Risk Management Top Concern Among CFOs

The current financial crisis has senior finance executives more likely to be concerned about their firms’ risk management practices (72 percent) than they are about their access to capital. A CFO Research Services study in conjunction with Towers Perrin, found that respondents were less concerned about issues such as accessing long-term debt financing (65 percent) and short-term financing (61 percent), in comparison to risk management. The companies surveyed also acknowledged they will need to retool their risk management practices, with 55 percent saying their risk management practices are likely to change at either the board or employee level.

When  asked which items contributed to the current financial crisis, respondents as a whole blame risk management practices at banks (62 percent), followed by the increased complexity of financial instruments (59 percent) and financial market speculators (57 percent). Additionally, 24 percent  said that fair-value accounting requirements were a major contributor to the crisis.  While the majority of respondents (62 percent) acknowledged that the financial crisis would dampen profit expectations and leave a potentially lasting dent on the world economy, only  4 percent said they feared a major negative impact on their financial results.

Above Average Hurricane Risk for October

If you thought hurricane season was over, think again. Colorado State University’s Tropical Meteorology Project team has warned that October will see well above average activity. The forecast calls for three named storms, one of which is expected to become a major hurricane (Category 3-4-5) as well as two hurricanes. An active October is in line with the well above-average activity that has occurred so far during the 2008 Atlantic hurricane season, the team noted. Bear in mind that even before this year’s hurricane season got underway, insured catastrophe losses as noted by ISO reached $10.3 billion during the first half of the year. This is higher than the 12-month totals for both 2006 and 2007, at $9.2 billion and $6.2 billion, respectively. Hurricane Ike – with an estimated insured loss of around $9.8 billion – is on track to become the fourth most costly hurricane in United States history and it was not the only major hurricane of the year. Hurricane Gustav caused $1.9 billion in insured losses, according to ISO’s PCS unit. The 2008 catastrophe loss bill for insurers is adding up. Check out I.I.I. facts and stats on catastrophes.  

Fundamentals Sound

The p/c industry yesterday reported a 57.4 percent drop in net income after taxes to $13.9 billion in the first half of 2008, down from $32.7 billion in first half 2007. The industry’s annualized statutory rate of return on average surplus fell to 5.4 percent in first half 2008 from 13.1 percent in first half 2007. The sharp decline in profitability is partially attributable to a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the p/c industry.

Despite the deterioration in profitability, in his commentary on the results I.I.I. president Dr. Robert Hartwig says a case can be made that the p/c industry is a pillar of strength in the financial services sector. Why? Dr. Hartwig explains that insurer investment portfolios are generally conservatively managed and insurers have avoided some of the problems of the investment banks and many other financial institutions because of their superior risk management model. He goes on: “The reality is that throughout its nearly 200-year history in the United States, the p/c insurance industry has endured every conceivable economic circumstance and crisis and managed to persevere.”

Credit Crisis Litigation

Amid the fallout from the credit crisis and the growing economic storm, it’s inevitable that litigation will follow. What started with subprime has become potentially a much bigger litigation net for enterprising attorneys. Fellow blogger Kevin LaCroix over at the D&O Diary addresses this issue in a recent posting titled “Litigation Wave Inflection Point?† In it he notes that shareholder lawsuits have already been filed against the directors and officers of some of the most prominent companies affected by recent events. He then points to additional developments that suggest a possible new wave of credit crisis lawsuits where the defendant companies are not themselves directly affected by the credit crisis fallout, but instead suffer from exposure to other companies that have been directly affected. The ultimate wildcard in all of this, according to LaCroix, is the impact that the current proposed federal bailout will have on litigation going forward. Insurers will be closely monitoring all these developments. Check out further I.I.I. information on the liability system.  

NFIP Extension

On the eve of the expiry of the current National Flood Insurance Program (NFIP) a short-term extension of the federal program passed the Senate over the weekend.  This means that authorization of the NFIP is  extended until March when  further  action on  long-term reform of the program is expected. Check out  today’s online article at National Underwriter by Arthur D. Postal for  more information.  While several bills  reforming the  NFIP have been proposed, the House and Senate have yet to reach agreement on  reauthorization of the program. As Hurricane Kyle brushed by the coast of Maine this weekend, bringing as much as 5.5 inches of rain over three days, it was a timely reminder of the importance of flood insurance. At the end of 2007, the NFIP had some 5.7 million policies in force. However,  a 2008 poll by the I.I.I. found that only 17 percent of Americans have a flood insurance policy. Check out further I.I.I. facts and stats on flood insurance.  

Buffett Memoir

It’s not every day that a book related to our industry jumps onto the best-seller lists, but a new memoir on Berkshire Hathaway chairman and billionaire Warren Buffett has done just that. The Snowball: Warren Buffett and the Business of Life will be published Monday and is already on the best-seller list at Amazon. Penned by Alice Schroeder, a long-time property/casualty insurance analyst who was a managing director at Morgan Stanley, this widely anticipated authorized biography recounts the life, values and strategies of the Oracle of Omaha. It should be a great read.

Climate Change Disclosure

Insurers Allianz, The Hartford, Travelers and reinsurer Munich Re have been recognized for their professional approach to climate change disclosure by the Carbon Disclosure Project (CDP). Allianz, The Hartford and Munich Re are among 67 Global 500 companies to have been named to the CDP’s Global Carbon Disclosure Leadership Index. The index, compiled by PricewaterhouseCoopers (PwC) on behalf of CDP, grades companies on their responses to a questionnaire based on their reporting of greenhouse gas emissions, associated risks and opportunities as well as emissions reduction targets. U.S. S&P 500 companies were also graded and Travelers, as well as The Hartford,  have been  named to the U.S. Carbon Disclosure leadership Index. Some 74 percent of global 500 companies reporting to CDP are now reporting emissions reduction targets, an indication they are increasingly taking climate change mitigation seriously. The CDP represents some 385 global institutional investors with more than $57 trillion in assets under management.

Challenges Amid the Economic Storm

If you’ve been wondering what the implications might be for insurers of the federal government’s proposed $700 billion financial bailout plan, a report presented by I.I.I. president Dr. Robert Hartwig before the Excess/Surplus Lines Claims Association focuses on this very topic. Called “The Financial Crisis & the P/C Insurance Industry: Challenges Amid the Economic Storm†, the report also includes a discussion of AIG’s $85 billion loan from the Fed, detailing the structure of the agreement. Another section gives an overview of excess and surplus lines market trends.

NY Moves to Regulate CDS

The unregulated $62 trillion credit default swap (CDS) market – the Achilles heel of the emerging financial crisis – yesterday was served notice by New York State that part of the sector will be subject to regulation for the first time by the state insurance department. Announcing the move, Governor Paterson urged the federal government to regulate the rest of the credit default swap market. The new guidelines, which will take effect from January 1, 2009, establish that certain credit swaps are insurance contracts, and therefore subject to state regulation. This reverses a decision by the state insurance department in 2000 that all CDS were not insurance. The insurance department has also issued new best practices for financial guarantee insurers,  including  measures designed to limit risks for financial guarantee insurers and increasing the minimum amount of capital and reserves they must maintain.  

Texting Risk

The dangers of text-messaging while driving a vehicle, at work, even crossing the street are making the headlines both in the U.S. and overseas. A September 19, 2008 New York Times article by Jennifer Steinhauer and Laura M Holson, focuses on the danger texting can pose by distracting users. The issue has been receiving widespread attention following the September 12 train collision in California that left 25 dead. Last week the National Transportation Safety Board (NTSB) confirmed it is investigating how text messaging by the Metrolink train’s engineer may have affected his operation of the train.

Meanwhile, new research conducted by the UK’s Transport Research Laboratory for the Royal Automobile Club Foundation has found that texting behind the wheel impairs driving skills more than being drunk or high. Reaction times deteriorated by over one-third (35 percent). This was worse than alcohol at the legal limit (12 percent slower) and driving under the influence of cannabis (21 percent slower). In addition, drivers drifted out of their lane more often, with steering control 91 percent worse, compared to 35 percent worse when under the influence of cannabis. The ability to maintain a safe following distance also fell. Despite the danger, 48 percent of UK drivers aged 18-24 admit to using short message services (SMS) while driving. Check out I.I.I. information on auto crashes.

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