Category Archives: Business Insurance

Triple-I CEO: Insurers can meet their obligations during crisis

America’s auto, home, and commercial insurers have the financial resources to meet their obligations during the COVID-19 crisis, according to a presentation the Insurance Information Institute (Triple-I) delivered to state regulators.

“This year marks Triple-I’s 60th anniversary, and we are proud to be able to report before this forum that today that the property/casualty insurance industry is well-positioned to honor the promises it has made based on strong fundamentals, which include long-term risk management and an actuarially sound approach to underwriting,” said Sean Kevelighan, CEO, Triple-I, in remarks to the National Association of Insurance Commissioners (NAIC). 

“It is important to appreciate that as much as this is a catastrophe of historic magnitude, there are more on the horizon — hurricanes, wildfires, floods —  and we must remain prepared in the way that we have long-planned, so again, we can continue act as the financial first responder that we have been for several centuries,” Kevelighan stated.

Kevelighan and Triple-I senior economist Michel Leonard highlighted a few keys to the financial strength of the nation’s P/C insurers as a group, including its:

  • Policyholders’ surplus: U.S. P/C insurers’ cumulative assets exceeded its liabilities by more than $800 billion as of year-end 2019.
  • Diverse investment portfolios: Nearly 80 percent of P/C insurers’ portfolio exposure is to non-stock assets, such as high-quality corporate and municipal bonds.
  • Reinsurance: U.S. P/C insurers’ ability to access global reinsurance markets allow them to spread U.S. financial risks worldwide.

In an analysis of the current U.S. P/C insurance markets, Dr. Leonard told the NAIC’s special session on COVID-19 that workers’ compensation insurers providing coverage to hospitals, first responders and law enforcement faced the highest exposure to COVID-19 related claims. Liability and directors and officers (D&O) insurers who cover health care, transportation, retail and pharmaceutical businesses have moderate exposure, Dr. Leonard added.

A copy of the presentation is on the Triple-I website.

Emerging cyber terrorism threats and the Federal Terrorism Risk Insurance Act

Cyber is a relatively new, evolving risk. Insurers manage their exposures, in part, by setting coverage limits and excluding events they don’t want to insure.

On December 20, 2019, President Trump signed a federal funding package that includes a seven-year extension of the Terrorism Risk Insurance Act (TRIA). TRIA provides for a federal loss-sharing program for certain insured losses resulting from a certified act of terrorism.

Passage of the act was met with resounding approval by the insurance industry. You can read more about it here.

A critical mandate of the TRIA extension is for the Government Accountability Office (GAO) to make recommendations to Congress about how to amend the statute to address emerging cyberthreats. Triple-I recently hosted an exclusive members-only webinar featuring Jason Schupp of the Centers for Better Insurance, who discussed issues likely to be addressed by the GAO report.

Schupp said the report will likely serve as a starting point for a discussion about cyber threats and how the insurance industry can better meet the needs of businesses, nonprofits and local governments for cyber insurance. It will address:

  • Vulnerabilities and potential costs of cyber-attacks to the United States;
  • Whether adequate coverage is available for cyber terrorism;
  • Whether cyber terrorism coverage can be adequately priced by the private market;
  • Whether TRIA’s current structure is appropriate for cyber terrorism events; and
  • Recommendations on how Congress could amend TRIA to meet the next generation of cyber threats.

Cyber terrorism is already covered under TRIA, but such acts don’t fit neatly into the TRIA framework. Because cyber limits and conditions are already narrow, TRIA’s current make available requirement has not been effective in providing coverage for cyber-terrorism events at the same limits and conditions as non-cyber events.

Schupp proposes that the requirement be amended so the coverage doesn’t exclude insured losses specific to the loss of use, corruption or destruction of electronic data or the unauthorized disclosure of or access to nonpublic information.

But expanding the requirement carries considerable risk. If insurers are required to make more coverage available for cyber events than they are comfortable with the result could be a pullback in property and liability insurance generally – not just for cyber events. Any expansion must be balanced with the terms of the backstop.

Schupp concluded that the GAO’s investigation and report (which is required to be completed by June 2020) is likely to kick off a multi-year debate that could substantially redefine U.S. cyber insurance markets. Insurers, policyholders and other stakeholders should engage accordingly.

To learn about how to become a member of Triple-I visit iiimembership.org.

Florida Dropped From 2020 “Judicial Hellholes” List

Each year the American Tort Reform Association (ATRA) publishes a list of “Judicial Hellholes”  — places where ATRA says laws and court procedures are applied in an “unfair and unbalanced” way in civil cases, usually to the disadvantage of defendants.

Since the issue of social inflation has been trending in recent months, it’s no surprise that the mention of ATRA’s report in our Daily newsletter garnered an unprecedented number of clicks.

Florida — a former number one Judicial Hellhole — doesn’t even make the cut this year.

“Florida took great strides toward improving its legal climate in 2019,” ATRA says “Although there is much work to be done, the election of Governor Ron DeSantis (R) has heralded a sea change in Florida’s legal landscape, beginning with the appointment of several new Florida Supreme Court justices. This new court is deferential to legislative efforts to stop lawsuit abuse and poised to correct the course set by the prior activist court.”

DeSantis in 2019 also signed into law a measure aimed at curbing assignment of benefits (AOB) litigation in the state. AOB is a standard insurance practice and an efficient, customer-friendly way to settle claims. As a convenience, a policyholder lets a third party – say, an auto glass repair company – directly bill the insurer. In Florida, however, legislative wrinkles have spawned a state of affairs in which legal fees can dwarf actual damages paid to the policyholder – sometimes tens of thousands of dollars for a single low-damage claim.

The measure DeSantis signed puts new requirements on contractors and lets insurers offer policies with limited AOB rights, or none at all. But it excludes auto glass repairs. The number of auto glass AOB lawsuits statewide in 2013 was over 3,800; by 2017, that number had grown to more than 20,000.

This year, the Philadelphia Court of Common Pleas took over the top spot for 2019. It is one of the preferred jurisdictions for asbestos litigation and home to an $8 billion product liability verdict. California, New York City, Louisiana, and St. Louis all rank in the top five.

Some of the trends noted in the ATRA report include:

  • the trial bar’s push to use public nuisance law to shift costs associated with public crises to businesses;
  • lead paint and climate change litigation;
  • the opioid and vaping crisis; and
  • new rights of action against employers.

Three Illinois counties – Cook, Madison, and St. Clair – made the list.  Antonio M. Romanucci, president of the Illinois Trial Lawyers Association, called the ATRA report misleading.  “The deceptively titled ‘Hellholes’ report is part of [ATRA’s] ongoing campaign to deny access to the court system that our tax dollars fund,” Romanucci told Illinois Radio Network. “ATRA’s annual publicity stunt demeans the U.S. Constitution and attacks citizens’ Seventh Amendment right to trial by jury.”

Romanucci said the number of civil lawsuits filed in Illinois has been declining since 2010 and was down 47 percent. And medical malpractice cases have dropped 32 percent since 2003.

Is a Global Recession Imminent? If So, Businesses Can Protect Themselves with Credit Risk Insurance

By Loretta Worters, Vice President – Media Relations

The credit crisis of 2007-2008 was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.  “Everyone was impacted, not just those working in banks.  Because the price of debt, the ability to get financing changed, a lot of things happened.  So, everyone is impacted by credit every day, whether they know it or not,” said Tamika Tyson, senior manager, credit with Noble Energy, in this video interview.

Tyson, who is also a non-resident scholar with the Insurance Information Institute, said what she is most concerned about is debt repayments that are coming due. “If a global recession happens, as economists are predicting, and it happens in conjunction within an election, it can be difficult for companies to refinance any mature debentures they have coming in 2020,” she said.  “Leadership needs to be thinking about the risks in their company.  Not just the credit risks, but all risks related to their business.”

What leads to credit risk and how can companies protect themselves?

The main microeconomic factors that lead to credit risk include limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, direct lending, massive licensing of banks, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank.

Doing a comprehensive risk assessment is a great idea for everyone within an organization, noted Tyson.  “Once an assessment is made as to how much risk they are exposed to, then they can develop a strategy to help protect the company. If there’s more risk in the system than a company is willing to take, then they should consider obtaining credit risk insurance,” she said.

What is Credit Risk Insurance?

Credit risk insurance is a tool to support lending and portfolio management.  It protects a company against the failure of its customers to pay trade credit debts owed to them. These debts can arise following a customer becoming insolvent or failing to pay within the agreed terms and conditions.

What can impact credit risk?

The factors that affect credit risk range from borrower-specific criteria, such as debt ratios, to market-wide considerations such as economic growth. Political upheaval in a country can have an impact, too.

For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs or barriers, investment, wage levels, labor laws, environmental regulations and development priorities, can affect the business conditions and profitability.

“At the end of the day, political risks have the ability to impact credit risks.  Credit risks rarely impact political risks,” she said.  “We have a lot of different views right now on the political spectrum so until we know how that’s going to work out, it’s going to create risk in the system, and we’ll see how different companies react to that,” Tyson said.

“We all talk about biases.  Everyone thinks they’re better off and it’s always someone else that has the issue.  It’s the same when looking at a risk assessment or reviewing someone’s financials; everyone thinks they’re doing fine, but then they discount what’s going on with other people.  That’s why it is imperative companies self-evaluate as they evaluate those they transact business with.”

“Know your portfolio, know your customers and understand your risk tolerance,” said Tyson.  “Know, too, there are a lot of tools available to help you mitigate against those risks.”

 

When Must Insurers Defend Motels
in Trafficking Cases?

Hotels and motels are routinely used for sex trafficking. Two recent lawsuits highlight the complexity of determining who bears legal costs associated with trafficking.

Human trafficking is a crime with enormous individual and societal impacts, and it relies on legitimate businesses to sustain it. Motels, for example – and, arguably, insurers.

“Hotels and motels are routinely used for sex trafficking,” reports the Polaris Project, a nonprofit that aims to “eradicate modern slavery.” Two recent lawsuits involving insurers of motels used by traffickers highlight the complexity of determining who bears legal costs associated with such activities.

Duty to defend

Both cases revolve around “duty to defend” — an insurer’s obligation to provide a legal defense for claims made under a liability policy. Before proceeding, let me say: I’m not a lawyer.  Everything that follows is based on published reporting, and no one should act on anything I write without first consulting an attorney.

In the first case, a woman sued motel operators for letting her be trafficked at their motels when she was a minor. The Insurance and Reinsurance Disputes Blog says, “The allegations of physical harm, threats, being held at gun point, and failure to intervene were wrapped up into claims ranging from negligence per se to intentional infliction of emotional harm.”

One of the motels sought defense from its insurer, Nautilus Insurance Co. Nautilus argued it was not obligated to defend based on a policy exclusion for claims arising out of assault or battery. The court agreed, and an appellate court affirmed.

In other words, the motel owners were on the hook for their own legal costs.

In the second case, a court found the insurer – Peerless Indemnity Insurance Co. – must defend its client in a suit brought by a woman claiming she was imprisoned by a man grooming her for prostitution while the owners turned a blind eye. A lower court had dismissed the case, finding insufficient evidence the motel was engaged in trafficking. An appeals court overturned that decision.

“The relevant question,” the judge said, is whether the victim’s injuries constitute personal injury. This is because the definition of personal injury under the policy included injuries arising from false imprisonment.

Because her injuries, at least in part, arose from false imprisonment, the judge said, “the answer to that question is ‘Yes’.”

So, the court said, Peerless must pay to defend the motel.

Trafficking is a $32 billion-a-year industry. Insurers might want to review their policy language to avoid funding defenses of criminals and businesses that enable them.

Language matters

The differences between these rulings seem to have more to do with nuances in policy language than trafficking facts.

In the Nautilus case, the appeals court found the exclusion – stating Nautilus “will have no duty to defend or indemnify any insured in any action or proceeding alleging damages arising out of any assault or battery” – unambiguous. It declared: “Nautilus had no duty to defend and indemnify” because the claims “arose from facts alleging negligent failure to prevent an assault or battery.”

The Peerless case involved two policies – a general liability and an umbrella – both of which contained exclusions for “‘personal and advertising injury’ arising out of a criminal act committed by or at the direction of the insured.”

The “personal” in “personal and advertising injury” includes false imprisonment.

To a non-lawyer like me, this seems as unambiguous as the Nautilus case: the Peerless policies excluded personal injury “arising out of one or more” of a variety of offenses, including false imprisonment.

The U.S. District Court for the District of Massachusetts disagrees. Its analysis goes into semantic tall grass, parsing phrases like “arising out of” and “but for” and is peppered with case law citations like:

  • “Ambiguities are to be construed against the insurer and in favor of the insured” and
  • “The insurer bears the burden of demonstrating that an exclusion exists that precludes coverage.”

It would exceed the bounds of my non-existent legal training – and the length of a blog post – to critique the court’s analysis. I recommend reading the decision.

But it doesn’t take a lawyer to see insurers have a stake in reviewing and possibly tightening their policy language to avoid having to fund defenses of criminals and businesses that enable them.

Trafficking is a $32 billion-a-year (and growing) industry, according to the Polaris Project.  With that kind of money involved, cases like these won’t just go away.

Despite Safer Skies, Aviation Claims Rise: 
What’s Up With That?

 Flying has never been safer.

You’re more likely to die from being attacked by a dog than in an airline accident (see chart).

Today’s aircraft contain more sophisticated electronics and materials than those flying in the 1960s. When they bump into each other or come down too hard, they cost more to repair.

And yet, according to a recent Allianz Global Corporate & Specialty (AGCS) report, the aviation sector’s insurance claims continue to grow in number and size.

The report – Aviation Risk 2020 – says 2017 was the first in at least 60 years of aviation in which there were no fatalities on a commercial airline. The year 2018, in which 15 fatal accidents occurred, ranks as the third safest year ever.

Of more than 29,000 recorded deaths between 1959 and 2017, the report says, fatalities between 2008 and 2017 accounted for less than 8 percent – despite the vast increase in the number of people and planes in the air since 1959.

So, what gives?

Safety is expensive

Some of the reasons for the increased claims are good ones: Safer aircraft cost more to repair and replace when there are problems.

The report analyzed 50,000 aviation claims from 2013 to 2018, worth $16.3 billion, and found “collision/crash incidents” accounted for 57 percent, or $9.3 billion. Now, this may sound bad, but the category includes things like hard landings, bird strikes, and “runway incidents.”

The AGCS analysis showed 470 runway incidents during the five-year period accounted for $883 million of damages.

Engine costs more than the plane

Today’s aircraft contain far more sophisticated electronics and materials than those flying in the 1960s. When they bump into each other or come down too hard, they cost more to repair.

“We recently handled a claim where a rental engine was required while the aircraft’s engine was repaired,” said Dave Watkins, regional head of general aviation, North America, at AGCS. “The value of the rental engine was more than the entire aircraft.”

When entire fleets have to be grounded – the report cites the 2013 grounding of the Boeing Dreamliner for lithium-ion battery problems and the more recent fatal crashes involving the Boeing 737 Max – costs can really soar. Boeing reportedly has set aside about $5 billion to cover costs related to the global grounding of the 737 Max.

Even after a fix is found, the task of retrofitting a fleet takes considerable time – and, in the aviation industry, time truly is money.

Liability awards take off

Compounding the claims associated with the costs of safer flight, the report says, liability awards have risen dramatically.

“With fewer major airline losses,” Watkins said, “attorneys are fighting over a much smaller pool and are putting more resources into fewer claims, pushing more aggressively for higher awards.”

Today’s aircraft carry hundreds of passengers at a time. With liability awards per passenger in the millions, a major aviation loss could easily result in a liability loss of $1 billion or more.

CA Workers Comp Earthquake Cat Bond Launched

Earthquake exposure is one of the biggest risks to workers compensation insurers, so it’s interesting to read that the California State Compensation Insurance Fund (SCIF) is once again looking to the capital markets to provide reinsurance protection for workers comp losses resulting from earthquakes.

This is a repeat of the first catastrophe bond sponsored by the SCIF in 2011 — Golden State Re Ltd sized at $200 million — which is due to expire in January 2015.

Artemis blog says:

The unique transaction, which has not been repeated by anyone else until now, links earthquake severity to workers compensation loss amounts demonstrating a new use of the catastrophe bond structure.”

The Golden State Re II catastrophe bond issuance is expected to be sized at $150 million or more, and will cover the SCIF until January 2019.

While the covered area is for earthquakes events across the United States, Artemis notes that as with the 2011 deal as much as 99.99 percent of the SCIF’s insurance portfolio is focused on California, so the risk is primarily focused on California-area earthquakes.

The new deal apparently carries a similar modeled loss trigger to the 2001 transaction, using the exposures of a notional portfolio of workers compensation risks in the SCIF portfolio, earthquake severity factors (ground motion), geographic distribution of the covered portfolio, types of buildings covered, time of day and the day of week an event occurs as some of the weighting factors.

An earthquake has to be magnitude 5.5 or greater to trigger the catastrophe bond, according to Artemis, and losses after an event will be modeled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters. This will be modeled against the notional portfolio using day/time weighting to determine an index value and notional modeled loss amount.

A 2007 report by EQECAT for the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) estimated California workers compensation insurers would pay annual losses of $180 million caused by earthquakes.

The report  suggested that the losses would affect 15.6 million employees working during a major earthquake.

Check out I.I.I. facts and stats on workers compensation insurance.

Insurance Potpourri

As we head into August and the weekend, here are some of the stories from around the insurance blogosphere that piqued our interest:

Bertha: Tropical storm warnings have been issued for Puerto Rico, the U.S. and British Virgin Islands and other nearby islands as Tropical Storm Bertha — the second named storm of the 2014 Atlantic hurricane season — approaches the Caribbean. Early Friday, the National Hurricane Center (NHC) reports that Bertha’s winds are near 45 mph with no significant change in strength expected in the next few days. The latest 5-day forecast track for Bertha via the NHC has it staying well off the U.S. East Coast — let’s hope it stays that way.

Commercial Rate Increases Slow: Prices for commercial property/casualty insurance continued to slide in the second quarter of 2014, according to the latest quarterly survey from the Council of Insurance Agents & Brokers. On average, prices for small, medium and large accounts eased by a modest -0.5 percent during the second quarter, compared with 1.5 percent in the first quarter. Competition continued to drive the market, the Council said. Of note, pricing for property fell into negative territory with a -2.6 percent drop last quarter compared with flat pricing in the first quarter.

CAT Bond, ILS Market Dashboard: Looking for real-time metrics of the growing insurance-linked securities (ILS) and catastrophe bond market? Look no further than the just-launched Artemis Dashboard, an easy-to-use tool that allows you to access the data behind the transactions. You can view the current size of the market, issuance for the current year, top sponsors in the market as well as analyze outstanding cat bond and ILS market by key metrics such as the mix of perils, triggers, expected loss levels and pricing, and also data about the development of the market over time.

The I.I.I. has additional resources on these topics. Check out I.I.I. facts + statistics on hurricanes and catastrophe bonds.

New York MTA in Storm Surge Catastrophe Bond First

Superstorm Sandy highlighted the enormous risk of storm surge along the Gulf and Atlantic coasts, so we’re interested to read that the captive insurer of the New York Mass Transit Authority (MTA) has accessed the capital markets to cover it in the event of storm surge resulting from a named storm.

Artemis blog reports that this is the first time in the history of the catastrophe bond market that a transaction has provided cover just for storm surge:

Hurricane and tropical storm induced storm surge is included in many U.S. wind cat bonds, so it is not particularly diversifying, but it has never been structured into a cat bond as the sole peril in this way and is an interesting addition to the market that could spur more issuance of storm surge cat bonds. It’s another sign of the increasing maturity and flexibility in the cat bond market, as well as the increasing appetite investors are showing for catastrophe risk.

Artemis adds that the sponsor, the captive insurer of the New York Mass Transit Authority (MTA), has significant exposure to storm surge, as evidenced by the losses it faced from last year’s hurricane Sandy:

The MTA suffered a loss in the region of $5 billion from the storm, predominantly from surge due to flooded transit tunnels and subways, so it is encouraging to see it turn to the catastrophe bond market for a new source of reinsurance protection.

The $125 million catastrophe bond will be issued by First Mutual Transportation Assurance Co. (FMTAC), the MTA’s captive insurer and sold via MetroCat Re Ltd, a Bermuda domiciled special purpose insurer.

Artemis says the deal offers protection against named storms that generate a storm surge event index that equals or exceeds 8.5 feet for Area A or 15.5 feet for Area B. Area A includes tidal gauges located in The Battery, Sandy Hook and Rockaway Inlet, while Area B includes tidal gauges in East Creak and Kings Point.

Business Insurance has more on this story.

Check out I.I.I. facts and statistics on catastrophe bonds.

Market Impact of Asiana Airlines Loss

While it’s too soon to know how the crash of Asiana Airlines’  Flight 214 may affect the market for airline insurance, it’s important to recognize that the loss comes at a time when the industry’s overall claims level was exceptionally low, reflecting its investment in safety.

In its latest Q2 2013 Airline Insurance Market News, Aon had reported on the extremely low level of claims the market had seen up to the beginning of May 2013. This followed a 40 percent reduction in the cost of major losses in 2012.

For the year to the beginning of May 2013, the loss figure, excluding minor losses, was $107.63 million, which while up from the $32.17 million recorded at the same point in 2012, was still some 67 percent below the five-year average, Aon said.

Adding an estimate for minor losses, the overall loss total stood at $357.63 million, compared to $282.17 million in 2012.

Passenger and third party fatality levels were extremely low, with only 23 up until the beginning of May, compared to 214 on average for the same point between 1995 and 2012, Aon added.

Major losses in 2012 totaled US$324 million, nearly 40 percent  less than the US$522 million recorded in 2011. Adding an estimate for minor losses, the overall estimated incurred claims total was US$924 million, down 20 percent against the US$1.13 billion total claims in 2011.

Despite the low level of claims and fatalities, Aon noted:

The airline industry still represents a considerable risk where a single loss could still mean that the claims statistics for 2013 overtake the long term average. Equally, as we have seen in the past, a string of incidents at the mid-point of the year can change the position significantly.†

Asia Insurance Review reports that the total insurance cover on the Boeing 777 aircraft owned by Asiana Airlines that crash landed at San Francisco international airport (SFO) on Saturday stands at $2.2 billion, according to the Financial Supervisory Service.

That amount includes coverage of $130 million on the aircraft hull and $3 million in crew liability coverage. Up to $2.2 billion may be paid out for facility damages and passenger casualties.

Some 291 passengers and 16 crew were on board when the aircraft crashed during its approach to the airport. The crash resulted in two fatalities and more than 180 injured.

Check out a summary of the incident by law firm Kreindler & Kreindler.

I.I.I. facts and stats on aviation are available here.