Category Archives: Business Risk

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.

Captive Groups Coordinate IRS Response

Those of you in the alternative risk transfer business may be interested in today’s item. Two prominent captive insurance associations have teamed up to form a coalition to battle a proposed Internal Revenue Service (IRS) rule change that would significantly alter the landscape for captive insurers in the U.S.   Issued September 28, the proposed IRS regulation would eliminate the right of U.S.-sponsored captives to claim reserve deductions against their domestic tax for future claims and losses on consolidated, or related, business. Instead, they would only be allowed to claim deductions when claims are actually paid. The change would essentially result in treating the transaction as non-insurance for tax purposes. We don’t need to remind you that captive insurers are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Use of captives by corporations has grown exponentially during the last 30 years in the U.S. In 2006, the U.S. was the largest captive domicile– with 1,251 licensed captives – followed by Bermuda with 989. If the IRS proposal goes ahead, it seems likely that it would drive more business offshore. The Coalition for Fairness to Captive Insurers (CFCI) has been formed by the Captive Insurance Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA). Those interested in joining the coalition should contact either association. Check out further I.I.I. information on captive insurers.

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.