Risky levees in 27 states could trigger flood insurance mandate
The Army Corps of Engineers reported that 122 levees from Rhode Island to California are at risk of failing, potentially affecting thousands of people and requiring millions of dollars in repairs.
According to Butch Kinerney of the Federal Emergency Manage-ment Agency's national flood insurance program, should the Corps determine a levee is at risk of failing, homeowners in the area could be required to buy flood insurance if repairs are not made.
Twenty-seven states plus the District of Columbia and Puerto Rico had threatened levees, though only two had more than a handful. California led the list with 37 and Washington state had 19.
Though many levees were in rural areas, some were in metropolitan regions including the District of Columbia; Springfield, Mass.; Stockton and Sacramento, Calif.; and some suburbs of San Francisco.
California's capital, Sacramento, faces significant flooding threats due to the deterioration of levees protecting the flood-prone Central Valley. In November, voters approved the issuance of $4.1 billion in bonds for repairs.
The list did not include any levees from Louisiana. The New Orleans area was ravaged after Hurricane Katrina caused levees to collapse in 2005.
Sen. David Vitter, R-La., sent a letter to President Bush complaining that levee work in New Orleans is underfunded and the Corps was far behind on projects.
But Maj. Gen. Don Riley, director of civil works for the Corps, told reporters levees in the New Orleans area will be adequate once the current work is completed. He said no levees in in Louisiana show any deficiencies.
Riley said he could not say how many people potentially could be at risk from the levees on the list. He offered no estimates for the potential costs of repairs, but said the federal government would not cover the bill for local governments.
"It would be a community responsibility to seek the funding that's required," Riley said.
Larry Larson, director of the Association of State Floodplain Managers, said it is clear the repair bill could run into the millions and that thousands of people are potentially at risk from the levees on the list.
Rhode Island had two deficient levees, both in Woonsocket. Alan Brodd, the city engineer, admitted the levees had not been well maintained but said the city cannot afford the $1.5 million for repairs.
Riley said each community had a one-year grace period to correct the deficiencies.
Communities near the levees have been notified they have received an "unacceptable maintenance inspection rating." Problems can include animal burrows, trees, erosion and the movement of flood walls.
The Corps has told communities they need to take care of routine levee maintenance, Larson said, adding he was glad the Corps was publicizing the problems.
"The feds are saying, 'Wait a minute, we haven't been doing our job,"' Larson said. "'We better get on top of this. Your people are at risk. You need to get something done."'
The Corps is responsible for inspecting about 2,000 levees covering about 13,000 miles. When the Corps' inspections turn up deficiencies, it notifies FEMA, which can declare a community to be in a flood plain. That requires homeowners in the flood plan to buy flood insurance. If residents bought the insurance before the community's designation changes, they could pay a lower rate.
FEMA can give communities up to two years to correct the problems or contest the finding that the levee is not sound. During that period, residents are not required to purchase flood insurance.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Sales of flood insurance up sharply
Sales of federal flood insurance rose sharply across the country last year after homeowners witnessed the devastation wrought by Hurricane Katrina and realized that typical insurance policies didn't cover many victims' losses.
From November 2005 to November of last year, the number of federal policies jumped more than 13 percent, far more than normal, according to officials at the Federal Emergency Management Agency. Partici-pation in coastal and other vulnerable areas spiked dramatically. In Mississippi, the number of policies jumped 61 percent.
Strong increases were seen in northeastern and western states as well. Idaho had a 24 percent increase, and Rhode Island 21 percent.
"I would have to believe that very few people think their regular insurance program covers flood. You'd have to be living under a rock to still think that," said Ted Kinney, of the Alabama Independent Agents Association.
The roughly 700,000 new policies will provide an injection of cash for the National Flood Insurance Program.
The program takes in $2 billion a year in premiums, but more than a third of that goes to debt payments.
The recent surge in policy purchases put the program over $1 trillion in liability, with some 5.4 million policies.
Along with Katrina, regional flooding in the northeast and elsewhere last year probably contributed to the spike, said an FEMA spokesman.
Some private insurers say they are finding renewed interest in flood insurance from wealthy homeowners.
"We are seeing very brisk interest," said Mark Schussel, The Chubb Corp., a N.J.-based insurer that is expanding its flood coverage.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Agency owners could benefit from new pension law
Now is the time for independent insurance agency owners to bone up on a new law that makes big changes in employee retirement plans.
The Pension Protection Act of 2006, passed in August, rewrote many of the rules on pensions in an effort to aid owners and employees alike. While some changes won't kick in for a year or two, others went into effect this month.
The law opens up new opportunities for savings and also holds potential pitfalls.
A major benefit: Business owners and key personnel, who had been limited in their own 401(k) savings, can now sock away more if the company enrolls employees automatically in its plan and contributes a required amount.
Potential pitfalls include new rules that require more communication with employees. Quarterly statements are now required, for example.
For a small business without a designated pension person, staying on top of the new rules can be daunting. "Call your professionals and tell them that you're ready when they want to talk to you," said Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute, in Washington. "Say, 'We know we have to do something, so when you know what it is, tell us.'"
The new law affects both defined-benefit plans -- traditional pensions that pay out a fixed sum after retirement -- and defined-contribution plans like 401(k)s. The changes to defined-benefit plans mostly involve funding requirements.
Among the most significant changes now in place is automatic enrollment, which lets an employer put all employees into the plan by default.
Auto enrollment has proven popular, according to Jack Stewart, a director in the consulting group at Principal Financial Group. Many who had wanted to use the option in the past were afraid of state laws that guard against garnishing wages. "We've seen a fairly good uptick in clients that have gone into auto enrollment already," said Stewart.
Auto enrollment lets business owners unlock savings for themselves and key personnel when they use it with a set of other practices; these include contributing 3 percent of salary into each employee's account and increasing the amount by a required percentage each year for several years.
Taken together, the practices trigger a safe harbor in the law that lets owners and key personnel contribute their own maximum contributions, $15,500 for an individual this year, and an additional $5,000 for those over 50.
"In general, the PPA will make establishing a retirement plan more attractive to more small business owners, and because of that, more of the rank and file employees will be covered by, and benefit from, an employer-sponsored retirement plan," said Ray Shojinaga, president of Flynn, Shojinaga & Associates Inc., an independent actuarial consulting firm in Alameda, Calif.
Congress also weighed in on whether an employer should encourage employees to get professional advice on managing retirement savings. The law encourages advice by saying that a plan sponsor won't be held responsible for investment losses in the plan.
Company stock in retirement plans is also affected by the law, which requires that employees be told of its presence in a plan, and informed that a heavy concentration can be risky.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Maine lawmakers balk at federal driver's license-ID system
The Maine Legislature declared that it would refuse a congressional order to change its drivers' licenses so they can serve as national identification cards.
Supporters of a recent nonbinding resolution say the federal program would invite identity theft and cost Maine taxpayers $185 million over the first five years.
The resolution says the Legislature "refuses to implement the Real ID Act of 2005" and asks Congress to repeal it.
Copies were to be sent to President Bush, Homeland Security Secretary Michael Chertoff and other officials.
The Real ID Act passed after it was found that Sept. 11 terrorists had obtained legitimate driver's licenses. The law seeks to link state records to a central database and unify state licensing rules, making it harder to obtain a card fraudulently. Now, Chertoff says, people cross borders with hundreds of kinds of IDs.
State licenses that fail to meet Real ID's standards will not be able to be used to board an airplane or enter a federal building.
Shenna Bellows of the Maine Civil Liberties Union derided Real IDs as "a one-stop shop for identity thieves" because they would include coded addresses that could be read by someone with a scanner. Bellows said Maine was the first state to oppose the law and other states are catching on.
Last March, the New Hampshire House of Representatives voted to reject a $3 million grant for a Real ID pilot but the Senate killed the bill.
In August, the National Conference of State Legislatures demanded that Congress either find a way to pay for the Real ID Act or repeal it. Several states have complained that it will cost them tens of millions of dollars to implement. At the time, Chertoff sought to ease worries about the law, saying there was no intent to create a "big brother" approach.
In Maine, House Majority Leader Hannah Pingree, a Democrat, acknowledged that the resolution is not binding. She said the language saying the state "refuses" to comply with the law "is more expressing our feeling and intent that we're not interested in following through."
But Pingree added that companion legislation yet to be voted on directs the secretary of state not to comply.
Senate Majority Leader Elizabeth Libby Mitchell, D-Vassalboro, sponsor of the resolution, said Real ID "will do nothing to make us safer, but it is our job as state legislators to protect the people of Maine from just this sort of dangerous federal mandate."
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
The Commissioners: Howard Mills
Lessons on broker compensation and filling the gaps in state regulation
Howard Mills, formerly an elected state representative, served the State of New York as its appointed insurance superintendent for the last two years. He stepped in to fill the shoes of Greg Serio when he departed and Mills himself stepped aside in December to make way for Eric Dinallo, newly-elected Gov. Eliot Spitzer's nominee for the post. Before he stepped down, Mills spoke with Insurance Journal's Andrea Ortega Wells at the winter meeting of the National Association of Insurance Commissioners.
Since the interview, Mills has joined Deloitte & Touche USA LLP as chief advisor with its insurance industry group.
The following is an edited version of the interview. The complete video interview is available at www.insurnacejournal/broadcast, in the video section of the Web site.
Looking back at the past two years, what were some highlights in your tenure as insurance superintendent?
Mills: I actually think that the entire two years of my tenure were a highlight. I came in at a time of great turmoil, really, in the industry. There were the Attorney General Spitzer investigations going on, finite re, and we had some issues of particular concern in New York with our workers' compensation fund.
Then nationally or internationally there were huge issues. The expiration of the terrorism risk insurance program in my first year was something I spent a lot of time on. I've been working on international issues with the IAIS [International Association of Insurance Supervisors] on the reinsurance collateral rule for ailing reinsurers, for example ... So there have been many, many issues, and it has been a very exciting time.
What are some lessons you learned?
Mills: Well, the absolutely critical role that the insurance industry plays in the global economy, our national economy, and in New York State. It is the underpinning of all economic activity. And we have so many really pressing issues. We saw, last year with Katrina, the importance of being prepared for mega catastrophe and the impact it can have on our national and global economy, the role of reinsurance. So I have learned that we really need to do a lot of work in improving regulation.
We really do have a very inefficient system regulating insurance. The state based system does have some strengths. I think that we in New York do certain things very, very well, as other states do, like solvency monitoring and consumer protection. But we need to do a much better job on speed-to-market issues, on transportability of products, getting new products to the market quicker, enable the industry to be faster in their innovation. That ultimately benefits the consumer.
I do think that we need a greater role of the federal government in regulating insurance, so that we can move things like a national approach to dealing with natural catastrophes, dedicated CAT reserving, for example and move issues of international consequence like the reinsurance collateral issue much faster than the state-based system has been able to deal with it thus far.
Did your background as a legislator help you as a regulator in some way?
Mills: It definitely did. Coming from an elected background in the legislature, you deal with a lot of diverse, different people. I mean, my job as Insurance Superintendent of New York is a lot of balancing. On the one hand, you have to protect the consumers of insurance in New York State. That is a primary focus of our mission.
But you also have to maintain an environment that is conducive to the conduct of the insurance industry, so that the business is there, the market is strong, and people have options, and that requires some balancing.
I think that we have struck the right balance in the last two years. We are tough on the industry where we need to be, but we still have a situation where the market in New York is strong and competitive, and that is a function of having an environment that is seen as something that the industry wants to do business in our market.
Your state was certainly the leader in the agency compensation and disclosure issue. How you feel about the deals that have come out of the investigation?
Mills: Well, we have done a lot in the area of transparency, which is critical. Our focus in working cooperatively with Attorney General and soon-to-be-Governor Spitzer has been to bring transparency to the process, to enable consumers to understand what it is that they are getting, what they are buying.
On agents and brokers we have been working to get them more involved and more buy-in from the insurance industry on transparency; and now we have a lot of work to do in establishing a level playing field. Some agencies, some of the world's biggest brokers, obviously signed agreements where they have given up contingent commissions, but they remain the norm throughout most of the industry.
We have had a position in New York, partly I think due to my experience as a legislator, that that is really an issue of such importance that we think that the legislature needs to weigh in. It is not something that I thought I should have done by regulation, just extending the ban on contingent commissions throughout the whole industry in New York. That is something the legislature needs to weigh.
Main Street agents have been very vocal in that they feel they are being caught up in all these issues that came from the mega brokers. What do you have to say about that? Should the same standards be used for Main Street agents as these large national brokers?
Mills: My sensitivity to the differences between the mega brokers and the Main Street brokers, the smaller brokers in upstate New York, is the reason why I didn't just push from a regulatory point of view to extend the ban across the whole spectrum. I have that sensitivity as a legislator. I understand that the smaller businesses, the smaller brokers are different than the mega brokers. And that's why I believe that deferring that to the legislature was the proper way to deal with it.
The legislature will by definition and necessity take, I think, the balanced view and would understand the differences between the small Main Street broker as you say and the mega broker. That's why we've gone and exhibited some prudence in how we've dealt with that issue.
How do you feel about state attorneys general being involved in insurance issues?
Mills: I have felt that there needs to be a lot of cooperation between insurance departments and state attorney generals. One of the things I did when I came in was, I looked at why Attorney General Spitzer was so involved in the insurance sector in New York and tried to understand why it was that that happened. I concluded that there had been a vacuum and that the regulators were largely responsible for that vacuum, and the attorney general leapt in.
What we have attempted to do is to correct that situation. I'll give you two examples. We had been operating on a periodic exam format, the tried and true, you go in every five years, you look at the company A-Z, and we realized that, number one, it was putting us in a situation where we were looking at five year-old data, while the attorney general was looking at things in real time.
So we've switched and we are now doing risk-based exams. It allows us to be much more proactive, spotlight issues and problems before hand, hopefully before they've because major issues.
We've done in that in conjunction with establishing our own Corporate Practices Unit within the insurance department with attorneys with investigatory experience like the attorney general has. So now when we spot a problem, hopefully with a risk-based exam format, our attorneys from our Corporate Practices Unit can come in and if they find criminal wrongdoing, of course, we immediately would give it to the attorney general, and prosecute in a very tough fashion.
We hope to be able to find problems before they become full blown and avoid a lot of the collateral damage, if you will, that we've seen in some of these investigations in recent years.
Do you have any concerns for the insurance market that may come under the Spitzer administration?
Mills: I think that Governor-Elect Spitzer certainly understands the critical role of the insurance industry. I am absolutely convinced that he has every intention of doing what he needs to do to create and maintain a strong market for insurance in New York State. It is critical for the consumers of insurance and for our state and national economy.
So, I have no concerns. And I'm sure that my successor will understand, as I do, the absolutely critical nature of the insurance industry. We'll work to foster a strong viable market in the state of New York.
Do you have any advice for that successor?
Mills: It would be premature of me, we don't know who my successor is going to be, but I will tell you that as soon as my successor is announced, I will be reaching out and offering any assistance that I can. And if he or she feels that I can be helpful to them in any way I would be very happy to do it.
I have enjoyed this job very much. I really care about the insurance department, the insurance consumers in New York State and of course, the insurance industry and I expect to remain involved in it, so I'll do anything I can to help my successor be successful in the job.
Do you think there is any benefit from the appointed insurance commissioner or superintendent versus an elected official?
Mills: I really do. And no offense to some of my elected colleagues, but I do believe that an appointed system is better than elected. Certainly it is in New York.
Auto fraud crackdown benefits Mass. urban insureds
High-profile crackdowns on auto insurance fraud have resulted in dramatic savings for drivers in some Massachusetts communities.
The statewide average premium is scheduled to drop by nearly 12 percent on April 1, but drivers in some communities where antifraud task forces have been operating will see even greater savings, with premiums falling 24 percent in Lawrence and more than 15 percent in some Boston neighborhoods.
Drivers in Lawrence, the first Massachusetts community to target insurance fraud in 2003 following a case in which a grandmother died in what police called a staged accident, will see the average annual premium drop to $1,379 from $1,815.
In Boston's Dorchester section, drivers will see the average premium fall to $1,670 from $2,033, a reduction of almost 18 percent.
The new rates apply to experienced drivers, who represent the most common category of insured driver. The savings calculations are based on a driver with six or more years of experience, a vehicle that is a couple of years old, an average driving record, and comprehensive and collision coverage with a deductible of $500.
Finally have proof
"We've said that if we could take fraud out of the system, rates would come down," said Daniel Johnston, president of the Automobile Insurers Bureau of Massachusetts. "Now we finally have proof."
The antifraud campaign has led to charges against or the arrest of 528 people, including lawyers and chiropractors, Johnston said.
Reduced fraud has also led to a reduction in claims filed with insurers, which allows regulators to cut premiums.
In communities where fraud is less of a problem, and where the average premiums are lower, the percentage reduction coming on April 1 is also less. For example, experienced drivers in Newton will see their average premium drop 8.6 percent.
"This is exactly how the system should work, and we can lower premiums even more in the future if we apply a similar approach to reducing accidents," said Stephen D'Amato, a consultant to the Center for Insurance Research in Cambridge.
Massachusetts is the only state where auto insurance rates are set by state regulators.
Some insurers say rates would drop even further if regulation was reduced and companies were allowed to compete for drivers' business.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Royal & Sun buyout approval expected
A state hearing officer recommended that Delaware's insurance commissioner approve the proposed management buyout and eventual dissolution of Royal & Sun Alliance Insurance Group's U.S. operations. Insurance Commissioner Matt Denn is expected to make a decision soon.
Royal & Sun announced in 2003 that it did not consider its struggling U.S. business central to its main operations, and it stopped writing new policies and put in place a plan to leave the U.S. market after more than 150 years.
Among the four U.S. subsidiaries that are incorporated in Delaware and which managers of Royal & SunAlliance USA plan to "run off'"is Royal Indemnity Co., which has been sued over more than $250 million that it may owe to the developer of the World Trade Center site in New York City. RSA USA also is involved in litigation over potentially costly asbestos and environmental claims, although a Michigan judge last month dismissed a lawsuit in which General Motors asserted more than $1 billion in asbestos and environmental claims.
Royal & Sun's U.K. parent has agreed to provide $287.5 million in financing for the buyout, but opponents contend that amount is insufficient to ensure that obligations are met.
But in his report submitted, Widener University law professor Lawrence Hamermesh recommended that Denn approve the buyout, which critics, including New York Sens. Hillary Clinton and Charles Schumer and New York City Mayor Michael Bloomberg, fear may leave Royal Indemnity unable to meet its obligations, including helping to pay for the rebuilding of the World Trade Center site. Hamermesh said the deal meets all the requirements of Delaware law, and that there is no evidence that policyholders will be left holding the bag while RSA USA managers enrich themselves.Copyright
2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Tighter steering in Conn.
Connecticut Attorney General Richard Blumenthal has drafted legislation that he says would strengthen the state's anti-steering law prohibiting insurers from forcing consumers to use a preferred auto repair shop as a condition of paying for the repair.
Blumenthal announced the legislation with leaders of the Auto Body Association of Connecticut who say steering by insurers -- stifling fair competition -- remains rampant in the industry.
According to Blumenthal, insurers now use various methods to "skirt" the anti-steering law, "including providing consumers with a preferred list of repairers, intimating that other repairers may not guarantee their work, may charge consumers for some of the repairs or may not complete the repairs in a timely fashion." He said some insurers provide for a reduced deductible if the consumer chooses a preferred facility.
Currently, insurers are already prohibited from requiring that consumers repair their vehicle at a specific shop but Blumenthal's proposal would expand the prohibition to prevent insurers from using subtle coercion to steer consumers. It requires insurers to pay the reasonable and customary hourly rate that a consumer would typically pay for the repair -- to the shop of the consumers' choice.
UNH calculates cyber attack threat
Hackers, terrorists and nations all use computers, but who really is capable of damaging the critical infrastructure of the U.S.? The University of New Hampshire has unveiled the UNH Cyber Threat Calculator, which assesses the level of threat any attacker poses to sectors in the country that rely on information technology.
The UNH Cyber Threat Calculator was developed by researchers at UNH Justiceworks and students, and promises a new method to identify the threats posed to the cyber infrastructure.
"Nation states potentially pose the greatest threat with regard to cyber security to the United States. Clearly Russia and China are two of the top countries because they have more developed capabilities, but it may not be in their interest to use cyber attacks for strategic attacks ends. Both countries have worked on doctrine and there is some evidence that they are incorporating it into their military training as well. However, individuals, political groups, religious groups and organized crime groups also pose ongoing risks and should be considered cyber threats, as well," says professor Andrew Macpherson, director of Justiceworks.
A cyber attack could have a significant effect on the energy sector; emergency response and preparedness systems; financial services; telecommunications; even agriculture.
Analysts enter data for an organization or country into the calculator, which assigns a value to variables that measure the actor's intent and technological capabilities.
"What is known is that the threat of a cyber attack is a real and growing concern for industry and the government alike. With approximately 85 percent of the cyber infrastructure owned by the private sector, it's not just a government problem," Macpherson says.
UNH expects to make the calculator available to private industry. "These are the people who really need this information and tool to limit their risk," Macpherson says.
Industry forecast predicts slower premium growth in 2007 and 2008
Despite slow-down, industry still anticipates underwriting profits
Most insurance industry analysts predict slower P/C premium growth for 2007, according to an Insurance Information Institute's annual survey of Wall Street stock analysts and industry professionals released each year on Feb. 2, Groundhog Day. This year's survey results indicate that the respite in catastrophe losses in 2006, combined with a strong performance in virtually all other major lines of property/casualty (P/C) insurance, will, in all likelihood, propel the industry to its best underwriting performance since 1936.
Analysts further expect the industry's profitability to continue in 2007, albeit with an underwriting performance that generates a much smaller underwriting profit; the trend of decreasing underwriting profits is expected to continue in 2008.
The I.I.I.'s poll also shows that analysts uniformly expect premium growth to become even more sluggish in 2007 and 2008. This apparent paradox -- a peak in industry profits, but stalling premium growth -- is a clear reminder of the cyclical nature of the property/casualty business.
Premium growth stuck in neutral
The average forecast calls for an increase in net written premiums of just 1.8 percent in 2007, a substantial slowdown from the 3.3 percent estimated for 2006. The 1.8 percent increase in premium growth that analysts forecast for 2007 would be the third slowest rate of growth for P/C insurers since 1998, during the depths of the last soft market. It represents a near halving of the estimated figure for 2006.
The deceleration in premium growth in 2007 is a direct result of an across-the-board softening in the personal and commercial lines pricing environment. The exception to this general trend is hurricane-exposed coastal property insurance coverages. For 2008, the average forecast calls for an equally modest increase in net written premiums at just 1.9 percent.
Premium growth peaked during the most recent cycle at 14.6 percent in 2002, before dropping to 9.8 percent in 2003. It is also worth noting that premium growth in 2006 will come in well below the average analysts' expectations from a year ago. In last year's Groundhog survey, the consensus estimate was for net written premium growth of 3.8 percent.
Buyers of insurance are, of course, the clear winners when it comes to reaping the benefits of slowing premium growth. For example, countrywide auto insurance expenditures are expected to fall 0.5 percent in 2007 -- the first drop since 1999. Businesses will see declines of 5 percent or more in 2007, across their entire insurance program.
Overall, the share of P/C insurance premiums relative to the overall economy will shrink by about 2.5 and 3.1 percent in 2006 and 2007, respectively.
For insurers, the current premium growth pattern is eerily reminiscent of the soft market of the late 1990s, when the industry recorded growth of 2.9 percent in 1997 and 1.8 percent in 1998. Those years presaged some of the worst years in the insurance industry's history, with combined ratios rising from 102 in 1997 to nearly 116 in 2001. Fortunately, with an expected combined ratio of 96.6 in 2007 and 98.6 in 2008, the comparison -- at least so far -- appears to be superficial, or at least premature.
Combined ratio: best result in decades
The combined ratio -- the ratio of losses and expenses to premiums -- for 2007 is projected to be 96.6, a deterioration from an estimated 93.2 in 2006. The 93.2 estimate for 2006, if accurate, would represent the industry's best underwriting performance since the 93.3 combined ratio recorded 70 years earlier in 1936. If, as predicted, the combined ratio in 2007 comes in under 100, it would produce just the third underwriting profit in the property/casualty insurance industry since 1978.
While the survey results indicate fundamentally sound underwriting performances in 2006 and 2007, the anticipated 3.4 point deterioration in the combined ratio for 2007 begs questions about 2008 and beyond. This year's Groundhog survey includes, for the first time, combined ratio projections for 2008 -- the combined ratio for that year is forecasted to be 98.6, a very respectable number, but one that nonetheless represents an additional 2.0 point deterioration from 2007 and a 5.4 point deterioration relative to 2006.
2007 looks favorable; challenges remain
What are the biggest potential downside risks for 2007? Still high on the list is exposure to catastrophic loss, which superseded loss of pricing and underwriting discipline as the chief concern in 2005 -- by far the worst year for catastrophe losses, with $61.2 billion in insured losses.
Analysts' forecasts for net written premium growth in 2007 -- which range from 0.1 percent on the low end to just 3.1 percent on the high side -- reflect the fact that pricing and underwriting discipline remain a key issue.
Increased interest by traditional commercial insurance buyers in alternative forms of risk transfer, especially captives, self-insurance arrangements and large deductibles, is causing significant leakage of premiums from the system. Also, insurer pullbacks from coastal areas are resulting in the ceding of significant premium to state-run residual market mechanisms.
High on the list of external threats are adverse court decisions in Mississippi and Louisiana that have injected significant additional uncertainty into what are already very difficult operating environments.
Terrorism and more
Among other major external risks, terrorism remains a key concern as the two-year extension of the Terrorism Risk Insurance Act is set to expire on Dec. 31, 2007. While the shift to Democratic control in Congress leads many industry pundits to believe that passage of some form of backstop is likely, there is concern as to exactly what the program will look like and how it will operate.
Fortunately for insurers, at least some of the momentum built in 2006 will be carried into 2007 and 2008. That being said, insurers will need to come to grips with challenges unrelated to catastrophe losses, including increasing price pressure and the slow growth environment in the year ahead.
Forecasters predict active hurricane season to come in 2007
Atlantic basin and U.S. hurricane landfall expected to be up 60 percent above normal
A return to high hurricane activity in 2007 is likely following the below-average 2006 hurricane season, according to the consortium of experts on insurance, risk management and seasonal climate forecasting led by the Benfield UCL Hazard Research Centre at University College London.
The Tropical Storm Risk (TSR) consortium, long-range forecast anticipates Atlantic basin and U.S. landfalling hurricane activity will be 60 percent above the 1950-2006 norm next season. According to TSR, whose long-range outlooks for the exceptionally active 2004 and 2005 hurricane seasons and active 2003 hurricane season proved accurate, it is 76 percent likely that U.S. landfalling hurricane activity in 2007 will be in the top one-third of years historically.
TSR predicted there will be a 79 percent probability of an above-normal Atlantic hurricane season, a 15 percent probability of a near-normal season and only a 6 percent chance of a below-normal season. The consortium also predicted there will be 16 tropical storms for the Atlantic basin as a whole, with nine of these being hurricanes and four intense hurricanes.
For the United States specifically, TSR predicted a 76 percent probability of above-normal landfalling hurricane activity, a 15 percent likelihood of a near-normal season and only a 9 percent chance of a below-normal season. Additional, the consortium says five tropical storm are likely to strike the U.S., of which two will be hurricanes.
TSR predicts that two tropical storm will strike on the Caribbean Lesser Antilles, of which one will be a hurricane.
P/C industry may be long overdue for massive losses from an extreme "great" earthquake
>Study says industry could suffer from a $100 million loss
The U.S. property/casualty insurance industry is long overdue for heavy losses from a massive earthquake, reports A.M. Best in its recent "2006 Annual Earthquake Study." It is likely that if an earthquake of 7.6 magnitude occurred in San Francisco today, the insured loss would top $100 billion, the report says. The next "great quake" is only a matter of time.
The San Francisco Bay area, which includes Oakland, has a well established potential for destructive ground shaking. Less well known, at least to the general public, is the time bomb not far from St. Louis: the New Madrid fault. While northern California is assumed to be a candidate for such a temblor, other major metropolitan areas are at some risk for a similar level of earthquake devastation. Among those areas are Chicago, Philadelphia, Tokyo and Vancouver, Canada.
If such a disaster occurred today, insured loss undoubtedly would be severe, placing financial stress on thinly capitalized insurers with heavy concentrations of earthquake, fire, multiperil and automobile physical damage coverage in the stricken area, the study reports.
Further, because of generally low take-up rates on earthquake insurance, a major earthquake would tend to do more damage to the economy than would a more fully insured catastrophe of equivalent insured loss. This is due to the relatively greater uninsured loss that has to be absorbed by those without insurance.
Best's study provides historical perspective on earthquakes and the insurance industry, as well as an examination of the ability of the insurance industry and the public to absorb losses from a "major" or "great" earthquake, otherwise referred to as a mega-catastrophe.
Top 10 hail cities
Hail events remain a constant threat to property and casualty insurers. In 2005 alone, there were over 13,000 hail storms in the United States. According to Swiss RE, four out of the top 20 most costly insurance losses of 2005 were hail related.
The following is a list of the top 10 most hail prone metro areas in the United States, according to the Boston, Mass.-based CDS Business Mapping's, RiskMeter Online's Hail Model, which predicts the severity of hail storms for any location in the Continental U.S.
1. Tulsa, Okla.
2. Amarillo, Texas
3. Oklahoma City, Okla.
4. Wichita, Kan.
5. Dallas/Fort Worth, Texas
6. Arlington, Texas
7. Denver, Colo.
8. Colorado Springs, Colo.
9. Shreveport, La.
10. Kansas City, Kan./Mo.
Top 10 tornado cities
The violent thunderstorms in Central Florida in early February, spawned powerful tornadoes that killed at least 20 people is a deadly reminder of the constant threat insurers face against tornado exposures. Tornado-related losses account for 24.5 percent of insured catastrophe losses in the U.S., says the Insurance Information Institute.
The following is a list of the top 10 most tornado prone metro cities in the U.S., according to Boston, Mass.-based CDS Business Mapping's RiskMeter Online's Tornado Model.
1. Aurora, Colo.
2. St. Petersburg, Fla.
3. Houston, Texas
4. Hollywood, Fla.
5. Sioux Falls, S.D.
6. Little Rock, Ark.
7. Dallas, Texas
8. Ames, Iowa
9. Oklahoma City, Okla.
10. Bloomington, Ill.
Lloyd's climbs on the climate change bandwagon
There's little doubt that the world is getting warmer. But this raises more questions. To what extent are greenhouse gasses, particularly CO2, responsible? Will the warming trend continue? Are there any effective measures that can be taken to slow down or reverse it? Are the dire predictions of worldwide catastrophes justified?
The insurance industry has made strong commitments to address the potential climate change problems. The latest pronouncement came from Lloyd's Chairman Lord Peter Levene. In an address to the World Affairs Council in Washington, D.C., on Friday, Jan. 12, he stated: "We cannot risk being in denial on catastrophe trends. We urgently need a radical rethink of public policy, and to build the facts into future planning."
He stressed the importance of convincing the United States to take action. He noted that Lloyd's has "a particular responsibility to understand those trends in the U.S., our largest market, where we underwrote a record $12 billion of insurance and reinsurance here last year." Levene warned that failure to "prepare and adapt quickly and vigorously" would risk "putting society's future in grave danger."
His direct appeal for action reinforces Lloyd's concern over global warming. Last June, Franchise Director Rolf Tolle, commenting on Lloyd's first "360 Report," stated: "Although it's almost two decades since the U.N. (United Nations) recognized that climate change was a catastrophic threat to earth, it's clear that the insurance industry has not taken catastrophe trends seriously enough. As an industry we must work together to understand and manage these new risks, and to change our behavior.
"Today's risk environment is changing and evolving -- more rapidly than ever before," he continued. "So at Lloyd's, understanding and anticipating major risk trends is at the heart of all we do. Climate change is today's problem, not tomorrow's. If we don't take action now to understand the changing nature of our planet and its impact, we will face extinction."
Levene aimed three rhetorical questions at his U.S. audience: "First, is the U.S. a nation in denial? Today the insurance industry faces the prospect of a $100 billion mega-catastrophe twice the size of Katrina. We need to wake up to the truth about catastrophe trends and radically review our public policy.
"Second, is the insurance industry strong enough to protect its policyholders against Mother Nature? Insurance has a vital role to play as a supporter and enabler of the economy -- but it can only do that where free market forces prevail.
"Third, what action can we take on climate change? We believe that an international partnership which brings together governments and businesses is the only solution, and there are sound business reasons to change our behavior."
Levene's responses are familiar. He reminded his audience of the terrible 2004-05 hurricanes and the threat, despite the 2006 respite, increasingly powerful natural disasters pose. He challenged the idea that the industry has made excessive profits, indicating that for the health of world economies must remain strong. Solid balance sheets and adequate reserves are vital. Nor did he miss an opportunity to cite Lloyd's long-standing complaints about discrimination against "alien" insurers.
The third question, however, remains the most unsettled and the most controversial. Levene noted some progress. He specifically cited initiatives by a number of states and local governments to "cut carbon dioxide or CO2 emissions by Kyoto levels." A few days after his speech the U.S. Congress weighed in with a bill aimed at cutting greenhouse gas emissions by 2 percent a year. Levene sees in such measures a "groundswell of opinion which suggests action will become an increasing priority for business too."
This "groundswell" may hold true for the insurance industry, which is in line to take the hits from catastrophic weather events, but elsewhere, particularly in the U.S., it's more like a ripple.
Two days before Levene's speech, Daimler Chrysler's chief economist, Van Jolissaint, caused controversy after a report, broadcast by the BBC, said that any fallout from climate change is "way, way in the future, with a high degree of uncertainty."
Chrysler challenged the report's accuracy and asked for a retraction, which the BBC refused. (Transcript available at: http://news.bbc.co.uk/
2/hi/business/6250327.stm.)
Jolissaint's conclusions were triggered by the time he spent in Germany, where he saw a far greater concern among Europeans over climate change than from their American counterparts. He called studies, notably the U.K.'s Stern report, "highly political," and saw no reason to radically alter the structure of society to meet the threat. He supports a "step-by-step" approach as opposed to playing "Chicken Little."
He also indicated that "what you do is buy insurance" to cover the problem. While that might help Chrysler, it also highlights the risks that concern Levene and the rest of the industry. There are certainly people who would agree with Jolissaint's attitude, but there are others who don't.
Thomas Friedman, in a recent New York Times column, described his trip to Montana, where the State's Governor, Brian Schweitzer, accompanied him to an open-pit coal mine. Friedman notes that Montana, with a third of all U.S. coal reserves (8 percent of world reserves), could supply the equivalent of 240 billion barrels of oil. Gov. Schweitzer, however, is committed to making sure that it's burned cleanly by eliminating the CO2. He's also skeptical about industry efforts to minimize adverse reports. He's seen hard evidence of global warming and believes it.
Levene, however, made another point; becoming more energy efficient saves money and increases profits -- even if it has no effect on global warming.
He recognized this in his conclusion, stating: "Mega-catastrophes and climate change are two powerful forces here to stay. We don't yet know exactly what the future will bring. And there is little or nothing that could be done now to turn back the clock. Even if we stop all man-made CO2 emissions now, we would still endure 30 years of warming before the effects take hold. But we must not use that as an excuse not to act. History, and future generations will surely not forgive us if we do."
