Buffett’s Insurance Commandments

Warren Buffett had some words of wisdom for insurers and underwriters in his annual letter to shareholders released Saturday.

In the letter, the Oracle of Omaha noted that a sound insurance operation needs to adhere to four disciplines.

These are:

  1. Understand all exposures that might cause a policy to incur losses;
  2. Conservatively evaluate the likelihood of any exposure actually causing a loss and the probable cost if it does;
  3. Set a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and
  4. Be willing to walk away if the appropriate premium can’t be obtained.

Buffett went on to comment:

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,† spells trouble in any business, but in none more so than insurance.†

Given that Berkshire Hathaway’s insurance operations have now delivered nine consecutive years of underwriting profits, totaling about $17 billion, some may want to heed this advice.

Data Breach Victims More Likely To Suffer Identity Fraud

Approximately 1.4 million more adults were victimized by identity fraud in 2011, compared to 2010, as the number of fraud incidents increased by 13 percent in the United States.

One of the key factors potentially contributing to the increase in identity fraud was the significant rise in data breaches, according to Javelin Research & Strategy’s just-released 2012 Identity Fraud Report.

It  found that 15 percent of Americans, or about 36 million people, were notified of a data breach in 2011. Those receiving a data breach notification were 9.5 times more likely to become a victim of identity fraud.

The report also found that consumers’ social media and mobile behaviors may be putting them at greater risk of identity fraud.

LinkedIn, Google+, Twitter and Facebook users had the highest incidence of fraud although there is no proof of direct causation.

Despite the warnings, people on social networks are still sharing too much personal information frequently used to authenticate a consumer’s identity.

Specifically, 68 percent of people with public social media profiles share their birthday information (with 45 percent sharing month, date and year); 63 percent shared their high school name; 18 percent shared their phone number; and 12 percent shared their pet’s name.

Smartphone users are also experiencing greater incidence of fraud, Javelin found, with seven percent victims of identity fraud. This is one-third higher incidence rate compared to the general public.

The good news is that despite the increase in identity fraud last year, it is becoming less profitable for fraudsters as the dollar amount stolen remained steady.

In addition, consumer out-of-pocket costs have decreased by 44 percent since 2004. Javelin attributed this to improved prevention and detection tools that have come available as well as fraud alerts leading to reduced detection time.

Check out I.I.I. info on  identity theft.

Study On Extreme Weather Events

The blogosphere has been abuzz over a report on extreme weather events in the United States released last week by Environment America.

Among the key findings:

– Since 2006, federally declared weather-related disasters in the United States have affected counties housing 242 million people – or roughly four out of five Americans.

– Since 2006, weather-related disasters have been declared in every U.S. state other than South Carolina.

– During this period, weather-related disasters affected every county in 18 states and the District of Columbia. (Alabama, Arkansas, Connecticut, Delaware, Hawaii, Iowa, Louisiana, Maryland, Maine, Massachusetts, Missouri, North Dakota, Nebraska, New Hampshire, New Jersey, Oklahoma, Rhode Island and Vermont.)

– More than 15 million Americans live in counties that have averaged one or more weather-related disasters per year since the beginning of 2006. Ten U.S. counties – six in Oklahoma, two in Nebraska, and one each in Missouri and South Dakota – have each experienced 10 or more declared weather-related disasters since 2006.

– More Americans were affected by weather-related disasters during 2011 than in any year since 2004. The number of disasters inflicting more than $1 billion in damage (at least 14) set an all-time record, with total damages from those disasters of at least $55 billion.

It’s  important to note  that private sector insurers paid out $35.9 billion in insured natural catastrophe losses in the United States in 2011, according to an overview recently provided by Munich Re and the Insurance Information Institute (I.I.I.). This was above the 2000 to 2010 average loss of $23.8 billion (in 2011 dollars).

Events included a very active thunderstorm (tornado-hail) season, with insured losses exceeding $25 billion, more than double the previous record, and Hurricane Irene, which caused major flooding in the northeastern U.S.

The I.I.I. also reminds us that U.S. insurers have paid out billions of dollars in catastrophe claims in the past two decades, yet the overwhelming majority remain well-capitalized in 2012.

Rethinking Risk

A timely report from the Association of Chartered Certified Accountants (ACCA), the global body for professional accountants, points to the increasing need for businesses to work harder to spread responsibility for risk management across the entire organization.

The survey of over 2,000 ACCA members found accountants on the front-line of businesses have a vital role to play in successful risk management. Its release comes at a critical time for risk management in the wake of the financial crisis.

ACCA says:

Accounting is really about providing information to help make good decisions, and good decisions mean less risk. The accountant’s day-to-day role is all about managing risk, even if people don’t think about what they do in that way.†

However, the survey did reveal the value of accountant’s contributions can be lost through their misuse.

Accountants in the survey reported very high levels of bad behavior around risk management, including frequent ‘gaming’ of forecasts, providing optimistic versions to avoid criticism or pessimistic ones to reduce expectations.

Just 1 percent of respondents reported never seeing any of the bad behaviors asked about in the survey at their organization.

Still, the survey did find a statistical link between the use of good risk management practices by accountants and incidences of dysfunctional behavior: more good practices correspond with less dysfunctional behavior.

Types of good practice identified by ACCA include aspects of management accounting, forecasting, reporting and quality controls, decision support and controls over wrongful behavior.

ACCA notes:

Businesses need to make sure they use the risk awareness and risk management skills of their qualified accountants, and not miss an opportunity to effectively integrate risk management.†

A.M. Best on Thai Flood Losses

The Thailand floods could be among the top five costliest insured loss events of the past 30 years, according to a briefing from ratings agency A.M. Best.

Insurers’ estimates of industry wide losses from the Thailand floods have increased to $15 billion  Ã¢â‚¬“ an increase of more than 50% since its last briefing on the event, A.M. Best says.

Such a loss would place the Thai floods in a tie for the fifth costliest insured loss event in the past 31 years.

Here’s an excerpt from  Best’s briefing:

Aon Benfield estimated the floods in Thailand have damaged or destroyed more than 4 million homes, businesses and manufacturing facilities. This has generated structural damage four times greater than what resulted from Japan’s earthquake and tsunami in March 2011, but only half of the total insured loss due to a low rate of insurance adoption.†

A.M. Best also says that it will take the industry significant time to reconcile the true impact of the floods because of a general lack of data on Thai exposures, the length and magnitude of the floods, and the complexity of business interruption and contingent business interruption (CBI) claims.

Another excerpt:

The four-month long deluge of flooding in Thailand, labeled the costliest natural disaster in Southeast Asia, delivered a shocking and unexpected blow to the global insurance industry in the form of an un-modeled event. Reinsurers no longer will spare Thailand from consideration as a risk for natural catastrophes, resulting in significant changes to flood insurance policies, including increased pricing and decreased coverage.†

A.M. Best concludes that it expects to see additional upward revisions to initial loss estimates and feels that the amount of the total insured loss could change.

More on this story at Insurance Journal.

As Political Risk Concerns Rise, So Does Insurance Interest

Two political risk reports are pointing to the continued instability in the Arab Spring countries as an ongoing concern for businesses in 2012.

Aon’s 2012 Political Risk Map notes that while clarity has begun to emerge in some of the countries affected by the Arab Spring, the resulting tension has spurred or intensified protests in dozens of countries, both within the region and elsewhere.

In a press release, Aon says that interest in political risk insurance is rising, as chief stakeholders take notice:

These uprisings and protests remain a key concern in 2012 and we see this reflected in rating downgrades of several countries. This is forcing CEOs and CFOs of businesses with overseas operations in emerging markets to revisit risk management and risk mitigation measures.†

In addition, the outcome of elections in the United States, France, Russia   and China may contribute to greater global uncertainty, while the eurozone debt crisis also remains a significant risk and extends to those countries economically or otherwise dependent on the region, according to Aon.

In similar vein, a recent report from risk analysis firm Maplecroft highlights the risk of continuing instability in Arab Spring countries among the most significant political risks for businesses and investors in 2012 and beyond.

Of the 10 states with the fastest increasing risk trends in Maplecroft’s short-term Political Risk Index, nine are located in the Arab world, reflecting the political upheaval and unrest taking place in the region. These countries are: Algeria, Bahrain, Egypt, Kuwait, Libya, Morocco, Oman, Syria and Tunisia.

Maplecroft’s analysis indicates there is also increased risk of unrest in other Arab states, including Saudi Arabia and Sudan.

Check out PC360Â  for more on this story.

MarketScout: 2012 Begins With Rate Increases

Calendar year 2012 started with a composite property and casualty rate increase of 1 percent, according to online insurance exchange MarketScout.

In its latest market analysis, MarketScout noted that the 1 percent composite rate increase in January matched the increase in December 2011.

Richard Kerr, CEO of MarketScout, said:

Workers’ compensation and catastrophe exposed property continued to exhibit the largest increases with upward adjustments of plus 2 percent.†

Commercial property, business interruption, BOP, general liability and workers’ compensation all reported rate increases of 2 percent.

Umbrella/Excess, commercial auto, D&O liability, and EPLI coverages had a composite rate increase of 1 percent. Professional liability, fiduciary, crime and surety coverages were flat.

Meanwhile, the latest Commercial P/C Market Index Survey from the Council of Insurance Agents  & Brokers found that commercial property/casualty pricing rebounded in the fourth quarter of 2011.

On average, small, medium and large account pricing increased 2.8 percent last quarter, compared with a -5.4 percent decline in the same period the previous year, according to the Council.

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

Predicting the Super Bowl Winner

Who will win Super Bowl XLVI this Sunday?

If you’re wondering whether you should be backing the New York Giants or the New England Patriots look no further than the Super Bowl Prediction System of sports statistician John Dewan.

In his Stat of the Week, the owner of Baseball Info Solutions and co-publisher of ACTA Sports asks us to consider four things:

  1. The Patriots rank 31st in total defense (yards allowed) in the NFL this year.
  2. The Packers, another juggernaut, ranked 32nd and lost earlier in the playoffs.
  3. Defense wins championships.
  4. The Super Bowl Prediction System loves defense.

But if you’re thinking this must mean the Patriots are going to lose making the New York Giants the next Super Bowl champs, the Super Bowl Prediction System suggests you’re wrong.

Dewan goes on to note that while the Patriots rank 31st in total yards allowed, it’s points, not yards that count in the score. In points allowed, the Patriots are in the top half of the league ranking 15th (allowing 342 points during the regular season) while the New York Giants rank 25th (allowing 400 points).

He says:

The Super Bowl Prediction System was off its game last year picking the Pittsburgh Steelers. The Green Bay Packers beat the Steelers 31-25. But the system still has a great track record. It has picked 16 of the last 21 winners (76 percent). This year, the system thinks the Patriots will avenge their Super Bowl XLII loss to the Giants.†

Dewan adds  that the Super Bowl Prediction System comprises 12 different statistical indicators and each one correctly predicts the Super Bowl winner 55-65 percent of the time. Evaluated collectively, the system is 76 percent in the last 12 games.

By the way, for those of you throwing a Super Bowl party, the I.I.I. has tips on how to be a responsible host.

Arbitration Saves Industry Millions In Litigation Costs

In a new record, nearly 520,000 insurance claims disputes valued at more than $2.4 billion were resolved via arbitration in 2011, Arbitration Forums Inc reports.

According to AF, the nation’s largest provider of inter-insurance dispute resolution services, it is saving the property/casualty insurance industry more than $700 million in litigation costs annually.

Disputes leading to arbitration typically arise when insurance or self-insured companies believe their insureds are not at fault or disagree over the percentage of liability or the amount of damages.

Over 85 percent of inter-company arbitration disputes involve auto collisions.

W. Russ Smith, president and chief executive officer of AF, said:

Companies are increasingly focused on controlling their expense dollars, and arbitration offers a proven, cost-effective way of generating those savings while enhancing customer service.†

Some 98 percent of the arbitration filings in 2011 were made electronically, via AF’s electronic subrogation claims system known as E-Subro Hub – more than twice the percentage of a few years earlier.

E-Subro Hub expanded to all 50 states in 2011 and handled subrogation cases valued at more than $1.4 billion.

AF noted that eight of the 10 largest auto insurers in the United States have already moved their subrogation process to E-Subro Hub, and it projects that 80 percent of the private passenger auto market will be using the system in 2012.

E-Subro Hub significantly streamlines the process by enabling users to electronically send and receive subrogation demands, attach supporting documents, manage subrogation claims and electronically file inter-company arbitration where necessary.