal with President Obama on Wednesday.

The article also cites legal experts saying that while other government-run funds exist (e.g. Superfund legislation, asbestos liability funds, and the 9/11 victims compensation  fund), they differ from the proposal facing BP.

As the responsible party, BP has already begun accepting claims filed by individuals and businesses to cover property damage and lost income as a result of the oil spill.

BP’s latest update of its response to the oil spill suggests that to-date over 51,000 claims have been submitted and more than 26,500 payments made, totaling over $62 million.

Industry commentators have noted that these claims totals will continue to rise as long as the oil continues to spill and affect the area and in the event of a large landfalling storm during hurricane season.

New World Trade Center Settlement Approved

A federal judge has approved a renegotiated settlement to compensate about 10,000 workers whose health was damaged during the rescue and clean up at the World Trade Center following the terrorist attack of 9/11.

The new $712.5 million settlement increases payouts to those injured and caps the fees going to plaintiffs’ attorneys.

It comes a little more than two months after U.S. District Judge Alvin K. Hellerstein ordered the parties to renegotiate a deal saying that too much of the original $657.5 million settlement was going to plaintiffs’ attorneys and not enough to the victims.

Under the new deal plaintiffs’ attorney fees are capped at 25 percent, adding $50 million to the fund, the WTC Captive Insurance Co is paying an additional $50 million to $55 million in cash, and New York City is waiving certain workers’ compensation liens. As a result of those savings, the payout to WTC plaintiffs will increase by up to $125 million.

In a statement WTC Captive Insurance Co president and CEO Christine LaSala said:

This settlement gives the plaintiffs immediate, fair and reasonable compensation, certainty and closure after years of protracted and costly litigation that will continue without this agreement.†

La Sala also noted that the settlement establishes objective criteria, based upon accepted medical standards, to assess the type and severity of each illness alleged in order to achieve a fair value for each claim.

Under the settlement those suffering debilitating respiratory illnesses such as severe asthma, could receive between $800,000 and more than $1 million. Approximately $1.5 million could go to compensate death claims.

Plaintiffs who have no qualifying injury, but have a legal claim for fear of becoming sick, will receive $3,250. A special insurance policy through MetLife will provide coverage for certain blood and respiratory cancers diagnosed during the coverage period, paying a benefit of up to $100,000.

Judge Hellerstein will hold a public hearing June 23 to hear from parties to the settlement. For more on this story check out a New York Law Journal report via law.com and an online article at National Underwriter. Check out the new I.I.I. paper Terrorism Risk: A Reemergent Threat.

Oil in Flood Water

The Federal Emergency Management Agency (FEMA) has confirmed that National Flood Insurance Program (NFIP) policies will cover property damage caused by oil in flood waters in the event of a defined flood.

The clarification comes after rising concerns over whether flood insurance policies would cover damage to homes and businesses if oil from the Deepwater Horizon spill mixes with flood waters, comes ashore during a storm and causes pollution damage to buildings.

In a memorandum to Write-Your-Own (WYO) flood program insurer participants, James Sadler, director of claims at the NFIP, said:

“Oil in flood water is not new for the NFIP, especially in riverine flooding. In the past, the mixing of oil and other pollutants in flood waters resulted from damage caused by a storm.†

FEMA states that there must first be a defined flood as described in the Standard Flood Insurance Policy (SFIP) and that damage caused by the oil in flood waters is covered subject to the provisions of the SFIP. There must also be direct physical loss to property for flood coverage to apply.

Other key points made by FEMA are:

  1. Under the terms of the General Property Form of the SFIP (commercial buildings and contents coverages must be purchased separately), damage caused by pollutants is limited to $10,000.
  2. Damage to residential buildings and contents from pollutants is covered up to the policy limits, under the Dwelling form and the Residential Condominium Building Association Policy form.
  3. Damage to ground, soil or land caused by flood, oil, or flood water mixed with oil is not covered.
  4. The cost of complying with any local or State ordinance including one that requires special removal methods for oil is specifically excluded.
  5. There is no coverage for testing or monitoring of pollutants unless there is a law or ordinance requiring it.
  6. FEMA or the WYO companies retain the right to subrogate, i.e. if the policyholder makes a claim against an entity who caused a loss and recovers any money, the policyholder must pay FEMA or the WYO back before they may keep any of the money.

Check out I.I.I. facts and stats on flood insurance.

Energy Security Supply Threat

As the New York Times reports on the lack of consensus surrounding how much oil is spilling from the Deepwater Horizon well in the Gulf of Mexico, a timely new study from across the pond says that green energy systems are essential in securing our energy supply and protecting the environment.

According to the report from Lloyd’s 360 Risk Insight and UK think tank Chatham House, the Deepwater Horizon oil spill is an example of how reliance on fossil fuels is pushing the search for reserves into more difficult and risky territories as declining production from easy to access oil reserves combines with growing global energy demand.

However, Lloyd’s reports that these trends could spur the transition to more cost-efficient clean and renewable energy systems. A press release quotes Lloyd’s CEO Richard Ward saying:

The current generation of business leaders need to rethink their approach to energy risks or be left behind as energy becomes less reliable and more expensive. The environmental and economic cost of our reliance on fossil fuels is too high. We need a long-term plan to reduce consumption and diversify our energy sources.†

As a result Lloyd’s says that all businesses, not just the energy sector, need to consider how they, their suppliers and their customers will be affected by energy supplies which are less reliable and more expensive.

With markets for low-carbon energy products likely to be worth at least $500 billion per year by 2050, Lloyd’s says this sector holds tremendous opportunities for business, though the lack of global agreement on carbon reduction is inhibiting commitment and investments.

The report calls on governments to set clear policies and create certainty in the transition to a low carbon economy. It also urges businesses to prepare for a new set of risks as our energy system changes. Check out I.I.I. energy facts and stats.

Moderating Rate Reductions

Energy industries, along with transportation and habitation industries, had the least premium reductions at minus two percent in May 2010, according to the latest market barometer from online insurance exchange MarketScout.

Just last month MarketScout CEO Richard Kerr warned that energy rates would increase, especially for offshore accounts in the wake of the explosion, fire and sinking of the Deepwater Horizon oil rig.

MarketScout’s latest analysis reveals that the premium and corresponding rates for all lines of commercial property and casualty business in the United States were down three percent in May 2010, compared to minus four percent in April and a six percent rate decrease a year ago.

Not since June 2005 has the average property/casualty rate decrease been as little as 3 percent.

Crime (flat), EPLI, fiduciary and surety (down 1 percent) were the coverage classes experiencing the smallest decreases in May, while general liability experienced the largest rate decrease at 5 percent.

Check out a new I.I.I. presentation on the Deepwater Horizon  event and I.I.I. information on the industry’s financial results and market conditions.

World Cup Risks Supported by Insurance

The 2010 FIFA World Cup held in South Africa begins in a week. Before a ball is struck, it’s important to note that global insurers and reinsurers are providing billions of dollars in risk protection for the event.

Munich Re reports that staging the World Cup finals is an enormous undertaking for both hosts and organizers and presents risks on every scale. The list of those requiring protection ranges from FIFA, the official organizer of the World Cup, to broadcasters, sponsors, travel firms, airlines and retailers.

In fact any party connected with the event will likely require insurance to cover their costs, expenses and profits should the event be cancelled. Munich Re observes:

The financial consequences of the event being cancelled, abandoned mid-way through or simply postponed due to a natural catastrophe or a terrorist attack are simply too great for the organizers to shoulder on their own.†

In addition to contingency cover, insurance protection against war or terrorist attack is another important protection. South Africa was among 16 countries that saw their terrorism threat level increase, according to Aon’s 2010 Terrorism Threat Map released earlier this week.

Reuters recently reported that at least $5 billion of cancellation and other insurance is in place for the 2010 World Cup, with coverage spread out among the global insurance and reinsurance marketplace.

NFIP Lapses Again

Insurance Journal reports that the National Flood Insurance Program (NFIP), which expired at midnight on May 31 after Congress failed to act on legislation reauthorizing the program, is not expected to be able to issue new policies for a week or longer.

This is the fourth time in recent months that the program has been allowed to lapse. The hiatus means that the NFIP is not authorized to sell new policies, issue increased coverage on existing policies, or issue renewal policies.

However, NFIP policies that are in force will remain in force and claims under those policies can continue to be paid after May 31.

Allowing the NFIP to lapse at the start of the 2010 hurricane season is irresponsible, according to the National Association of Mutual Insurance Companies (NAMIC). In a press release, NAMIC federal affairs director Kathy Mitchell said:

Millions of homeowners and businesses will be left vulnerable to storm losses because of Congress’ failure to act as one of the worst possible times†¦Given the forecast for this summer’s storm season, it is unfortunate that Congress would fail to act on this issue and put millions of Americans’ financial security at risk.†

It’s worth noting that it was the widespread flooding associated with Hurricane Katrina in 2005 that put a spotlight on the NFIP and started the debate about how to improve it. Five years later, that debate continues.

After its last hiatus the NFIP was granted a temporary extension until May 31. That renewal was retroactive to March 28, covering the more than two-week period when Congressional inaction allowed the program to lapse.

On the FEMA Web site, the agency says the hiatus period is expected to end soon. FEMA has issued guidance including a set of Frequently Asked Questions concerning NFIP authorization to help insurers participating in the program to communicate with insurance agents and policyholders. Check out I.I.I. information on flood insurance.

Hurricane Season Opener

The 2010 Atlantic hurricane season gets underway today and by all accounts it’s going to be a busy one and perhaps the most active since record-breaking 2005. Tomorrow Colorado State University’s Tropical Meteorology Project team will issue its latest forecast.

Speaking on the sidelines of the Florida Governor’s Hurricane Conference last week to Reuters, William Gray, founder of the CSU storm research team said CSU will be upping its forecast for the season.

Back in April, CSU called for 15 named storms, including eight hurricanes, four of which were expected to be major (Category 3-4-5) hurricanes. It put the probability of U.S. major hurricane landfall at about 130 percent of the long-period average.

In its latest seasonal outlook, the National Oceanic and Atmospheric Administration (NOAA) said this hurricane season could be one of the most active on record and underscores the importance of having a hurricane preparedness plan in place.

NOAA said there is a 70 percent chance of 14 to 23 named storms, including eight to 14 hurricanes, of which three to seven could be major hurricanes (Category 3, 4, or 5; winds of at least 111 mph).

NOAA and CSU are not alone in predicting above-average activity this season. WSI (Weather Services International Corp), London-based consortium Tropical Storm Risk and Accuweather.com have all pointed to hurricane activity being well above norm in 2010.

WSI in particular, noted that the Northeast United States faces an increased risk of hurricane landfall this season.

Whether the forecasts call for below- above- or just average seasons and whether or not their estimates prove accurate, the fact is that for coastal residents hurricanes are a constant threat. Policyholders that take the time to prepare now will have the best chance of recovering from a hurricane or any other disaster. Check out the I.I.I. video on making your home more hurricane resistant.