Florida’s Sinkhole Claims: The Numbers

The problem of sinkholes in Florida is increasing, both in terms of frequency and cost, according to a new report from the state’s Office of Insurance Regulation (OIR).

OIR’s study puts numbers around a problem that’s been making the headlines as many property insurers in Florida have sought approval for rate increases, citing a surge in non-catastrophe losses – read sinkhole claims.

So what do the numbers tell us? OIR requested information on all sinkhole claims occurring in Florida between 2006 and 2010.

It found that total sinkhole costs over the sample period amounted to approximately $1.4 billion and increased from $209 million in 2006 to $406 million in 2009.

Of the total claims reported, 66 percent are concentrated in Hernando, Pasco and Hillsborough counties –known sinkhole hotspots. But Miami-Dade and Broward counties – where sinkholes have traditionally not been an issue – have seen a 4.2 percent increase in claims so far in 2010.

A key takeaway from the OIR report is that just one percent of the claims were catastrophic ground cover collapse sinkholes, while nearly 57 percent were allocated to subsidence.

Still, insurers are paying out more than $140,000 for the average sinkhole claim, regardless of whether its due to catastrophic ground collapse or subsidence.

As I.I.I. Florida representative Lynne McChristian comments in her Straight Talk blog: “All I can say is†¦what??!!†

McChristian highlights another key finding from the report –  while insurers are paying sinkhole claims,  only 20 percent of claimants actually have repairs made:

So, 80 percent make an insurance claim for sinkhole damage, do not make repairs (because repair work is optional) and do what with the money? Some pay off their mortgage; others may just take the money and stay – or take the money and run.†

Bottom line:

Insurers paid a total of $406 million for Florida sinkhole claims in 2009. True, that amount pales in relation to the billions paid out following a hurricane. But when insurers talk about non-catastrophe losses rising, now you know what they mean.”

We couldn’t have put it any better.

Check out the I.I.I. Florida website for more on the issue of sinkholes.

Current Rating Environment: The ‘New Normal’?

Online Insurance exchange MarketScout  has warned that the current pricing environment may be the ‘new normal’ and around for several more years.

The prognosis came as MarketScout’s latest analysis reveals the composite rate for U.S. property and casualty insurance in the U.S. was down four percent in October 2010, extending the slow and steady moderation trend that began in August 2009.

MarketScout noted that for the last 14 months rate reductions have been very tight, measuring from minus 5 percent to minus 3 percent.

Richard Kerr, founder and CEO of MarketScout observed:

Since February 2005, rates have been cut in all areas regardless of how the data is measured. It doesn’t matter if you measure by line of coverage, industry group or the size of account; insureds have enjoyed a rate reduction every month with the exception of a month here and there for D&O coverage. Agents, brokers and insurers need to realize this pricing environment may be around for several more years.†

So what would it take to increase rates?

A major catastrophe in excess of $100 billion or the lack of return capital providers are seeing in their U.S. insurance portfolios are factors that could impact the market, according to Kerr.

Also, investments in some startup companies have not gone as well as expected. As a result, fewer capital providers are willing to back startup insurers. Kerr explained:

Less capital for startup insurers could impact the market and ultimately support rate increases as the supply channel constricts. Absent a major catastrophe or reduction in capacity, the current rating environment may be the new normal.†

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

Deepwater Horizon Disaster: A Hearing And Litigation Cleanup

Executives from BP, Transocean and Halliburton, are due to face the National Oil Spill Commission – the presidential panel appointed to investigate the Deepwater Horizon disaster at a hearing in Washington D.C. today.

The primary focus of the two-day public hearing will be on the causes of the rig explosion.

This is the fifth public meeting held by the commission as part of its investigation into the disaster. A final report on its findings is due to the President on January 12, 2011.

A cover story in the New York Times magazine this weekend by Douglas McCollam (a contributing editor for the Columbia Journalism Review and The American Lawyer) tells the story of how trial lawyers are competing to gain a piece of the action in the litigation against BP.

The article notes that BP is facing the most expensive corporate environmental catastrophe in history, but that the disaster comes at a pivotal juncture for the American trial bar:

In many respects its [the American trial bar’s] power and influence hit its zenith in the late 1990s, when a coalition suing the tobacco industry on behalf of 46 states reached a landmark $206 billion settlement in a case that both fundamentally altered the public’s perception of cigarette smoking and made billionaires out of several of the lawyers involved. That settlement led to predictions, both dire and hopeful, that the trial bar would use its newfound financial clout to go after a host of other industries, transforming the face of American capitalism.†

Instead, the article goes on, the past decade has seen a series of roadblocks in the trial bar’s influence across the country, due to setbacks in the courts, in Congress and state legislatures due to the tort reform movement spearheaded by the U.S. Chamber of Commerce, and especially in the court of public opinion.

It then discusses the $20 billion compensation fund established by BP that is now being administered by Ken Feinberg:

The Feinberg fund represents an alternative model for the resolution of big disasters, one that moves trial lawyers from center stage to a spot in the chorus. Over the last few decades the trial bar has built what amounts to a private-enterprise regulatory machine, compiling an impressive string of victories over – or at least a series of large settlements from – the most powerful corporations in the world. Some call them parasites and label their style of litigation the “American disease.† Others see them as the last truly effective check on corporate power left in the U.S. system. With the Feinberg model comes the prospect of their further diminishment, a blueprint for a future without big-time trial lawyers. And they are not willing to accept that future without a fight.†

Check out the I.I.I. backgrounder on the U.S. liability system.

Terrorism Risk: Reemerging Threat

Today brings yet more headlines underscoring the fact that terrorism risk is a constant and reemerging threat.

An Associated Press report quotes French Interior Ministry officials saying that one of two mail bombs sent from Yemen last week was disarmed just 17 minutes before it was set to explode.

Last Friday two parcel bombs aboard cargo planes en route to the United States were intercepted in England and the United Arab Emirates.

This is the latest reminder that terrorists continue to look for opportunities to target international aviation.

An Insurance Information Institute (I.I.I.) report published earlier this year noted that the cost of terrorism still looms large in United States history.

After nine attack-free years, the $32.5 billion in losses paid out by insurers for the terrorist attack of September 11, 2001, places second in an I.I.I. ranking of the most costly U.S. catastrophes – after just Hurricane Katrina (2005).

Nearly 10 years on, 9/11 also remains the worst terrorist act in terms of fatalities and insured property losses.

Check out the I.I.I. paper for more information on why terrorism risk is likely to remain a serious threat in the decade ahead and why changes to the federal terrorism risk insurance program would have a detrimental impact on the availability and affordability of terrorism insurance.

Reshuffling The Emerging Risks Deck

Immediate and pressing financial events have pushed risks that involve issues such as climate change or pandemics off most executives’ radar screens, according to a global survey conducted by Oliver Wyman with the Financial Times.

Less than 10 percent of executives surveyed consider potential threats related to environmental issues, societal risks, or technological concerns as major risks.

According to the study:

This result is especially troubling given the high-profile events related to these issues that have emerged in the last 12 months, including the eruption of volcanic ash in Iceland and the sudden emergence of the H1N1 flu.†

So what do executives consider their biggest risk over the next 18 to 36 months?

The survey found that 71 percent of executives listed global recession among their top five concerns, while 56 percent cited regulatory risks as one of their top five concerns.

Nearly one-quarter of respondents viewed recession as the biggest risk to their company.

Liquidity/credit crunch, financial market volatility and commodity price volatility rounded out the top five perceived global emerging risks among survey respondents.

Some 650 executives and senior managers of global organizations with annual revenues greater than $1 billion responded to the survey.

Election Day Impact On Insurance

As millions of Americans head to the polls and wait to see how the nation’s political landscape may or may not change after today’s mid-term elections,  commentators say  the results could have significant implications for insurance.

A.M. Best’s Election News 2010 website reports that voters nationwide could overhaul the insurance landscape:

Because of term limits and decisions not to run, about half of the country’s governors will be new. That could bring a tremendous change in the U.S. regulatory climate and will surely mean a great number of state insurance regulatory offices will soon be occupied by new commissioners.”

On the federal level, A.M. Best notes that key congressional races with insurance industry implications include those of Rep. Paul Kanjorski, D-PA; Rep. Earl Pomeroy, D-ND; Rep. Richard Neal, D-MA; and Rep. Walt Minnick, D-ID.

Both A.M. Best and Insurance Journal report that insurance commissioners will be elected in four states. Races will be determined in Georgia, Oklahoma and California, while in Kansas Sandy Praeger faces no opposition after prevailing in the August 3 Republican primary and will retain the commissioner’s post.

Results of governor races in two key insurance markets – California and Florida – will be keenly watched by the industry. Florida will also elect a new chief financial officer to fill the post vacated by Alex Sink, the state’s Democratic candidate for governor.

Follow the latest insurance-related election news and state-by-state coverage of the results on A.M. Best’s Election News 2010 website.

Late Season Hurricanes

An unprecedented late season Hurricane Tomas has triggered an insurance payout of $12.8 million from the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a multinational insurance pool developed by the World Bank.

Guy Carpenter reports that based on initial modeled losses, the CCRIF will pay out $8.5 million to Barbados, $3.2 million to St. Lucia and $1.1 million to St. Vincent and the Grenadines.

Tomas – the 12th hurricane of the 2010 Atlantic hurricane season – hit the islands in the eastern Caribbean as a Category 1 storm on October 30, causing significant damage and power outages in Barbados, St. Lucia and St. Vincent and the Grenadines.

Dr. Jeff Masters’ Wunderblog notes that the intensification of late season Shary and Tomas into hurricanes brings the total number of hurricanes this season to 12, tying 2010 with 1969 and 1887 for second place for the most hurricanes in a season. The record is held by 2005 with 15 hurricanes.

The formation of Tomas so far south and east this late in the season is unprecedented in the historical record; no named storm has ever been present east of the Lesser Antilles (61.5Â °W) and south of 12Â °N latitude so late in the year.”

Tomas has now been downgraded to a tropical storm, but is likely to restrengthen by Tuesday, perhaps heading towards Haiti, according to the National Hurricane Center (NHC). If this happens, the 2010 season  would see  a rare November hurricane.

Check out I.I.I. hurricane facts and stats.