Category Archives: Business Risk

Hall of Shame

The Coalition Against Insurance Fraud (CAIF) has released its annual Insurance Fraud Hall of Shame, listing the year’s most brazen insurance scams. We read that a glass-eating gypsy, a teacher who faked cancer, and an insurance agent who killed the homeless are among the top insurance swindlers of 2007 and have been duly inducted into the Insurance Fraud Hall of Shame. According to the Coalition, insurance fraud is an $80 billion-a-year crime and has grown more violent and invasive in recent years, as indicated by this year’s Hall of Shame swindlers. Check out further I.I.I. info on insurance fraud.  

Changed Energy Risk Landscape

Sharp increases in the price of commodities such as oil, steel, building materials and contractor day rates have had a significant impact on the energy industry risk management landscape. That’s the analysis from Willis in its latest Energy Market Review. Willis notes that superheated commodity prices have resulted in increased replacement cost valuations and provided extra scope for longer and costlier delays in the event of an accident. This means the energy industry is facing significantly increased exposures and the potential for higher losses. While the energy sector has benefited from a benign loss environment over the last two years, Willis questions whether the market is really prepared for more expensive future losses that are the inevitable result of these developments. In such a market, it urges clients to re-examine their risk exposures and asset valuations in order to make sure they are adequately insured.  

Online Privacy Concerns Increase

We all value our privacy, and the 2008 survey from the University of Southern California’s Center for the Digital Future finds that privacy and security continue to be a major concern when shopping online. The study also underscores the significant threat businesses face from breaches in data security. According to its findings, the percentage of respondents who were very or extremely concerned when they buy on the Internet increased in 2007, and overall concern was the highest since the first study was published seven years ago. Concerns about credit card security when or if buying online also continue to remain high but stable, with 57 percent of respondents very or extremely concerned in 2007. Check out further I.I.I. info on identity theft.

Stoneridge Decision

Yesterday the U.S. Supreme Court issued its  decision in the much anticipated securities litigation case of Stoneridge Investment Partners LLC v. Scientific Atlanta Inc. In a 5-3 opinion, the Court held that  shareholders cannot sue third parties (such as accountants and lawyers) charged with aiding a corporation that has defrauded its investors. The ruling upholds two lower court decisions. As we have discussed before (see our October 9, 2007 posting), a decision in favor of investors would have exposed U.S. companies as well as those doing business with them to the likelihood of significant additional costly shareholder suits. Further commentary on the Stoneridge case can be found at The D&O Diary, a blog focused on D&O liability issues.  

Financial Innovation

A new report on global risks from the World Economic Forum (WEF) highlights the growing role the financial markets are playing in the transfer of risk. For example, the WEF notes that the market in insurance-linked securities is broadening from natural catastrophe bonds to credit securitizations and mortality bonds. Besides insurance-linked securities, it points out that a wide variety of derivatives and other financial instruments are now being used to transfer insurance risks.  

Just how financial innovations could reshape the future of the insurance industry is the timely topic of a discussion being held tomorrow evening in New York City. Organized by the Columbia Business School Alumni Club of New York (CBSAC/NY), the panel will feature experts from Swiss Re, Zurich, Deloitte and UBS. The event will take place from 6-8pm at the UJA Federation of New York, 130 East 59th Street, 7th floor conference center. For further information, contact Sepp Ruchti at jpr2115@columbia.edu

Terrorism Backstop Moves Ahead

Congressional deadlock on extension of the federal terrorism risk insurance program has been broken with House approval of a bill extending the program for seven years from December 31. The bill, which passed the House yesterday  by a vote of 360-53,  is the same Senate measure that was passed last month (see our November 19 posting). The bill is now expected to be signed by the President. For more on this story check out a December 18 Business Insurance online article by Mark Hofmann. I.I.I. has further info on terrorism risk available online.

Tort Costs Update

Tillinghast has just released its 2007 update on U.S. Tort Cost Trends. The good news is that tort costs declined by 5.5 percent to $247 billion in 2006. That approximates $825 per person – $57 less per person than in 2005. The $13.4 billion decrease in costs over 2005 marks the first downward trend since 1997. A significant drop in commercial tort costs, due in part to the waning impact of asbestos costs was a contributing factor. But the near-term outlook is not so rosy, according to Tillinghast. It warns that several factors, including the potential fallout from the current subprime loan crisis, are expected to reverse the figures in 2007. As it notes: when people lose money, litigation tends to follow. Looking ahead Tillinghast expects growth in U.S. tort costs of around 2.5 percent in 2007, with slightly higher growth of 4.5 percent in the following two years. As well as subprime mortgages, global warming and backdating of options are just some of the issues that it expects will impact future trends. Check out I.I.I.’s update on the liability system.  

E&O Subprime Risk by State

Reinsurance broker Guy Carpenter has released a  briefing on the threat of errors & omissions (E&O) litigation on U.S. real estate professionals. To more accurately gauge the likelihood of litigation Guy Carp has developed its own subprime E&O litigation index. The index measures a combination of factors influencing the E&O litigation climate including foreclosure rate, subprime mortgage delinquency rate, litigation attorneys per mortgage professional, truth in lending legislation and banking litigation ranking. According to the index, Illinois, Michigan and Massachusetts claim the highest overall E&O litigation risk levels, with Mississippi, Indiana and Ohio close behind. The study throws up an interesting fact: there is little to no correlation between the highest risk states for subprime-related E&O litigation and those states such as Arizona and Nevada with the greatest number of subprime mortgage delinquencies and/or foreclosures. Guy Carp also notes that the riskiest states are those with average rankings in most categories and an extremely high result in a single category.

Subprime Litigation Latest

In our September 21 posting we cited future predictions of an uptick in securities class actions as a result of the subprime market turmoil. Willis has just released another alert from the company’s financial institutions practice in which it confirms this trend. It notes that claims in the U.S. against directors and officers of financial institutions have started coming as a result of nearly 40 class actions and there will undoubtedly be more. At first these suits were predominantly restricted to U.S. subprime lenders and certain real estate investment trusts (REITs). However, Willis says it has become apparent that class actions are now touching financial institutions not directly related to subprime loan default exposures. Such cases allege that directors failed to disclose their companies’ exposures to losses in the subprime market and misled shareholders. A trend to monitor. Further commentary on securities class actions can be found at The D&O Diary, a blog focused on D&O liability issues.  

Senate Endorses Terrorism Backstop

The news snuck in just after we had posted Friday, but we should mention that the Senate has approved extension of the federal terrorism risk insurance program. The move would extend the program for a further seven years from December 31. The Senate version is very different to House legislation passed a couple of months ago (see our September 21 posting). However, like the House, the Senate version would expand coverage under the program to include domestic acts of terrorism. Coming just days before Thanksgiving, this is a timely and positive step for the industry. Final consensus on the program will now need to be reached so that it can be reauthorized before year-end. Check out further I.I.I. information on terrorism risk.