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.  

Coastal Flooding Exposure

Hot on the heels of yesterday’s posting about modeling and as the UN Climate Change Conference continues in Bali, the release of a global study on coastal flooding by the OECD, RMS and the University of Southampton is timely. The study makes a first estimate of the exposure of the world’s largest port cities to coastal flooding due to storm surge and damage due to high winds. It also investigates how climate change is likely to impact each port city’s exposure to coastal flooding by the 2070s, alongside subsidence and population growth and urbanization. The upshot is that the total population  reliant on flood defenses  could more than triple from 40 million today to around 150 million people by 2070. In the same period, total assets exposed will grow even more dramatically, more than 10 times current levels reaching $35,000 billion. The findings are ominous for a number of U.S. cities, with Miami topping the list in terms of assets exposed to coastal flooding ($416.3 billion today and increasing to $3,513 billion by the 2070s). New York-Newark places third with exposed assets of $320.2 billion, rising to $2,147 billion by the 2070s. New Orleans ranks 12th, with $233.7 billion in exposed assets, rising to $1,013 billion by the 2070s, while Virginia Beach ranks 19th, with $84.6 billion in current exposed assets, increasing to $581.7 billion by the 2070s. How to put in place effective climate change policies and disaster management strategies are just some of the challenges the study highlights. Check out I.I.I. facts & stats on flood insurance.

Tsunami Factor

Look back at a list of major earthquakes through the years and you’ll see a number of related tsunami events. Perhaps the most memorable in recent history was the December 26, 2004, magnitude 9.0 earthquake in the Indian Ocean, that triggered a series of tsunami (tidal waves) and left some 220,000 people dead. In an I.I.I.  chart of the 10 deadliest world catastrophes between 1970 and 2006, that event ranks third. So yesterday’s announcement by the National Oceanic and Atmospheric Administration (NOAA) that it has completed high-resolution digital elevation models to prepare three east coast communities for tsunami and storm-driven flood threats is a welcome step. The latest models for Long Island, Atlantic City and Daytona Beach provide the framework to accurately forecast the magnitude and extent of coastal flooding during a tsunami or storm surge event. They add to models already in place for some 20 U.S. coastal communities and NOAA expects to build 50 more models in the coming years. Check out further I.I.I. info on flood insurance.  

UN Climate Change Talks and Initiative

The United Nations Climate Change Conference in Bali got underway today. The two-week long conference brings together representatives from more than 180 countries and observers from intergovernmental and nongovernmental organizations as well as the media. A key goal of the conference is to work towards a deal to replace the Kyoto Protocol which expires in 2012. Ahead of the Bali meeting, insurers AIG, Allianz, AXA, and Swiss Re were among 150 companies to have signed the Bali Communique on Climate Change, a call to world leaders for a comprehensive, legally binding United Nations framework to tackle climate change. This initiative has been led by the Prince of Wales’s Corporate Leaders Group on Climate Change and the University of Cambridge.  

Charitable Gala Dinner

The first annual dinner of the New York division of the Insurance Industry Charitable Foundation will take place at the Waldorf Astoria Hotel in New York City next Wednesday December 5. The event will feature special guest New York City Mayor Michael Bloomberg and will honor Brian Dupperault, former chairman and CEO of ACE Ltd. Martin Sullivan, president and CEO of AIG will chair the dinner. The event is expected to raise a total of $1.5 million for three tri-state area charities. Some of you will already be aware that the insurance industry ranks among the top 15 contributors when it comes to charitable donations. According to a survey by the Conference Board, charitable contributions to U.S. and international causes by 211 of the largest U.S. companies and U.S. corporate foundations amounted to $9.87 billion in 2005. The insurance industry’s donations to U.S. beneficiaries totaled $181.3 million, placing it eleventh out of 19 industry groups.

Bermuda Influence

We have commented before on the key role insurance plays in the U.S. economy. Now, a study from the Association of Bermuda Insurers and Reinsurers (ABIR) highlights the critical role Bermuda insurers and reinsurers play in the U.S. economy. Key facts include that Bermuda firms: employ 9,600 Americans directly in the U.S. and indirectly generate an additional 95,045 jobs; paid $17 billion in property claims in 2005 for hurricane damage, representing 25 percent of total property damages covered; protect (via reinsurance) four out of 10 U.S. homes and businesses with property coverage; provide 40 percent of hurricane and earthquake reinsurance coverage in the U.S.; account for 26 percent of the total U.S. reinsurance market; generate as much as $96 billion of the gross output for the U.S. insurance market; and write 57 percent of the total U.S. crop insurance and reinsurance market. For further I.I.I. info on the insurance industry’s contribution to state, local and national economies, check out the updated edition of our online publication “A Firm Foundation†.  

Mind the Gap

Hardly a day goes by without a headline on some environmental issue, whether a catastrophe such as the recent oil spill in San Francisco Bay, or an emerging liability like global warming. While environmental liability is not a new issue, the wide range of environmental problems occurring today underscores that the potential exposures for insurers may be growing. So the latest report from ratings agency A.M. Best on asbestos and environmental exposures makes for interesting reading. It notes that the industry’s unfunded environmental exposure totaled $22 billion at year-end 2006. This is a substantial number and dwarfs the industry’s estimated shortfall of $3 billion for asbestos. Based on A.M. Best’s estimate of $56 billion in ultimate environmental losses, the $22 billion funding gap is significant. A.M. Best’s explanation for the gap is that the industry has been funding its pollution liabilities very slowly based on optimistic assumptions about underlying claim trends. But while annual environmental loss payments have declined, payouts are still significant at $1.1 billion in 2006. Given emerging exposure trends and increasing demand for environmental coverages the question remains whether insurers’ environmental reserves are sufficient.

Postseason Forecast

Continuing our postseason theme, today Colorado State University’s Tropical Meteorology Project issued its summary of the 2007 Atlantic hurricane season. Right off the bat, the team admits that its 2007 seasonal hurricane forecast was not particularly successful. While it anticipated an above-average season, the season had activity at near-average levels. As we noted yesterday, everyone will remember 2007 as the season the U.S. dodged the bullet of two category 5 hurricanes. But as the CSU team reminds us, one hurricane, two tropical storms and one tropical depression did make U.S. landfall this year. While tropical depression Barry and tropical storm Gabrielle did minimal damage, Hurricane Humberto caused an estimated $250 million in insured damage in Texas. Damage from Erin is unavailable. For the record, in total the 2007 season saw 14 named storms, six hurricanes, of which two were intense. The CSU team will issue its first forecast for the 2008 hurricane season December 7. Check out further I.I.I. hurricane facts & stats.

Hurricane Season Closing

The 2007 Atlantic hurricane season ends Friday and while we may afford ourselves a brief sigh of relief, the season synopsis from the forecasters will remind us otherwise. For example, catastrophe modeling company RMS has just estimated its hurricane activity rates for the next five years. RMS says it expects U.S. hurricane landfall risk to remain significantly above the long-term average. It estimates average annual insured losses will be 40 percent higher than those predicted by the long-term mean of hurricane activity for the Gulf Coast, Florida, and the Southeast, and 25 percent to 30 percent higher for the Mid-Atlantic and Northeast coastal regions. RMS’ forecast also underscores the important point that the 2007 season featured 14 named storms, close to the annual average of 14.7 since 1995. According to RMS,  it is the first season ever recorded in which 40 percent of hurricanes reached category 5 status, and the only one in which two maximum strength storms struck land. Of course, the U.S. coast was spared the potential devastation of hurricanes Dean and Felix, but on a different track these storms had the potential to cause catastrophic damage to the U.S. Check out I.I.I. hurricane-related facts & stats.  

Holiday Travel

A record 38.7 million Americans will travel 50 miles or more from home over the Thanksgiving holiday period beginning tomorrow, up 1.5 percent on last year, according to the AAA. Despite record high gas prices, some 31.2 million motorists are expected to hit the road for Thanksgiving, a 1.3 percent increase on last year. Another 4.7 million will travel by air and the remainder by train, bus or other transportation. With that in mind, we note a study just completed by Farmers Insurance. Once again, it finds that seat belts remain the most important protection for drivers. Based on 2006 fatal crash data from the U.S. Department of Transportation, Farmers found that when a driver used a seat belt, the odds of fatality dropped nearly 70 percent compared to a driver who did not. Its analysis incorporates a logistic econometric model with 41 variables, accounting for factors such as road and traffic conditions at the time of the accident, location and time, accident events, vehicle specifics, driver demographics, and safety features. So as you head out for the holiday, remember to buckle up! Have a safe and happy Thanksgiving.

Latest research and analysis