Focus On Heightened Political Risk

Political unrest in the Middle East continues to dominate the news headlines amid recent protests in countries such as Egypt, Tunisia and Yemen.

Earlier today credit  ratings agency Moody’s Investors Service Inc. downgraded Egypt’s government bond ratings and changed its outlook to negative from stable.

Moody’s said the decision was prompted by the increased political event risk and concern that the policy response could undermine Egypt’s already weak public finances.

Meanwhile, a number of international businesses have  started to suspend  operations in the country due to the  volatile situation.

Just last week Aon warned that the level of political risk is rising in more countries than it is declining this year, leading to a greater need for political risk insurance cover.

A total of 19 countries were downgraded in Aon’s 2011 political risk map, while 11 countries were upgraded.

Political risk will continue to be a major influencer for businesses transacting in emerging markets in 2011, according to Aon.

The map measures the political risk of 211 countries and territories based on the level of risks such as currency inconvertibility and exchange transfer; strikes, riots and civil commotion; war; civil war; sovereign non-payment; political interference; supply chain disruption and legal and regulatory risk.

SOTU: Medical Malpractice Reform

In his State of the Union address last night President Obama mentioned a key issue for property/casualty insurers: medical malpractice reform.

I’m willing to look at other ideas to bring down [healthcare] costs, including one that Republicans suggested last year – medical malpractice reform to rein in frivolous lawsuits.†

President Obama’s comments follow landmark healthcare reform that failed to consider malpractice reform.

So what are we to make of this latest call?

Fortunately a number of commentators and bloggers have done the analysis. Here’s their take on the matter:

Over at Forbes Health Dollars blog, David Whelan says the President’s endorsement of malpractice reform warrants skepticism and offers some circumstantial evidence to support his view. His conclusion is that we shouldn’t get too excited just yet.

The Fact Checker at the Washington Post makes the point that President Obama favors certain ways of trying to lower costs related to malpractice, such as state incentives aimed at curbing lawsuits – rather than federal damage caps that Republicans favor.

Meanwhile, The Hill’s Healthwatch blog reports that senior Senate Democrats are highly skeptical of the President’s call for medical malpractice reform. Senator Patrick Leahy (D-VT), chairman of the Senate Judiciary Committee, is quoted saying he would only support such reform if it was part of broader legislation that included other fixes such as a controversial proposal to repeal insurers’ exemption from federal antitrust rules.

We should mention that numerous studies have shown that tort reforms, particularly caps on non-economic damages, are a key contributor to lowering health care costs.

Check out the I.I.I. backgrounder on medical malpractice.

Disaster Risk Reduction No Longer Optional

The Haiti earthquake and the Russian summer heat wave made 2010 one of the deadliest years for natural disasters in more than two decades, but future years could be worse, a United Nations agency has warned.

More than 296,800 people were killed in 373 natural disasters last year, which affected nearly 208 million others and cost nearly $110 billion in overall losses, according to annual data from the Centre for Research on the Epidemiology of Disasters (CRED).

A press release quotes Margareta Wahlstrà ¶m, head of UNISDR and Secretary-General Special Representative for Disaster Risk Reduction:

These figures are bad, but could be seen as benign in years to come. Unless we act now, we will see more and more disasters due to unplanned urbanization and environmental degradation. And weather-related disasters are sure to rise in the future, due to factors that include climate change.†

Ms. Wahlstrà ¶m goes on to stress that disaster risk reduction is no longer optional:

It’s critical for local governments, city leaders and their partners to incorporate climate change adaptation in urban planning.†

The Haiti earthquake was the deadliest event in 2010, resulting in more than 222,500 fatalities, while the Russian heat wave caused about 56,000 fatalities, according to CRED.

For the first time, the Americas became the world’s worst affected continent in terms of fatalities, with 74 percent of total deaths caused by the Haiti earthquake.

Even though Asia experienced fewer disaster-related deaths than the Americas or Europe, it remained the region most prone to natural disasters.

Some 89 percent of the total number of people affected by natural disasters in 2010 lived in Asia, according to CRED.

Five of the 10 most deadly disasters occurred in China, Pakistan, and Indonesia. However, the costliest event in 2010 was the earthquake in Chile, with overall damages valued at $30 billion.

Check out I.I.I. facts and stats on global catastrophes.

Australia: Financing Flood Risk

As the recovery effort continues in the wake of the Queensland floods, a fierce debate is raging over exactly how to finance what has been described by some as the biggest natural disaster in Australia’s history.

According to reports, some politicians are proposing introducing a flood levy across Australia to help cover the costs of flood damage. Another idea on the table is the establishment of a special fund, similar to the one set up in New Zealand following last year’s Christchurch earthquake.

Australia’s debate about the role of the private and public sectors in the wake of disaster comes as the United States looks at ways to reform its National Flood Insurance Program (NFIP), including privatizing part or the entire 40-year old program.

Two key concerns surrounding the NFIP are that its rates that do not accurately reflect the cost of risk and many do not purchase the coverage.

In The Australian, an op-ed by Rob Whelan, chief executive of the Insurance Council of Australia (ICA) says the ICA welcomes debate on the development of a standard definition on flood insurance, but warns that a flood levy will hurt existing policyholders and deter others from buying comprehensive flood cover:

If the proposed levy were to be applied to insurance policies, it would not only add to the cost of premiums but unfairly punish existing policyholders.

Imposing additional taxes in the form of levies on policyholders is not the way to encourage consumers to take out adequate insurance. Only a small percentage of the population lives in flood-prone areas. Is it fair and reasonable for the entire population to fund a small few?†

Whelan goes on to note that the insurance market in Australia is competitive, and that if insurers are provided with the necessary data the industry will respond by developing new and innovative flood products.

Countries around the world have taken varied approaches in their provision of flood coverage. The Queensland floods underscore the point that there  are different points of view, even among insurers themselves, on how to handle the flood peril.

As forecasters warn that the year 2011 is poised to be the year of the flood, it will be interesting to see how recent high-impact events influence the debate on flood insurance.

Current estimates from the ICA put the cost of insurance payouts in Queensland alone at $1.2 billion due to the recent floods. Some estimates have put the insurance bill as high as $6 billion.

The ICA estimate does not include industrial or mining claims, nor claims  as a result of  ongoing  flooding in the state of Victoria.

Check out a series of briefings on the impact of the Australian floods from law firm Norton Rose.

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

CIAB: Soft Market Continues

Insurers continued to pursue market share keeping pricing competitive in the fourth quarter of 2010, according to the latest Commercial P/C Market Index survey from the Council of Insurance Agents & Brokers (CIAB).

Commercial lines renewal rates on average declined 5.4 percent in the fourth quarter, compared with 5.2 percent the previous quarter. Council President Ken Crerar observed:

We didn’t see any strong resolve by insurers to hold the line on pricing last quarter. The fundamentals don’t add up, but competition still rules the day. Buyers still have opportunities to get more coverage at competitive prices.†

One piece of good news is that demand for insurance appears to be picking up. Some 47 percent of brokers responding to the CIAB survey said they saw an increase in demand, compared with 34 percent last quarter and only 24 percent a year ago.

The Council’s analysis comes after online insurance exchange MarketScout recently predicted that the soft market will come to a close by year end 2011.

Richard Kerr, founder and CEO of MarketScout said:

For those who have been asking for just ‘one more hard market’, your time is coming. You have six to nine months to get ready. Be prepared. Those with the ability to rapidly deploy product will win big.†

In its Q4 survey the CIAB said pricing remained soft across business lines and the rate of decline for commercial renewal pricing for small, medium and large business accounts remained roughly the same in the fourth quarter as in the third quarter.

Many brokers reported that carriers tried to hold pricing at renewal or introduce a small increase, but increases didn’t hold where competition was strong.

Check out latest I.I.I. information on financial and market conditions.

Airline Loss Reduction Measures Key

The airline insurance sector appears to have incurred more claims than premium once again in 2010, according to Aon’s January 2011 Airline Insurance Market News.

But the majority of airlines continue to take steps to reduce losses, despite continued upward movement in average claims values.

Aon’s preliminary estimates suggest that total claims in 2010 breached the $2 billion level for the third time in four years.

The market incurred an estimated $2.1 billion in total losses in 2010, while lead premium for 2010 looks to be just above $1.9 billion. This means a significant shortfall for underwriters even before reinsurance and fixed costs.

But while 2010 saw significant claims, the data is not universally negative.

For example, Aon notes that some 601 airline-related fatalities occurred in 2010, compared to the long term average of 621.

While this could simply be a statistical anomaly, the fact that fatality rates have been below the average in all of the last five years does at least suggest an improvement.†

Aon hints at a shift to fewer but more expensive claims, noting that between 1995 and 2009 there were 67 claims on average that met the criteria for inclusion in  its statistical analysis. Three of the last five years has seen the number of losses fall below this number, however.

Aon concludes:

Statistics can be used to justify any position that anyone chooses to take, and while the claims value average figures may continue to point upwards, the majority of airlines continue to take steps to reduce losses and ultimately insurance claims.†

Check out I.I.I. facts and stats on aviation.

Top Jury Verdicts Rise For Third Year Running

The size of the top 10 jury awards rose for a third consecutive year in 2010, according to the latest report from Lawyers USA.

The 10 largest jury verdicts in 2010 totaled $1.6 billion, a slight increase of 4 percent from $1.5 billion in 2009. Between 2008 and 2009, the sum of the top 10 jury awards had increased by 12 percent after more than doubling between 2007 and 2008.

Lawyers USA observed that the average award for 2010 increased less than in 2009, rising to just under $157 million, from nearly $145 million the prior year.

While the top award was significantly higher in 2010 – $505 million versus $370 million – there was then a sharp drop to the second-ranked award at $208.8 million and the third-ranked award at $152 million.

In contrast, 2009 saw three awards in the $300 million range.

Still, we note that you have to go back to 2005 to find a verdict in excess of $500 million.

In the year’s top verdict – a products liability case – a Nevada jury ordered Teva Pharmaceuticals and Baxter Healthcare to pay $500 million in punitive damages in addition to $5.1 million in compensatory damages to a man who developed Hepatitis C several weeks after undergoing a routine colonoscopy where he was anesthetized with propofol.

Another takeaway: three tobacco awards made this year’s top 10.

Lawyers USA compiles the Top 10 Jury Verdicts each year applying certain ground rules. Verdicts must be to an individual plaintiff, defined as a single person, family or small group of individuals injured in a single incident who had their claims tried in one case before the same jury.

The list does not include business-against-business suits, class actions or consolidated suits. Cases must have been defended and default verdicts and suits against incarcerated individuals are not included.

Check out I.I.I. info on the liability system.

Maritime Piracy At Record Levels

Today we take to the high seas to bring you latest reports of a surge in world piracy attacks and the resulting cost to the economy.

The number of people taken hostage at sea and the number of vessels taken in 2010 rose to record levels, according to  annual  data  from the ICC International Maritime Bureau’s Piracy Reporting Centre (IMB).

Pirates captured 1,181 seafarers in 2010, up 12.5 percent from 1,050 in 2009, while a total of 53 ships were hijacked in 2010, of which all but four occurred off the coast of Somalia. Eight crewmembers died in these incidents.

Overall, ships reported 445 pirate attacks in 2010, up 10 percent from 2009, the IMB said.

The IMB describes the continued increase in these numbers as “alarming†:

As a percentage of global incidents, piracy on the high seas has increased dramatically over armed robbery in territorial waters.†

Hijackings off the coast of Somalia accounted for 92 percent of all ship seizures last year, with 49 vessels hijacked and 1,016 crew members taken hostage. A total of 28 vessels and 638 hostages were still being held for ransom by Somali pirates as of 31 December 2010.

While attacks off the coast of Somalia remain high, the good news is that the number of incidents in the Gulf of Aden more than halved last year, with 53 attacks in 2010 down from 117 in 2009.

The IMB attributed the reduction to the deterrence work of naval forces that have been patrolling the area since 2008 and to ships’ application of self-protection measures.

An article in the Washington Post has more on this story. Follow the IMB record of  piracy and armed robbery incidents  on Twitter and view latest attacks  on the IMB Live Piracy Map.

Meanwhile, Insurance Journal reports that a new study from think tank One Earth Future (OEF), estimates that maritime piracy cost the international economy between $7 billion and $12 billion in 2010.

OEF’s calculation includes costs related to ransoms, insurance premiums, re-routing ships, security equipment, naval forces, prosecutions, anti-piracy organizations, and cost to regional economies. OEF noted that the numbers could change substantially as the economy rebounds from the current economic recession.

Covered For Employment Practices Liability?

The U.S. Equal Employment Opportunity Commission (EEOC) has just reported that job bias charges hit a record high of 100,000 in fiscal year 2010.

The EEOC stats show that 99,922 workplace discrimination charges were filed with the EEOC during fiscal year 2010 – an unprecedented level – and monetary relief obtained for victims totaled over $404 million.

All major categories of charge filings increased and for the first time ever, retaliation under all statutes (36,258) surpassed race (35,890) as the most frequently filed charge, the EEOC said. Race had been the most frequently filed charge since the EEOC became operational in 1965.

Another key takeaway: the number of charges alleging discrimination based on disability rose by 17 percent to 25,165, up from 21,451 in FY 2009.

Most media reports attribute the rise in job bias charges to the difficult economy and high unemployment.

But as businesses recover from the economic downturn and start to add jobs, this can also increase their exposure to liability claims and lawsuits, according to the findings of a recent survey by Chubb.

The 2010 Chubb Private Company Risk Survey found that nearly one-half of firms plan to add employees by year-end.

At the same time nearly one in five (16 percent) of survey respondents anticipated an EPL charge would be lodged against their firm in the next 12 months.

Sounds like a good time for businesses to make sure they have adequate employment practices liability (EPL) insurance in place.

The D&O Diary blog has more on the EEOC findings. Check out I.I.I. information on EPL insurance.