Lloyd's America's Baker: Time for action on climate change is now
For an insurer, understanding climate change is a matter of understanding trends in risk and changes in those trends. For Wendy Baker, president of Lloyd's Amer-ica Inc., staying on top of those trends in the United States -- where her company does around $12 billion worth of business -- is a both a responsibility and an opportunity.
Climate change, shifting demographics and economic factors all add up to a scenario in which a mega-catastrophe with $100 billion in insured loss is a matter of when, not if, Baker recently told attendees at the 2007 Mid-Year Property & Casualty Insurance Symposium sponsored by the Association of Fire and Casualty Companies in Texas and the Insurance Council of Texas.
"We need a radical rethink of public policy. We need an insurance industry that is financially strong and free to operate within the market. We need a coordinated action on climate change," Baker said.
She added that "at Lloyd's we believe the time for action is now." While the dire predictions of the 2006 hurricane season did not come to pass, Baker doesn't think the forecasts were overblown. She noted that although only two years out of the past 20 had lower cat losses than 2006, the number of natural catastrophes doubled between the 1960s and the 1990s, with insured losses increasing seven-fold during that time.
"2005 was the worst ever year with total world insurance claims of $85 billion, 80 percent of it from U.S. hurricanes," Baker said. "That's about $62 billion from Katrina, Rita and Wilma. Our share of that was about $6 billion, so this is very important to us at Lloyd's."
Baker explained that the impact of climate change will test the principles of insurability.
"All insurable risks ideally have the following characteristics," Baker said. "They should be identifiable -- they will not happen all at once. They should be quantifiable -- exposure can be assessed based on likelihood, spread and past data. Fortuitous -- may or may not happen. Economic -- the policyholder can afford to pay the premium."
With climate change, she said, identification and diversification may be difficult as aggregations of claims are likely with severe windstorms, floods and droughts. Losses can occur across classes of insurance, with claims from property damage, liability, auto and even political risk possibly coming into play.
As a result of the catastrophes of 2005 the industry realized that past data was not as relevant as previously thought, and, that it's a matter of when, not if, a major loss will occur. Additionally, she said, "In some cases we may have to charge more than the policyholder can afford to pay."
Because "climate change can happen in discrete jumps," the industry's fundamental assumptions may prove wrong, especially if the "data is sparse," Baker said. In which case, "an underlying trend can be hidden for years and only pop up as it did in 2004 and 2005."
Primary and secondary issues
An increase in average losses, as well as in the volatility and frequency of extreme losses, is possible over the next few decades as a result of climate change. With more humidity in the air and all other factors being equal, "after a hurricane, homes and buildings take longer to dry out. This leads to more time in hotels for homeowners, longer business interruptions and thus larger claim costs. It can lead also to operational issues, such as more complaints, meaning higher claims expenses," she said.
Claims drag out, reserves and capital are tied up, and financial results are subject to uncertainty. Inevitably, these secondary issues lead to lost opportunities for insurers.
"The primary issue is that hurricanes and other risks have increased in many regions in the world causing increased losses," Baker said. "The secondary issues, however, will magnify these losses and make it even harder to forecast and to model them."
She noted that after a mega-catastrophe like Hurricane Katrina, premiums are typically adjusted to recoup losses and insurer profits rise substantially in the following year. "When major events are rare as they have been in the past, this method works pretty well," Baker said. "But as large events occur more frequently, as is expected, the chance of several poor underwriting years in a row increases." The question for insurers is, will capital providers continue to return to the market again and again?
Affected insurance products
Property -- both personal and commercial -- business interruption, and directors and officers are among the many classes of insurance that can be affected by climate change, Baker said. For insurers, they represent not only increased risk but opportunities as well.
"As perils change and move, new groups of policyholders will need coverage," she said. "They will wish to protect themselves from this new risk and we can help them. But we can only help them if we gain a better understanding of how the peril has changed."
Using its own proprietary risk models, called realistic disaster scenarios, Lloyd's assesses the market against large disasters around the world. For a hypothetical Florida windstorm event, since 2005 the estimated losses have jumped from $70 billion to $100 billion in 2006 to a current figure of $108 billion.
"Part of the increase is due to our view that risk of extreme events due to climate change has changed dramatically. Part of the increase is due to the very significant impact that demographic and economic trends have on risk," Baker said.
"Between 2006 and 2007 we did not change the event details at all. They're the same storm strength, the same landfall location, the same track," she said. Demographic shifts, more people living in exposed areas, and economic effects, higher contents values and higher construction costs all contribute.
The industry cannot force customers to reduce and offset carbon emissions or build with green materials, she said, but insurers can take steps to reduce negative results from climate change. The industry can: promote loss prevention by encouraging policyholders to become risk managers in partnership with the industry; design innovative products in response to changing climate, demographic and economic influences; and take part in the public debate.
"We need to talk about it," Baker concluded.
Farmers rethinks homeowners rate hike in Texas
Texas regulators indicated they would turn down a proposal by Farmers Insurance for a 6.6 percent statewide increase in homeowners rates, so in late July 2007, the company said it will revise its plan. Ben Gonzales, a spokesman for the Texas De-partment of Insurance, said the agency was prepared to reject the plan because of concerns about rate variations across the state and indications that Farmers' current rates are adequate.
"It was clear that we would disapprove the filing as it was written," Gonzales said.
The state's file-and-use law allows insurance companies to raise rates once they've notified the insurance department. However, the company must roll the rates back and issue refunds -- with interest -- if the commissioner of insurance determines the increases were not warranted.
Gonzales said it was "a lot simpler for them to withdraw the filing than to move forward" on a plan that was opposed by the state.
Farmers spokeswoman Mich-elle Levy said the company still wants to adjust its rates and is working on a new plan.
Gonzales said state actuaries were concerned about rate differences in Farmers' proposal, from a 50 percent increase along the Texas coast to a 10 percent decrease for some North Texas customers.
"The increases are heavily weighted toward the coast, which may be appropriate because of the risks. But we need to see more documentation," he said.
The department also found that the company's loss ratios over the past year indicated healthy profits, Gonzales said.
The department is still reviewing a rate increase proposed by Allstate Insurance, the state's second largest home insurer, which wants to raise the average cost of its policies by 6.9 percent.
"There is no indication yet of which way we will go," Gonzales said of the Allstate proposal.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Illegal immigrants an unknown factor in Okla. insurance verification program
An auto insurance verification program being developed in Oklahoma does not address a growing number of uninsured drivers -- illegal immigrants.
The new real-time system will allow law enforcement officers to immediately determine whether or not a driver has the required insurance on a vehicle. The goal is to reduce the number of uninsured drivers on Oklahoma roads. But state law prevents illegal immigrants from buying car insurance because they cannot legally obtain a driver's license.
However, said Lonnie Jarman, director of financial responsibility at the Oklahoma Department of Public Safety, "they have cars." He believes as many as one-fourth of Oklahoma drivers do not have car insurance, although other estimates are lower. He said the number is "a constantly moving target."
The state also does not know how many illegal immigrants reside in Oklahoma.
Copyright 2007 Associated Press. All rights reserved.
La.'s minimum auto coverage stays the same; Citizens won't be sold all at once
In mid-July, Louisiana Gov. Kathleen Blanco vetoed two major pieces of insurance legislation passed by state lawmakers in 2007. One would have raised the minimum auto liability coverage requirement for the state's drivers and the other would have put the whole of Louisiana's property insurer of last resort up for sale.
Senate Bill 233 by Sen. Mike Michot, R-Lafayette, would have raised the minimum auto coverage requirement to a "25-50-25" level, or $25,000 in coverage for damage to other people's property, $50,000 for injury or death to more than one person in an accident, and $20,000 for injury or death to one person. With the veto, the required coverage remains at the "10-20-10" level.
Blanco said she vetoed the bill out of concern that it would impose a sudden 20 percent rate increase on the 1.5 million of the state's 4 million drivers carrying the minimum coverage, without addressing the problem of uninsured drivers. She said a rate hike may only serve to increase the population of uninsured drivers.
The governor also vetoed Senate Bill 195 by Sen. James David Cain, R-Dry Creek, which called for the state to put up for auction all of the policies written by the Louisiana Citizens Property Insurance Corp. Blanco said the plan would have conflicted with a bill she supported, Senate Bill 153 by Sen. Reggie Dupre, D-Houma, which aims to reduce the size of Citizens incrementally by periodically selling off bundles of policies. Dupre's plan was favored by both Blanco and Insurance Commis-sioner Jim Donelon.
Blanco had already signed Dupre's bill, which allows Done-lon to auction off Citizens policies in bundles of 500 to private insurers. The policies will include some from hurricane-vulnerable coastal areas and some from areas farther north, policies that carry smaller risk of storm damage and hurricane insurance claims.
Associated Press reports contributed to this story.
Notification may be required after Ark. burglaries
Following a series of burglaries at insurance agencies in Arkansas, Insurance Commis-sioner Julie Benafield Bowman issued a reminder to all insurance companies of the notification requirements in the event of security breaches. Should such a breach occur, companies are required to disclose the breach to their customers in the "most expedient time and manner possible," according to the insurance department.
Insurance agency burglaries have been reported in Cabot, Conway and Arkadelphia. The thieves appear to be taking mainly petty cash, but the department said it is concerned about the availability of personal information utilized by insurance companies and agents.
Any Arkansas insurance agent who has suffered a break-in should notify the Legal Division of the Arkansas Insurance Department by calling 501-371-2820.
If there is any possibility unauthorized third parties may have obtained confidential information about Arkansas insurance consumers, the notification requirements immediately come into play.
The Hartford settlement ends agents' contingent commissions
The Hartford Financial Services Group Inc. announced it has reached a settlement with the New York, Connecticut and Illinois attorneys general resolving matters relating to their investigations of the compensation arrangements between the insurer and its property/casualty agents and brokers.
As part of the deal, The Hartford will no longer pay its property/casualty insurance agents commissions that are contingent upon growth or future performance but will implement a new supplemental payment scheme with fixed commissions per policy based more on an agency's past performance with the insurer.
In this change in compensation plans, the insurer joins others including Chubb and Travelers in instituting fixed commission plans for agents.
The company also reported a settlement regarding the New York Attorney General's investigation of market timing within the company's variable annuity products.
In settling both the market timing and broker compensation matters, The Hartford said it has agreed to pay, in total, $115 million.
The Hartford did not admit or deny any violation of federal or state law as a result of this settlement.
Other previously disclosed matters that were under investigation by these attorneys general have been concluded, according to the insurer.
In addition, The Hartford had previously disclosed an investigation by the staff of the Securities and Exchange Commission into matters related to market timing. In light of the settlement, the company said that the SEC staff informed The Hartford that it has concluded its investigation without recommending any enforcement action.
The $115 million total amount consists of $89 million in restitution ($84 million for market timing and $5 million for broker compensation) and $26 million in penalties.
According to the insurer, a "substantial portion" of the cost of the settlement has already been funded by a previously disclosed reserve of $83 million set aside for regulatory matters.
"We are pleased to have these matters behind us," commented The Hartford Chairman and CEO Ramani Ayer. "Since these investigations began more than three years ago, we have cooperated fully with the attorneys general and other regulators. We have worked assiduously to strengthen and improve our business practices and will continue to do so. We emerge from this period with an unwavering resolve to uphold our longstanding commitment to providing our customers with outstanding products and exemplary service."
Of the total settlement amount, $5 million will be paid into a fund to compensate certain commercial property/casualty policyholders "related to a limited number of isolated instances of improper quoting between 2001 and 2004."
The attorneys general found that in these instances, certain employees of The Hartford engaged in improper underwriting by providing quotes for commercial insurance that were not based on an adequate assessment of the risk. The company said these activities were not in keeping with its standards and that over the last several years, the company has voluntarily strengthened its internal controls, guidelines and training in this area.
The Hartford also agreed that it will forego paying contingent compensation in any line of its property/casualty business in which more than 65 percent of the U.S. market does not pay contingent compensation.
The Hartford said it has decided to implement a new program for 2008 to compensate property/casualty agents and brokers for their performance in these lines of insurance and in its other standard commercial lines of insurance. Under this new supplemental commission program, The Hartford will pay a fixed commission, set prior to the sale of a particular insurance policy, that is based among other things on the agent or broker's past performance.
"We value our strong partnerships with independent agents and brokers," said Ayer. "Our new property/casualty supplemental commission program reflects their feedback for a more predictable compensation package."
In addition to the property/casualty fund monies, $84 million of the settlement will be paid into a fund to compensate certain variable annuity contract holders of The Hartford for harm the New York Attorney General found to have resulted from the market timing activities of variable annuity contract holders from 1998 through 2003.
House panel votes to add wind to flood program
Private insurance companies are balking at a decision by a key House panel to expand the federal flood insurance program to include wind coverage. The House Financial Services Committee voted late last month to add wind coverage to the National Flood Insurance Program (NFIP).
"We continue to believe that adding wind coverage to the NFIP is not the right solution," commented American Insurance Association (AIA) President Marc Racicot.
AIA commissioned a study by Towers Perrin showing that adding wind could cost taxpayers as much as $100 billion to $200 billion if the federal government began displacing the private market by providing wind coverage.
At a recent hearing, AIA was joined by other insurer groups in opposing the expansion. They included the Property Casualty Insurers of America and the Reinsurance Association of America.
PCI told lawmakers that, while the inclusion of wind coverage within the federal program is well-intentioned, it may produce unintended negative consequences for millions of American insurance consumers.
"Including wind coverage within the NFIP will create artificial subsidies, thereby essentially raising rates for consumers in inland parts of the country who are not subject to the same kind of wind-damage risks faced by policyholders on the coasts," said Ben McKay, PCI's senior vice president, federal government affairs. "It is hard to believe that Congress wants to give more responsibility to a failed government program. I wouldn't invest in a company that had inadequate cash flow and $17.5 billion of debt."
According to PCI, the combination of homeowners insurance coverage, state wind pools and flood coverage available through the NFIP already provide consumers protection from wind and water damage. Moreover, the current system provides consumers the opportunity to purchase coverage at a price that reflects the risk based on the location of the property and the likelihood of a loss.
"State residual market mechanisms provide wind coverage where there is no market, and private insurers provide wind coverage where there is a market," McKay said. "The Taylor bill simply creates a federal government fund that will compete with existing state funds and potentially with the private sector."
Franklin W. Nutter, president of the Reinsurance Association of America (RAA), also argued that the expansion provision was unnecessary because private sector insurers, reinsurers, capital market participants, and residual market programs already provide wind coverage.
In a letter sent to Chairman Barney Frank, D-Mass., and Ranking Member Spencer Bachus, R-Ala., of the House Financial Services Committee, Nutter said that it "fundamentally alters who bears the risk of loss from wind. Instead of spreading this risk throughout the private worldwide insurance marketplace, this legislation puts the entire burden of deficits on the U.S. taxpayer. This fundamental shift is not needed."
Insurers had hoped lawmakers would have instead pursued a proposed six-month study by the Government Accountability Office, which they said would have provided an analysis of adding wind coverage to the NFIP and provided a better understanding of the real cost of adding wind.
The measure approved by the House Financial Services Committee is H.R. 3121, the "Flood Insurance Reform and Modernization Act of 2007," which also includes other reforms to the NFIP that insurers support
Sandy Praeger, president-elect of the National Association of Insurance Commissioners (NAIC) and Kansas Insurance Commissioner, testified earlier in July before the Subcommittee on Housing and Community Opportunity on the merits of all-perils insurance coverage.
The NAIC stated that it believes adding wind coverage to the NFIP would help resolve potential conflicts between consumers and insurers regarding the cause of damage to their homes during a hurricane, but would also move the line of contention to other perils, such as fire or earthquake damage.
Praeger suggested that instead the NFIP could be restructured to function as a reinsurer. Alternatively, the private market could offer all-perils coverage and be supported by a federal backstop or credit line that would cap the industry's share of such catastrophic losses.
Agents say 'no' or nothing to adding wind coverage in flood program
Some independent insurance agents are taking a "neutral" position when it comes to adding in wind coverage in the National Flood Insurance Program (NFIP). Still others say "no" to wind entirely.
Patrick Royal of the Independent Insurance Agents and Brokers of America says his association remains "neutral," neither supporting nor opposing adding wind coverage to the flood program.
But the Professional Insurance Agents agents seem to be pleased that H.R. 3121, the "Flood Insurance Reform and Modernization Act of 2007" is moving forward, but disagree on some of the "language" in the bill.
"PIA is pleased the flood proposal is moving forward," said Patricia A. Borowski, PIA senior vice president. "However, we continue to be disappointed by and oppose the House's inclusion of Rep. (Gene) Taylor's language attaching a multi-peril (wind) coverage."
Borowski said that if the NFIP added wind coverage to policies, in essence those policies would have to become comprehensive property policies.
"PIA understands, appreciates and agrees with the challenge that Rep. Taylor is trying to resolve for constituents, that is to be sure that people have coverage that will respond no matter whether the damage is from flood or wind or water surge, etc.," she said. "However, the specific approach Rep. Taylor has selected and now is in the House version is highly defective and will not resolve the fundamental problem. It just adds more cost for insurance coverage for consumers and increases the number of parties and coverage forms that could be drawn into a claims coverage controversy."
Borowski said the challenge with adding wind to flood policies is that most states do not exclude wind from private property policies.
"So, now you have a problem with a person with a flood policy with wind coverage, and a property policy with wind coverage," she noted. And when there's a flood "who pays?" she asked. "Whose limits pay? Who's in control? Who makes the decisions?"
While Borowski added that PIA "absolutely understands Mr. Taylor's position" this concern has to be worked out in a different way.
"Imposing wind in the NFIP truly is not a solution," she said. "If this goes through we might be here three years later and have the same loss circumstance and those people who will have a flood policy with wind coverage, a property policy and a wind policy, will still be left short."
Borowski added that the PIA is currently working with the Senate "to fix this problem aspect of the bill."
