Category Archives: Business Risk

Financing Catastrophes

Yesterday we cited projections of increasing catastrophe losses in years to come along the Atlantic and Gulf Coasts, so today we turn our attention to the topic of how to finance catastrophic risk. Historically the capacity to finance such risk was limited to the traditional re/insurance markets, or to self-insurance and pooling. Now insurers can diversify their risk and expand the availability of insurance in cat-prone areas by tapping into the capital markets. An article by Michael Lewis in the New York Times magazine on Sunday August 26 focuses on this very topic and describes one well-known capital markets solution: catastrophe bonds. Catastrophe bonds developed in the wake of mega-cats Hurricanes Andrew and Iniki in 1992 and the Northridge earthquake in 1994. Since then, cat bonds have been used to cover a wide variety of exposures, with earthquakes (both U.S. and Japan) and U.S. hurricanes accounting for the majority of bond issues. Without question, the market for natural catastrophe bonds is growing. Guy Carpenter reports that annual issuance of cat bonds reached a record $4.69 billion in 2006, up 136 percent from $1.99 billion in 2005. The number of transactions completed also doubled to 20 in 2006, from 10 in 2005. However, despite recent gains, over the longer-term the dollar value and number of catastrophe securitization transactions is still modest in relation to global reinsurance capacity. Between 1997 and 2006, 89 catastrophe bonds  were completed, representing $15.35 billion in catastrophe bond issuance, relative to $330 billion in global reinsurance capacity. What do you think? Check out further I.I.I. info on reinsurance and alternative risk financing options.

Subprime Litigation Concerns

Every day another news headline appears on the subprime loan crisis in the U.S., so a release out of the London offices of Marsh on this topic makes for interesting reading. In it Marsh warns that the European financial services sector, including insurers, hedge funds, banks and ratings agencies, may be exposed to greater Directors’ and Officers’ liability (D&O) and Errors and Omissions (E&O) liability claims in the wake of the subprime meltdown in the U.S. Citing a  recent NERA Economic Consulting primer, Marsh says potential litigation arising out of D&O and E&O liability could include: lenders’ lawsuits versus banks; shareholders’ lawsuits versus lenders, accountants, trustees and underwriters; insurers’ lawsuits versus lenders; investors’ lawsuits versus trustees; trustees’ lawsuits versus lenders and underwriters on behalf of investors; as well as individual investor lawsuits. Marsh goes on to caution that European insurers, hedge funds, banks and ratings agencies must continue to assess the risks raised by the crisis and to examine their D&O and E&O exposures. What do you  make of this analysis?

Product Recall

Yesterday’s announcement by toy company Mattel of the recall of 19 million toys made in China is a reminder of the importance of product safety in any business and may be the tip of the iceberg as the holiday shopping season gets underway. Whether it’s toys, toothpaste or pet food, product recall as a precautionary step or worse following actual injury or damage can be costly to a business and its reputation. Just one example is the 1990 worldwide recall by Perrier when traces of benzene found in the water eventually led to the recall of 160 million bottles of Perrier. The bottom line is if you manufacture, sell or distribute any product there is the possibility that the product could cause bodily injury or property damage for which you would be legally liable. Even if you only sell or distribute the product, you could still be liable depending on the circumstances. According to Jury Verdict Research, the average jury award in product liability cases jumped by 68 percent from 1999 to 2005. Check out further I.I.I.  facts  & stats  on  litigiousness and I.I.I.’s small business owners’ guide to insurance.

Aging Infrastructure

As the recovery process continues following the Minneapolis Interstate 35W bridge collapse Wednesday night, many of us have given it more than a passing thought during our commutes via roads, rails, bridges and tunnels. Naturally the collapse is prompting questions concerning the quality of the nation’s transportation infrastructure. The insurance industry plays a vital role in helping individuals and businesses recover from an event like this. It underpins the economic security of individuals and businesses and helps sustain a number of related industries across the country. But maintaining and strengthening the existing outdated transportation infrastructure is a mammoth task that will require public and private input. For insurers, the potential liability exposure is enormous and certainly something to think about. Check out I.I.I.’s publication “A Firm Foundation† for further information on how insurers support the economy.

Back Pains Large States

Employee back problems are frequent and costly. That’s the upshot of a new study from the Workers Compensation Research Institute (WCRI). The report analyzes data from 14 large states (AR, CA, FL, IL, IN, LA, MA, MD, MI, NC, PA, TN, TX, and WI) from claims with an average of three years’ experience. WCRI found that nearly 14 percent of medical costs were paid to treat workers with back conditions involving disc conditions or radicular symptoms (e.g. radiating pain into the limbs). Nonspecific low back pain accounted for about one in seven claims and 11 percent of medical payments. Conditions involving the neck accounted for nearly 4 percent of claims and nearly 8 percent of medical payments. WCRI also found that shoulder or arm conditions – both inflammation due to overuse as well as sprains and strains – accounted for a significant share of medical costs and claims. For example, sprains and strains represented close to 7 percent of medical payments and nearly 6 percent of costs. Another interesting stat, carpal tunnel conditions were diagnosed in about 1 percent of cases, but accounted for more than 3 percent of medical costs. We’re wincing just thinking about it. Check our further I.I.I. information on workers compensation and workplace safety.  

Med Mal Alternatives

Two reports published yesterday by ratings agency A.M. Best on U.S. captives and risk retention groups (RRGs) point to continuing growth in these alternative market mechanisms, even amid soft market conditions. A number of trends are highlighted, but one interesting  nugget is that medical malpractice accounts for a significant portion of business for both captives and risk retention groups. According to the reports, medical malpractice continues to be the dominant line of business for domestic captives (close to 40 percent), while medical malpractice (claims made) accounted for 43 percent of RRG business in 2006. Which leads us to conclude that despite greater stability in the price of medical malpractice insurance and some improvement in the tort environment, doctors are not looking to return to the traditional market in a hurry. Check out I.I.I. updates on captives and alternative risk transfer mechanisms and on medical malpractice online.

Manhattan Explosion Lawsuit

The filing of a lawsuit against Con Edison less than a week after the New York City steam pipe explosion underscores the importance of liability insurance for businesses everywhere. According to reports, the woman’s lawsuit accuses Con Edison of negligence, saying the utility failed to properly maintain the pipe that ruptured outside her offices in mid-town Manhattan and is seeking unspecified damages. At least 30 people were injured and one died as a result of the July 19 explosion. Litigation risk is one of the major exposures facing U.S. businesses. A recent study by the Pacific Research Institute put the total annual cost of tort litigation to the economy at $865.37 billion, or $9,800 per family. It’s worth noting that this figure includes direct as well as indirect costs. The study also estimates that America wastes $589 billion each year on excessive tort litigation. Check out further I.I.I. info on the liability system.  

Immeasurable Challenge

Word on the street is that immeasurable risks are the biggest threat to the industry, according to a poll of executives at this week’s  International Insurance Society (IIS) annual  seminar in Berlin. Some 41 percent of attendees identified immeasurable risks as the biggest concern. Next up was inadequate human capital with 27 percent citing it as the biggest threat. New market opportunities were the top issue for 24 percent, while 21 percent cited competitive pricing and adequate profitability. Regulation challenges were identified as the biggest threat by 20 percent of those polled. The results are interesting given a recent survey of international risk managers by the Economist Intelligence Unit (EIU) (see May 3 posting). After climate change, respondents cited least confidence in how their organizations were handling terrorism risk and human capital risks. It strikes us that terrorism risk is a good example of an immeasurable risk, and human capital risks are clearly an ongoing concern for both insurers and their clients. How do we address these concerns going forward? What are your thoughts?  For more on international insurance,  check out  the  I.I.I.’s updated International Insurance Fact Book online.

CA Quake Exposure Update

California is the second leading state for earthquakes, with an average of over 160 earthquakes per year. The majority of the most costly earthquakes in U.S. history occurred in California. So a new study indicating that recent reforms to the state’s  workers comp  system would result in a substantial drop in the potential WC losses arising from earthquakes is welcome news. Based on the assumption of 15.6 million employees working statewide, the Workers’ Comp Insurance Rating Bureau of California study found that the expected annual loss for the state’s WC insurers would be slightly over $180 million, or $11.56 per employee, compared with $418.7 million, or $26.93 per employee, in a similar 2002 study. The updated study also projects the total statewide WC loss in a one-in-100 year quake would be $4.2 billion, and $6.3 billion for a one-in-200 year event. Looking at the 20 counties with the greatest exposure, the study puts Los Angeles County at the top of the list, with 4.25 million employees. While the drop in costs is a positive development, we note that WC is a compulsory  coverage for most businesses  in CA and that earthquake exposure continues to be significant. Check out I.I.I. earthquake facts & stats, workers comp info  and how insurers support the CA economy online. Further info is also available from the Insurance Information Network of California  (IINC).  

TRIA Hearing

Legislative solutions to extend the Terrorism Risk Insurance Act (TRIA) will be the focus of a hearing scheduled this Thursday before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. As with many issues in our industry, there are different viewpoints on what any extension legislation should look like. While there is general agreement a continuing federal role is key to ensuring that terrorism risk insurance remains available to those businesses that want and need the coverage, the devil’s in the detail. Key points under discussion right now include: the length of any proposed TRIA extension; trigger/deductible levels and potential extension of coverage under TRIA to include domestic acts, group life losses and chemical, nuclear, biological and radiological (CNBR). Check out I.I.I.’s additional information on terrorism risk online.