New View of U.S. Earthquake Risk

Tomorrow marks the 140th anniversary of the 1868 Hayward earthquake, dubbed the first great San Francisco earthquake and one of the most damaging quakes in U.S. history. If the 1868 earthquake were to reoccur today, catastrophe modeler Risk Management Solutions (RMS) estimates that total economic losses to residential and commercial properties would likely exceed $165 billion. Fire, damage to infrastructure and related disruption would substantially increase the loss. Meanwhile, Willis has just released a report on seismic hazard in the United States. The report highlights the results of two recent academic research papers: the 2008 National Seismic Hazard Maps and the 2007 Uniform California Earthquake Rupture Forecast. It focuses on the impact these new studies could have on catastrophe risk managers and how catastrophe models may change in the U.S. as a result of these findings. Check out I.I.I. information on earthquakes.

Indoor Mold Warning

A study from the U.S. Government Accountability Office (GAO) once again throws the spotlight on the issue of mold. GAO’s findings suggest that while federal guidance on minimizing indoor mold growth is generally consistent, guidance on mitigating exposure to indoor mold is sometimes inconsistent about cleanup agents, protective clothing and equipment and sensitive populations. As a result, GAO warns that the public may not be sufficiently advised of indoor mold’s potential health risks. GAO notes that mold growth may be particularly severe following natural disasters such as hurricanes and flooding. However, it says that differences among guidance documents could confuse the public about the safest and most effective way to remove mold. For example, if bleach is not necessary in most instances, using it unnecessarily could lead to avoidable problems, since bleach itself is a hazardous substance that can generate toxic fumes  if  it is mixed with ammonia based cleaners. The GAO report also calls for better coordination of federal research activities on mold and other indoor air issues. Check out I.I.I. information on mold and the insurance industry.  

Regulatory Risk Tops Threat List

Risk managers questioned for a new Economist Intelligence Unit survey point to regulatory risk as the most significant threat to their business, ahead of country risk, market and credit risk, IT and people risks, or terrorism and natural disasters. The report’s publication is timely given the widespread calls for increased global regulatory oversight in response to the financial crisis. While respondents to the survey  support the concept of regulation, they voiced strong concerns about the quantity and complexity of their compliance obligations, as well as the lack of regulatory harmonization between different jurisdictions. The findings form part of From Burden to Benefit: Making the Most of Regulatory Risk Management, a new Economist Intelligence Unit survey and report sponsored by ACE, KPMG, SAP and Towers Perrin. According to the results, audit and reporting regulations cause the biggest headaches, but other areas are also causing concern for many companies. In particular, respondents point to workforce and environmental legislation as areas that consume large amounts of resources and management time. Research for the report is based on an online survey of 320 global executives with responsibility for risk.

Litigation Uptick Looms

U.S. companies are preparing for a rise in litigation amid the economic downturn, according to the Fifth Annual Litigation Trends Survey from international law firm Fulbright & Jaworski. Despite two straight years of reporting declines in the numbers of new lawsuits and regulatory proceedings, this year’s survey reveals an important shift as to how U.S. corporate law departments view the litigation climate. Some 34 percent of in-house counsel at U.S. firms now expect to see an increase in the number of legal disputes faced by their company in the year ahead, while 25 percent expect an  uptick in the number of regulatory proceedings on the horizon. Fulbright reports that billion-dollar firms were especially wary, with 43 percent anticipating more litigation versus 34 percent last year. Financial firms feel the most at risk, with 50 percent expecting more disputes, followed by education (43 percent predicting uptick), health care firms (40 percent), retailers (39 percent) and insurers (36 percent). We note that insurers were the number one target for new litigation in the past year – two-thirds of insurers faced at least six new lawsuits, including 29 percent facing more than 50 new actions. Check out I.I.I. information on the liability system.  

Florida Cat Fund Meeting

Today we offer an example of the potential knock-on effect of the credit crisis on a critical insurance-related issue: natural catastrophe financing. A meeting of the Advisory Council of the Florida Hurricane Catastrophe Fund (FHCF) takes place in Tallahassee, Florida later today. Up for discussion is the claims-paying capacity of the FHCF, an increasingly key issue amid the continuing credit crisis. Following the October forecast for well above average hurricane activity and in the current credit environment, there are concerns about the ability of both the FHCF and Florida Citizens Property Insurance Corp (Florida Citizens) to raise funds via post-event bond offerings if a major hurricane strikes. In fact a number of state-run insurers have the ability to finance hurricane losses and raise additional capacity via the issuance of bonds. The cost of issuing bonds may be passed onto policyholders via assessments and surcharges. In a difficult investment climate and in the event of a major hurricane, this could leave the loss funding mechanisms in certain states in a bit of a quandary. Check out I.I.I. information on state-run property insurers.  

Deer-Vehicle Collisions by State

For the second year in a row a State Farm study of annual deer claims has found that the vehicles most likely to collide with deer are in West Virginia. State Farm estimates the chance of a West Virginia vehicle colliding with a deer in the next 12 months at 1 in 45. That’s roughly two times greater than the possibility that you will be audited by the Internal Revenue Service in 2009 and 1,100 times greater than your chance of winning a state lottery grand prize if you buy one ticket per day for the next year, according to State Farm. Michigan (1 in 78) remains second on the list of states where deer-vehicle collisions are most frequent, followed by Pennsylvania (1 in 97), Iowa (1 in 105) and Arkansas (1 in 108). The state in which deer-vehicle collisions are least likely is still Hawaii (1 in 10,962). The average property damage cost of these incidents was just over $2,950, up 2.5 percent from a year ago. State Farm used its deer claims data from the last half of 2007 and the first half of 2008 and motor vehicle registration counts by state from the Federal Highway Administration. The Insurance Information Institute estimates that there are more than 1.6 million deer-vehicle collisions each year, resulting in over $3.6 billion in vehicle damage. Check out I.I.I. tips for avoiding deer-related collisions.  

Hurricane Season Impact

How the 2008 hurricane season has affected insurers is an ongoing question, albeit a less audible one amid the focus on the current global financial crisis. A live chat hosted by ISO next Wednesday (October 15) and featuring Gary Kerney, assistant vice president of ISO’s PCS unit, should be able to provide some of the answers. Preliminary analysis by PCS indicates both the number of catastrophes and insured property damage incurred in the second quarter of the year were nearly double that of the first quarter. And in the first half of 2008 insured catastrophe losses as noted by ISO reached $10.3 billion – higher than the 12-month totals for both 2006 and 2007 ($9.2 billion and $6.2 billion respectively).

The 2008 hurricane season then brought several major storms, including Hurricane Ike and Hurricane Gustav. So far Hurricane Ike is on track to become the fourth most costly hurricane in United States history, with an estimated insured loss of around $9.8 billion. Coastal states were not the only ones affected by Ike. This week the Ohio Insurance Institute said that Ike caused at least $553.1 million in insured losses in the state, rivaling Ohio’s largest natural disaster in recent history, the Xenia tornado of 1974. Other inland states to suffer Ike-related damage include Kentucky, Indiana and Pennsylvania. Check out I.I.I. hurricane facts and stats.  

Convergence: Insurance and Capital Markets

Alternative risk financing and risk transfer has proven increasingly attractive to our industry over the years. Insurers and reinsurers have looked to the capital markets more and more to diversify their risks and expand capacity. So it’s not surprising that Allianz, Deloitte, State Farm, Swiss Re and Zurich Financial Services are among the co-sponsors of a new report published today by the World Economic Forum, titled Convergence of Insurance and Capital Markets. The report explores the growth of the market for insurance linked securities (ILS) and highlights potential next steps needed to continue its development and to further encourage investors’ strong appetite for catastrophe bonds and other forms of ILS products.

According to the report, the ILS market has seen strong growth since its inception in the mid 1990s. Issuance of ILS totaled $14.4 billion in 2007, up 40 percent from $10.3 billion in 2006. At the end of 2007, the notional value of outstanding ILS stood at $39 billion, a 50 percent increase from $26 billion at the end of 2006. Certain experts predict robust growth over the next several years. The report also notes that to accelerate the convergence of insurance with the capital markets, risk instruments must be made simpler and more attractive, and a wider investor audience must be courted. Check out background I.I.I. information on Captives and Other Risk Financing Options.  Ã‚  Ã‚  

Climate Change Initiatives

A couple of climate change initiatives announced this week remind us that financial risks are not the sole focus for our industry. In the first of these the National Center for Atmospheric Research (NCAR) working with federal agencies and universities as well as the insurance and energy industries has launched a study to examine how global warming will influence hurricanes in the next few decades. The project will use a combination of global climate and regional weather models, run on one of the world’s most powerful supercomputers, to look at future hurricane activity. Researchers are targeting the hurricane-prone Gulf of Mexico and the Caribbean Sea and will examine three decades in detail: 1995-2005, 2020-2030, and 2045-2055. The project includes support from the Willis Research Network.  

In another initiative Munich Re is collaborating with the London School of Economics (LSE) to advance research into the economic consequences of climate change. The five-year cooperation agreement is with the LSE’s newly established Centre for Climate Change Economics and Policy, of which Munich Re is a founding corporate partner. Research will focus on a range of issues, including: analyzing the risks and opportunities for the insurance industry; the economics of climate change and product trends in the finance industry; improving models to quantify the cost of a climate-related increase in natural catastrophes and economically efficient responses to this. Check out a new I.I.I. issues update on Climate Change.  

Auto/Homeowners Satisfaction Levels Differ

The gap in customer satisfaction between homeowners and auto insurance providers has steadily widened during the past five years. The J.D. Power and Associates 2008 Homeowners Insurance Study reports that satisfaction with auto insurers has increased to an average score of 787 on a 1,000 point scale in 2008 up 25 points from 2004. Meanwhile, customer satisfaction with homeowners insurance during the past five years has basically  held steady, with a score of 752 in 2008, down one point from 753 in 2004. The study measures customer satisfaction by examining five key factors: policy offerings; price; billing and payment; interaction; and claims. In particular, satisfaction with pricing has driven the steady improvement in satisfaction with auto insurance providers. While claims and pricing factors were key factors in the lack of improvement in customer satisfaction with homeowners insurance, some improvements were noted in policy offerings. Some key practices appreciated by customers? Bundling – satisfaction levels are particularly high among policyholders who bundle multiple policies with their homeowners insurer. Annual policy reviews also raised satisfaction and nearly 50 percent of homeowners policyholders report being offered one. Check out I.I.I. tips on  homeowners and auto insurance.  

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