P/C Industry Profitability Surges Amid Lower Cat Losses

The property/casualty insurance industry is on track for what will assuredly be its best year in the post-crisis era, after a sharp improvement in profitability in the first nine months of 2013, according to I.I.I. president Dr. Robert Hartwig.

In his commentary on the industry’s 2013 – First Nine Month Results, Dr. Hartwig notes that the industry’s strong performance was propelled chiefly by lower catastrophe losses, favorable prior year reserve development and growth in premiums.

The effect: the industry combined ratio fell to 95.8 in the first nine months of 2013 from 100.7 in the first nine months of 2012—leading to an underwriting profit of $10.5 billion—much needed in an era of persistent, ultra-low interest rates.

As a result, the industry’s overall net income after taxes (profits) surged by 54.7 percent through the first three quarters of 2013 to $43.0 billion from $27.8 billion in the year earlier period, pushing the industry’s return on average surplus up to 9.5 percent, up from 6.5 percent in the first nine months of 2012.

Dr. Hartwig comments:

Looking ahead, there is no question that 2013 fourth-quarter performance for the property/casualty insurance industry will be far superior to 2012. This is because last year’s fourth quarter includes the impacts of Hurricane Sandy, which resulted in $18.8 billion in insured catastrophe losses. No event in the fourth quarter of 2013 comes remotely close. In addition, property/casualty insurers will benefit from a strong performance in financial markets during the final quarter of the year.†

This year’s nine-month catastrophe losses were far below the 10-year average for the first nine months of $20.0 billion, according to ISO’s PCS unit. Direct insured losses from catastrophes through the first nine months of 2013 fell by $4.5 billion to $11.7 billion from $16.2 billion in the year earlier period.

Meanwhile, net written premiums were up 4.2 percent during the nine-month period from 4.1 percent for the year earlier reading. This marked the fourteenth consecutive quarter of growth and the longest continuous period of growth in nearly a decade, Dr. Hartwig noted.

The results were released by ISO and the Property Casualty Insurers Association of America (PCIAA).

Target Data Breach Update

The fallout continues in the wake of the massive data breach at Target in which hackers stole 40 million debit and credit card accounts from stores nationwide between November 27Â  and December 15.

USA Today reports that so far three class-action lawsuits have been filed in the wake of the incident, seeking more than $5 million in damages. Two of the cases were filed in California and one in Oregon.

The same USA Today article reports that the Attorney General in at least four states – Connecticut, Massachusetts, New York and South Dakota – have asked Target for information about the breach, in what is regarded as the first step to a possible multi-state investigation into the breach.

Meanwhile, the Krebs on Security blog which broke the story of the Target breach last Wednesday December 18, reports that card accounts stolen in the breach are flooding the underground markets. Check out the latest reports here and here.

For anyone who shopped at Target during the breach period, the New York Times has a helpful Q&A on what you should do.

While latest studies indicate U.S. companies continue to improve their preparation for and response to a data breach, the security breach at Target highlights the vulnerability of major companies to this threat.

Both the organizational cost of a data breach and the cost per lost or stolen record declined last year, according to the 2013 Cost of a Data Breach study by the Ponemon Institute and Symantec.

The organizational cost of a breach declined from $5.5 million to $5.4 million and the cost per record from $194 to $188.

The Ponemon report also noted that while the cost of a data breach can vary widely because of the types of threats and data protection laws, the financial consequences are serious worldwide.

Check out I.I.I. facts and statistics on identity theft and cyber security.

Man-made Disasters and 2013

Just $6 billion of the $44 billion in estimated insured global losses arising from catastrophes in 2013 were generated by man-made disasters, little changed from 2012, according to Swiss Re sigma preliminary estimates.

But as an article on the Lloyd’s website reports, even though natural catastrophes may have dominated the news headlines in 2013, a series of man-made disasters have had a significant impact on a number of communities.

In fact around 5,000 lives were lost as a result of man-made disasters in 2013, according to Swiss Re sigma estimates.

Lloyd’s explains that with so many different parties potentially affected by man-made catastrophes, the claims scenarios for insurers can be complex, often involving property, first and third party liability losses.

Major man-made disasters in 2013 include the massive explosion at a fertilizer plant near the town of West, Texas, in April, which caused around $100 million in insured property losses, according to Lloyd’s.

Two rail disasters, one in Canada and the other in Spain, also made headlines in July.

On July 6, 2013, an unattended 74-car freight train carrying crude oil ran away and derailed in the town of Lac-Megantic, Canada, resulting in a fire and explosion that left as many as 50 people dead and destroyed half the downtown area.

Later that month, on July 24, 2013, a high speed train derailed outside the railway station of Santiago de Compostela, Spain, leaving around 140 injured and 79 dead.

Check out I.I.I. facts and statistics on man-made disasters.

The September 11 terrorist attack in the U.S. was the costliest man-made disaster in history, based on Swiss Re data going back to 1970. It caused $24 billion in insured losses (in 2012 dollars).

Global Rise in Political Risks for Investors

Direct foreign investors operating in the Middle East and North Africa (MENA) face an increasing level of political risk as a result of the instability and uncertainty created by the Arab Awakening, according to an annual risk report.

The 2014 Marsh-Maplecroft Political Risk Map reveals that more than 60 percent of countries in the MENA region have experienced a significant increase in the level of political violence since 2010.

According to the map, 17 countries since 2010 have experienced a significant increase in their level of dynamic political risk, more than half of which are located in the MENA region.

Note: dynamic political risks focus on short-term challenges, such as rule of law, political violence, the macroeconomic environment, resource nationalism and regime stability.

Syria has seen the most significant increase in risk and is now ranked as the second-highest risk country behind only Somalia.   For the first time, Egypt is now categorized as “extreme† risk for political violence, a deterioration driven by post-coup violence and increased terrorist activity in the Sinai Peninsula.

Over the past year, East Africa was host to the most countries with an increase in political violence, according to the map.

Marsh notes that the increase in political violence in East Africa presents significant challenges to foreign investors looking to the region following the discovery of substantial oil and gas reserves.

Despite these risks, the map points to opportunities for investors in six growth markets where overall dynamic political risk has significantly improved since 2010: the Philippines, India, Uganda, Ghana, Israel, and Malaysia.

The map draws from Maplecroft’s Political Risk Atlas 2014 and highlights dynamic political risks across 197 countries, including conflict, terrorism, macroeconomic stability, rule of law, and regulatory and business environments.

Hat tip to Business Insurance which reports here.

Super Bowl Home Rentals and Insurance

We’re not football people, so the fact that the Super Bowl is happening in our back yard in New Jersey in early February, hasn’t registered yet.

However, the Insurance Information Institute (I.I.I.) just issued a press release that got us thinking, not just about touchdowns and field goals.

Before we look into renting out our house to Super Bowl fans, the I.I.I. cautions us and other like-minded homeowners to first contact our insurer to make sure we’re covered if our property is damaged or if someone is injured.

Apparently the market for properties near the Stadium in East Rutherford, New Jersey, eight miles west of mid-town Manhattan, is booming on peer-to-peer rental websites. Short-term rental prices for homes typically soar when the Super Bowl or other high-profile sporting events come to town.

So how do insurers approach this home-sharing scenario?

According to the I.I.I., some insurers may allow policyholders to use their property as a rental for a one-time, special occasion like the Super Bowl, as long as the insurer is informed about it ahead of time.

Other insurers, while allowing this type of arrangement, may insist on other criteria being met, such as the homeowner acquiring additional insurance coverage.

Some insurers, though, will consider any rental of your home to be a business venture, requiring the purchase of a business policy–specifically either a hotel or a bed and breakfast policy—because a standard homeowners insurance policy excludes losses arising from the operation of a business.

In the words of Jeanne Salvatore, senior vice president, Public Affairs, and consumer spokesperson for the I.I.I.:

Technological advances have allowed for the growth of the sharing economy. But, if you participate, it is your responsibility as a property owner to make sure you’re adequately covered.†

Check out I.I.I. information on the sharing economy and homeowners insurance.

Marsh: Health Care D&O Risks Rise As Reform Takes Effect

Health care organizations are facing a much more challenging directors and officers (D&O) liability insurance market as they adapt to changes arising from the Affordable Care Act (ACA), according to a new report from Marsh.

It reveals that average primary D&O rates for midsize and large health systems increased by 9.6 percent in the third quarter of 2013, while total program D&O rates renewed with 7.9 percent increases on average.

Nearly all organizations – 91 percent – renewed with rate increases, according to its findings.

Marsh notes that since the passage of the ACA in 2010, the health care industry has undergone rapid consolidation resulting in organizations working more closely together and sharing information.

As a result, many health care organizations face increased exposure to antitrust risks and this has insurers concerned.

In some cases D&O insurers have lowered their antitrust sublimits and increased antitrust-related coinsurance requirements and retentions, Marsh says. In addition to raising rates, some D&O insurers are also pulling back on offering full policy limit defense coverage.

It quotes Mark Karlson, Marsh’s FINPRO Health Care Practice Leader:

Ongoing merger and acquisition activity and the transition to accountable care organizations and similar networks are creating new exposures for many health care organizations, including antitrust risks.

This has resulted in a much more challenging D&O market for health care companies. Risk managers should expect to face additional rate increases in 2014 and be prepared to provide underwriters with detailed answers about their response to health care reform.”

PC360 has more on this story.

Check out I.I.I.  information on  D&O liability insurance.

Survey: Commercial Lines Price Gains Tapering Off

Another day, another commercial lines pricing survey. This one via Towers Watson.

Commercial insurance prices increased by 5 percent in aggregate during the third quarter of 2013, according to Towers Watson’s latest Commercial Lines Insurance Pricing Survey (CLIPS),

While this marked the 11th consecutive quarter of price increases, the gains appear to be tapering off, dropping a point since the CLIPS edition a year ago, Towers Watson said.

The survey compares carriers’ pricing on policies underwritten during the third quarter of 2013 to those underwritten in the same quarter of 2012.

Price increases by line of business were lower than those reported in the second quarter in all lines, with the exception of employment practices liability.

Employment practices liability experienced the largest price increase year over year, with price increases spiking into double digits, followed distantly by workers compensation and commercial auto.

Prices for most lines of commercial insurance showed gains in the mid-single digits, while none of the classes surveyed reported a price drop, according to Towers Watson.

A press release quotes Tom Hettinger, Towers Watson’s Property & Casualty sales and practice leader for the Americas:

This hard market is somewhat different from hard markets we have experienced before. Carriers are taking rate, which is logical, as they focus on measuring the capital required to support the business rigorously and realistically, and adjust their return expectations accordingly.†

Hettinger added that loss cost trends are benign – in fact, carriers are reporting flat loss costs.

Yet the explicit recognition of risk, whether in the form of investment yield, inflation risk or catastrophe exposure, seems to be leading to much more disciplined pricing decisions.†

Survey respondents reported that loss ratios have improved between 3 percent and 6 percent for accident-year 2013 relative to 2012 (excluding catastrophes), as earned price increases more than offset stagnant reported claim cost inflation.

For the most recent survey, data were contributed by 43 participating insurers representing approximately 20% of the U.S. commercial insurance market (excluding state workers compensation funds).

Check out I.I.I. facts and statistics on commercial lines.

MarketScout: Commercial Insurance Rates Hold Steady

Online insurance exchange MarketScout reports that the composite rate for U.S. commercial insurance held steady at plus 4 percent in November, matching the rates for October 2013.

Richard Kerr, CEO of MarketScout noted:

The market is still on an upward trajectory but rate increases are slowing.†

Kerr went on to explain that the only rate increases by coverage classification were small commercial policies (BOP) and general liability coverages, which both increased from plus 3 percent to plus 4 percent.

However, the general liability increase was possibly an adjustment from the unusually large percentage rate reduction in October, Kerr said.

Jumbo accounts (those over $1 million premium) were up from plus 2 percent to plus 3 percent. The manufacturing segment saw its rates increase from plus 4 percent to plus 5 percent.

Rates moderated by 1 percent in November for umbrella liability, auto, and crime coverages, MarketScout added.

By account size, medium accounts ($25,001 to $250,000 premium) were down from plus 5 percent to plus 4 percent.

Transportation accounts paid an average plus 4 percent in November as compared to plus 5 percent in October.

Check out latest information on financial results and market conditions from the I.I.I.

Global Pandemics Top Extreme Risk Worry

A global pandemic is the most important extreme risk for the insurance industry to worry about in the long term, according to a survey of global insurance industry executives conducted by Towers Watson.

Rounding out the top three extreme risks of concern are a large-scale natural catastrophe and a food/water/energy crisis, the survey found.

Other top 10 extreme risks named in the Towers Watson survey include cyber-warfare, an economic depression, a banking crisis and a default by a major sovereign borrower.

Votes were compiled in a wiki survey which enabled participants to add their own ideas. Over 30,000 votes were cast.

Meanwhile, a new report by AonBenfield says pandemic risk remains the most important mortality exposure for the insurance industry and is placed above other forms of catastrophic event including natural catastrophes, nuclear explosions, and terrorism.

In Pandemic Perspective, AonBenfield points out that according to historical data, pandemics are large enough to destabilize the insurance market more than once every 200 years, with three global pandemics recorded in each of the last three centuries.

This suggests that the majority of people working in the insurance industry today are likely to face at least one pandemic during their careers. Insurers should be aware that now is the time to anticipate and educate themselves on pandemic risk, and begin to model it.†

Check out I.I.I. facts and statistics on mortality risk.