Category Archives: Business Risk

Subprime Notes

Another day, another broker brief on the subprime market turmoil and its potential impact on insurance markets. Willis has released an alert from the company’s financial institutions practice. It notes that Directors & Officers (D&O) and Errors & Omissions (E&O) insurers have seen a number of claims arising from the subprime issue, though these could be just the tip of a huge iceberg. Other key points from Willis: a worst-case loss scenario for D&O insurers could be in the realm of $3 billion; the downturn in the real estate market resulted in a 52 percent increase in the amount of title insurance claims paid in the second quarter of 2007 as compared to 2006; foreclosure activity in the first half of 2007 was up 55 percent from 2006; foreclosures for the month of July rose 93 percent from the prior July; and 43 states have reported an increase in foreclosure activity in 2007. Willis plans to issue alerts on some insurance coverages that will receive more prominence as a result of the crisis, such as mortgage impairment, foreclosed and forced placed covers, in coming weeks. For I.I.I.’s take on the subprime issue, check out a paper authored by Dr. Steven Weisbart, I.I.I. vice president and chief economist.  

Subprime Professional Impact

We’re in D.C. today at the Professional Liability Underwriting Society (PLUS) International Conference. Much to talk about for professional liability lines, especially given recent headlines on the subprime market turmoil. Reinsurance broker Guy Carpenter just released a briefing on this very topic titled: “Credit Market Aftershock Threatens Professional Lines Profits.” In its analysis Guy Carp notes that estimates of the insurance impact range from $1 billion to $3 billion, but when the dust settles total insured losses are likely to be at the top end of that scale. Most of the credit crunch’s impact will affect the D&O product line, although E&O suits, ERISA actions and other suits have been filed and could lead to substantial further insurance losses, according to the briefing. Guy Carp puts the potential D&O loss at in excess of $2 billion, but cautions that the full impact will not be known until 2008 or 2009. For our take on the subprime issue, check out a paper authored by Dr. Steven Weisbart, I.I.I. vice president and chief economist.

ID Theft Rules for Financial Institutions

Financial institutions are prime targets of identity theft because they hold their customers money and store large quantities of personal data, so rules issued by Federal regulators on steps these companies must take to prevent ID theft could increase their potential liability. Under the final rules issued by the Federal Trade Commission (FTC) and other Federal regulatory agencies, all financial institutions will be required to develop and implement a program to prevent identity theft on new and existing consumer accounts. The program must include reasonable policies and procedures for detecting, preventing, and mitigating ID theft and enable a financial institution or creditor to: identify relevant patterns, practices, and specific forms of activity that are “red flags† signaling possible identity theft and incorporate those red flags into the program; detect red flags that have been incorporated into the program; respond appropriately to any red flags that are detected to prevent and mitigate ID theft; and ensure the program is updated periodically to reflect changes in risks from ID theft. The rules, which implement sections of the Fair and Accurate Credit Transactions Act of 2003, take effect January 1, 2008. Covered financial institutions and creditors have until November 1, 2008, to comply. Check out further I.I.I. facts & stats on ID theft.

Litigation Trends

U.S. companies may afford themselves a sigh of relief, albeit brief, when they take in the headline findings of the fourth annual Litigation Trends Survey by Fulbright & Jaworski showing a distinct drop in the number of new lawsuits and regulatory actions filed against them. Based on interviews with in-house counsel at 250 major U.S. corporations, 17 percent of respondents said their companies had escaped the past year without having to defend a single new lawsuit, a sharp increase from just 11 percent in 2005-06. But despite the fact that internal investigations are down and fewer businesses are filing suit, Fulbright cautions that the litigation landscape remains fully loaded, with one-third of U.S. companies facing at least 25 lawsuits, and 18 percent defending 100+ cases domestically. As industries go, it appears insurers along with retailers faced the most litigation. Some 93 percent reported having to defend at least one new case this past year, and more than half from both sectors got stung with one or more $20 million dispute – the highest of 10 industry segments represented. Insurers contended with the most $20 million-plus cases with 54 percent taking on more than 20 such actions. The upshot is that even with fewer companies reporting new lawsuits this past year, Fulbright notes that the vast majority of U.S. businesses remain significantly exposed to litigation. Check out further I.I.I.  facts  & stats  on  litigiousness.

Terrorism and Flood Bills Before Senate Committee

Keep your eye on Capitol Hill tomorrow where the U.S. Senate Banking Committee will consider both further extension of the federal terrorism risk insurance program and reform of the National Flood Insurance Program (NFIP). Votes on both measures are expected  in the  morning. The House passed its version of the terrorism bill on September 19 (see our September 20 posting). Word on the street is that the Senate version is very different to the House bill in scope, as it would extend the program for seven years and not extend coverage to group life. The debate on extending coverage to chemical, nuclear, biological and radiological (CNBR) terrorism also remains undecided. Check out I.I.I. information on terrorism risk and NFIP  facts & stats  online.

Considering Stoneridge

Today the U.S. Supreme Court will begin hearing a major securities litigation case with potentially enormous implications for businesses. The outcome of Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. will decide whether shareholders can sue third parties (such as accountants and lawyers) charged with aiding a corporation that has defrauded its investors. The Securities and Exchange Commission (SEC) already has the ability to sue third parties for aiding corporate fraud, but a decision in favor of investors in this case would likely expose U.S. companies as well as  those doing business with them to significant additional costly shareholder suits. We don’t need to remind you of how much litigation costs U.S. businesses. For more on this, check out I.I.I.’s liability issues update. Further commentary on the Stoneridge case can be found at The D&O Diary, a blog focused on D&O liability issues.

Illuminating Surplus Lines

Phrases like non-admitted or non-standard are enough to give any market a complex, but as is widely known, surplus lines insurers perform a vital role by assuming risks that licensed companies decline to insure or will only insure at a very high price. With that in mind the latest figures indicating that despite the soft market, the surplus lines share of the commercial insurance market grew again in 2006, might come as a bit of a surprise. In fact A.M. Best reports that surplus lines insurers benefited from the one notable soft market exception: catastrophe-exposed coastal property. It also notes that the growth of the surplus lines market as a percentage of total commercial lines premiums has increased steadily over the past two decades, from 5.4 percent in 1986 to 14.4 percent in 2006. How to sustain that growth in the coming year is likely to be one of the discussion points at the annual meeting of the National Association of Professional Surplus Lines Offices (NAPSLO) in New Orleans this week. For more on the surplus lines market, what it is and how it operates, check out I.I.I.’s commercial insurance site.  

Fraud Costs

We’re often asked how much insurance fraud costs the industry (the answer is an estimated $30 billion annually), so a new global survey on corporate fraud commissioned by risk consulting firm Kroll and conducted by the Economist Intelligence Unit makes for interesting reading. According to its findings, new technologies, new investors and expansion into overseas markets are opening the door to different forms of fraud and four out of five companies have suffered from corporate fraud in the past three years. As you might expect the associated costs are substantial. The survey shows the average cost due to fraud to large companies (those with annual revenues of more than $5 billion) was more than $20 million, with about one in 10 losing more than $100 million. In some sectors, more than one-fifth of all companies have lost more than $1 million – these sectors include financial services and healthcare. Looking to future risks, companies cite theft, loss of or attack on information as their biggest concerns, with 20 percent of respondents describing themselves as highly vulnerable. More than 30 percent believe that IT complexity has increased their exposure to fraud. For those companies, the good news is that there are some innovative insurance covers out there to help protect against cyber risks. See our paper on information security and liability for further information.

TRIA Extension Latest

For anyone who missed the news, the Terrorism Risk Insurance Revision and Extension Act of 2007 (H.R. 2761) passed the House yesterday afternoon, by a final vote of 312-110. Key elements of the House bill are that it would extend the program for an additional 15 years (until December 31, 2022), and expand coverage under the program to include domestic acts of terrorism, group life losses and chemical, nuclear, biological and radiological (CNBR) terrorism. We hasten to add that the general consensus among insurers that a continuing federal role is essential to ensuring that terrorism risk insurance remains available to businesses is not a view shared by all. Earlier this week the Administration said TRIA should be phased out in favor of a private market for terrorism insurance. That said, the Administration did say it is willing to work with Congress as the bill moves through the legislative process so that H.R. 2761 meets the critical elements of an acceptable extension. As the clock counts down to TRIA expiration on December 31, 2007, we’ll be watching this issue closely, so let us know your views. Check out I.I.I. information on terrorism risk online.

Revisiting Terrorism Risk

On the sixth anniversary of September 11, we take a look at a timely new Marsh risk survey of Fortune 1000 companies. The survey findings offer us an insight into how board-level executives at these companies view international terrorism attacks among seven other risk scenarios, including natural disasters, rapidly rising oil prices and pandemics. While terrorism ranks second only to natural disasters in terms of the most likely crisis scenario to occur, just 38 percent of Fortune 1000 executives felt that international terrorist attacks were likely to occur in the next eight to 10 years. This compares with 65 percent who felt that natural disasters were the most likely to occur. At the same time, 39 percent said a terrorist attack would have a catastrophic impact on their business. When asked if they had taken steps to prepare, roughly four in 10 (44 percent) of those surveyed said their company has prepared for a terrorist attack, compared to 58 percent for natural disasters. On the flip side, very few executives believe it is likely that a housing market collapse, reduced access to water or a pandemic disease, will occur in the coming decade. Encouragingly, in the event of one or more of the eight crisis situations, 74 percent of those surveyed say their company has prepared a business continuity plan. Check out further I.I.I. terrorism risk information  online.