Coastline populations increasing insurance prices
The U.S. population residing in hurricane-prone states continues to rise, a trend which is likely to impact adversely the nation's coastal property insurance market for years to come, according to testimony by Dr. Robert Hartwig, president and chief economist for the Insurance Information Institute (I.I.I.). Hartwig appeared before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
"Despite the well-known vulnerability to hurricanes and rapidly escalating property values, coastal development in high risk areas continues at a furious pace," Hartwig said, noting that 15 new condominium projects, with a total of more than 2,100 units, will be completed by 2009 in South Miami Beach, Fla.
"Rapid build-ups are also observed in many other coastal areas, including Galveston Island, Texas; Hilton Head and Myrtle Beach, S.C.; the Maryland shore; eastern Long Island, N.Y.; and Cape Cod," he added.
Florida has the highest population growth among hurricane-prone states and is expected to gain 12.7 million new residents between 2000 and 2030, according to the U.S. Census Bureau. "Florida is the most exposed state in the country, by far, accounting for 27 percent of all hurricane exposed property. Adjusting for growth since 2004, insured coastal exposure in the state now exceeds $2 trillion. Although New York is a close second, it is statistically less likely to be hit by major hurricanes than Florida," Hartwig said. "It is expected that the value of insured coastal property will double within the next decade as coastal populations and property values continue to soar."
Hawaii's population is expected to grow 21 percent between 2000 and 2030, and New York's population is expected to grow 2.6 percent in the same period.
Hartwig, who spoke before the U.S. Senate committee's hearing, noted that insurance prices are determined primarily by the degree of risk assumed by the insurer.
"Hurricane Katrina revealed that too many U.S. coastal structures are unable to withstand the forces of a major hurricane, the importance of prudent zoning and land-use management, and that private-sector insurers provide by far the fastest, most efficient means of economic recovery for communities affected by disaster," he said.
Furthermore, he believes state-run insurers of last resort have offered little short-term property insurance rate relief to hurricane-prone regions, and may end up shifting the long-term risks of hurricane-related losses to policyholders and taxpayers who do not live near the coast.
"Depending on the state, the redistribution of costs is commonly achieved via laws that allow state-run insurers (which are often the largest insurers in the most hazardous areas) to recover their losses in excess of their claims-paying resources by assessing (effectively taxing) the insurance policies of homeowners and business owners throughout the state, including those well away from the coast and those who have never filed a claim," Hartwig said. "In some cases, even unrelated types of insurance such as auto insurance and commercial liability coverage can be assessed."
"The price of insurance is determined primarily by the degree of risk assumed by the insurer. Therefore, from an insurance perspective, the prospect of a long-term crescendo in coastal risk is a paramount concern," he said. He noted "the industry wants to work in partnership with public policymakers, consumers and businesses in developing solutions to the formidable challenges posed by Hurricane Katrina and other disasters."
Hartwig's testimony can be viewed at www.iii.org/media/met/gulfcoasthurricanes/
Utah Court: Agents should take care when making verbal statements
The Utah Supreme Court has found that a "party may recover under the doctrine of estoppel when an insurance agent makes material misrepresentations as to the policy provisions, the party reasonably relies on those misrepresentations in buying the coverage, and that reliance results in legal injury to the party."
In Youngblood v. Auto-Owners Insurance Co., Robert L. Youngblood was struck by a vehicle while he was walking through a parking lot. The driver carried $50,000 in available liability insurance and paid the claim for the policy limit. However, Youngblood claimed that his damages exceeded $50,000, and thus sought additional coverage from his company's insurer, Auto-Owners Insurance Co.
Youngblood had purchased underinsured motorist coverage in the name of his corporation, Youngblood Home Improvement Inc., rather than in his individual name.
According to Youngblood, his insurance agent told him his underinsured motorist coverage would cover him if he was struck by a vehicle as a pedestrian. However, the policy, as written, actually limited his coverage to bodily injury sustained only while he was "occupying" an automobile. Or, coverage would be provided if he had sustained bodily injury as a pedestrian or while occupying another person's automobile that is not insured under the UIM policy and the first named insured in the policy was an individual, according to court documents.
Youngblood acknowledged that the language of his policy did not extend coverage. However, he argued that coverage should be expanded to cover his claim, under the principles of estoppel.
For the purposes of the case, estoppel generally means when an insurance agent promises things, knowing at the time of the promise all of the material facts, but is ultimately wrong, and reasonable reliance on that promise leads to loss or injury.
The Supreme Court said the "law holds insurance agents to accurately represent policy provisions and honestly answering consumer questions. Agents who are not trained to act with complete honesty and integrity in their interactions with consumers, or who simply refuse to do so, place themselves and their principals at risk. The law will hold both principal and agent liable for misrepresentations upon which consumers reasonably rely."
Thus, the high court ruled that estoppel may apply under some factual circumstances. It said: "Estoppel may be applied to modify terms of an insurance policy when (1) an agent makes material misrepresentations to the prospective insured as to the scope of coverage or other important policy benefits, (2) the insured acts with prudence and in reasonable reliance on those misrepresentations, and (3) that reliance results in injury to the insured.
Thus, an insurance agent's verbal representations of a policy to an insured may provide insurance coverage beyond the express terms of the insurance policy, the court indicated.
Arizona Appeals Court: Pain not equal to injury in workers' comp claim
The Arizona Court of Appeals has ruled that subjective pain does not fall under Arizona's definition of an injury for which an employee is entitled to workers' compensation benefits.
According to court documents, in Polanco vs. Industrial Commission and Pima County, Mont Polanco, an employee of Pima County, injured his back during the scope of his employment while lifting a rock out of a manhole in 2001. His subsequent workers' compensation claim was accepted for benefits, and he had diskectomy surgery. Polanco's claim was closed in Feb. 2003, but he continued to receive treatment for his back injury, "including caudal epidural injections" that "markedly improved [his] pain and allowed him to work full-time."
He suffered an industrial motor vehicle accident in Aug. 2004, at which time the injections became less effective. In late 2005, Polanco's physician recommended he have a spinal cord stimulator implant to control his pain. Consequently, Polanco filed in Nov. 2005 a petition to reopen his initial claim, which the workers' comp insurer denied.
"The ALJ denied benefits, finding the employee had not shown his inability to return to work was related to his injury and, in the alternative, determining his injury was not compensable because residual pain did not "constitute a ratable permanent impairment under the ... [American Medical Association] Guides," according to court documents.
In writing for the appeals court, Judge William Brammer Jr. said a claim could not be reopened based on a worker's "increased subjective pain if the pain is not accompanied by a change in objective physical findings." To qualify for benefits, the appeals court said the employee must prove from both a legal and medical perspective that the injury is work-related.
"Section 23-1061(H) governs the reopening of workers' compensation claims and requires an employee to prove the existence of 'a new, additional or previously undiscovered temporary or permanent condition' to reopen a claim. And the employee must show a causal relationship between the new condition and a prior industrial injury," court documents noted.
Thus, the court acknowledged that "because subjective pain is not an injury within the meaning of article XVIII, §8 of the Arizona Constitution, §23-1061(H) does not unconstitutionally eliminate it as a type compensable injury. And the objective physical findings requirement of §23-1061(H) does not address either legal or medical causation. That requirement instead makes clear that subjective pain alone cannot support a petition to reopen a claim. Rather, subjective pain must be directly related to the degree of impairment resulting from an objective physical change."
Wash. lawmakers OK Insurance Fair Conduct Act
Washington senators have approved a proposed Insurance Fair Conduct Act, passing it 31-18 mostly along party lines. The bill, which would prohibit the practice of delaying or denying an insurance claim without proper cause, and would allow the policyholder to collect triple damages if the insurance company unreasonably denies a claim or violates unfair practice rules, has been sent to Gov. Chris Gregoire for her signature.
The American Insurance Association, National Association of Mutual Insurance Companies and Property Casualty Insurer Association of America had opposed the bill, saying that lowering the threshold for first-party bad faith claims against insurers would "encourage frivolous lawsuits" because there is an incentive for insureds to litigate. Plaintiffs who prevail under a bad faith claim are routinely awarded attorney's fees and costs," they said.
House Republicans generally agreed, lambasting trial lawyers as money-grubbers who will drive up insurance rates with their litigation. The bill eventually passed the House on a mostly partyline 59-38 vote.
Democratic House Majority Leader Lynn Kessler said the bill is an important consumer protection and some of the 4,000 people who file complaints each year will have greater recourse to the courts to get satisfaction from their insurance companies.
"This is for all the people who get stiffed by their own insurance company," she said.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Bush administration rejects pleas for federal disaster plan
Warning of another looming hurricane season, lawmakers including Florida Gov. Charlie Crist pleaded this month in Washington for a national catastrophe fund to help stabilize an insurance industry that some say has gone berserk in coastal areas.
The Bush administration shot down the idea, however, and a leading Democrat promised only to create a commission to study the issue.
Crist, a Republican, joined Florida Sens. Bill Nelson, a Democrat, and Mel Martinez, a Republican, as the lead witnesses at a Senate banking committee hearing, saying that rising insurance premiums after recent hurricanes are driving people from their homes. Lawmakers from other Gulf states, the Northeast, and elsewhere have also voiced support for such a national program, which would establish a backup for property insurance similar to a federal program set up for terrorism insurance after the Sept. 11 attacks.
"Traditional insurance market mechanisms are not adequately managing catastrophic risk," Crist said, accusing insurance companies of profiting from disaster-stricken communities. "Floridians are being forced to choose between paying skyrocketing insurance premiums or selling their homes."
A Bush administration official -- joined by some industry representatives -- countered that such a program would undermine the private market and ultimately cost taxpayers more.
"Government insurance would displace insurance provided by the private market," said Edward Lazear, chairman of the White House Council of Economic Advisers. "For the most part, the national insurance industry is healthy today."
Sen. Richard Shelby of Alabama, the ranking Republican on the committee, said a national fund also would leave taxpayers everywhere paying to cover vulnerable coastal locations, including ritzy houses on the beach.
Crist and others disputed that argument, saying the fund would cover all types of catastrophes in every region, such as earthquakes. Besides, federal taxpayers already pick up the tab for events like Hurricane Katrina in the form of disaster assistance. It's wiser to create a fund on the front end that could earn interest and hold down insurance rates, they argued, even if it requires a taxpayer subsidy.
"Our current system is based largely on a post-event reaction," said Alabama Insurance Commissioner Walter Bell, adding that the United States is one of the only industrialized nations in the world without a comprehensive catastrophe plan.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Congressional hearings examine the need for national disaster solution
Some say private market insurance is sufficient, while others claim federal help is needed to solve a 'national problem'
Two U.S. Senate committees -- the Committee on Banking, Housing and Urban Affairs, and the Committee on Commerce, Science and Transportation -- met this month to examine the response of the insurance industry to the claims filed by homeowners and business owners in the wake of the calamitous 2005 hurricane season and the need for a national solution for natural disaster coverage.
"Put simply, insuring against natural disasters is a national problem that requires a national solution," the Independent Insurance Agents and Brokers of America said in a statement. "Despite our longstanding position that the insurance market is best served by limited federal involvement, we believe that a federal solution to the issue of natural catastrophe insurance is necessary to help provide capacity and fill a void that the private market cannot and will not service."
Franklin W. Nutter, president of the Reinsurance Association of America, testified that creating federal and state catastrophe reinsurance funds would not solve the homeowners' insurance availability problem. He argued that cat funds do not reduce the vulnerability of people to natural catastrophes. "There is no evidence that state reinsurance catastrophe funds result in greater availability or affordability of homeowners' insurance," Nutter said. "Instead, these funds are effectively a cost shifting mechanism -- low risk policyholders end up insuring high risk policyholders," he stressed.
Property/casualty insurers continue to argue that while the private insurance marketplace is the best vehicle to address coastal insurance issues and natural disasters in the U.S., the federal government can play a role in efforts to reduce affordability and availability problems in coastal regions.
"While government and the private sector can and should work together to address this problem, we should not delude ourselves into thinking that economic principles affecting the relationship between supply, demand, and price can be erased by government regulation and programs," testified National Association of Mutual Insurance Companies' President and CEO Chuck Chamness.
Both insurers and agents believe that federal involvement should come into play when assisting with the financing of mega-catastrophe risk.
"Government, consumers and insurers must work together to put in place viable solutions to reduce losses from future catastrophes and speed relief to those who need it after the next natural disaster hits," says Ben McKay, Property Casualty Insurers Association of America, senior vice president, federal government relations.
"There are no shortcuts to addressing these problems, and all of us must remain committed to solutions that guarantee long-term stability in the private markets to protect our economy and, more importantly, to provide certainty to the nation's insurance consumers," testified American Insurance Association President Marc Racicot.
Banks' total insurance revenue dipped
The nation's bank holding companies (BHCs) experienced a slight decline of 1.3 percent in their total insurance revenue from $44.1 billion in 2005 to $43.5 billion in 2006. Citigroup Inc. (N.Y.), Wells Fargo & Co. (Calif.), Countrywide Financial (Calif.), HSBC North America Holdings (Ill.), and BB&T Corp. (N.C.) led all bank holding companies with significant banking activities in total insurance fee income in 2006, according to findings released by Michael White Associates (MWA) and the American Bankers Insurance Association (ABIA).
The findings are based on data reported to the Federal Reserve Board by top-tier BHCs. The analysis measures the banking industry's insurance business and provides some benchmarks that gauge bank insurance performance.
"While the industry's insurance underwriting activities registered a decline of 5.2 percent, its insurance brokerage fee income continued growing, increasing 10.6 percent in 2006. Among the top 50 in insurance revenue, the mean ratio of insurance revenue to non-interest income was 14.8 percent in 2006," said Michael D. White, president of MWA. "So, insurance activities continue to make increasingly meaningful contributions to banking revenues."
During 2006, 656 bank holding companies (or 67 percent of all top-level BHCs reporting) earned some type of insurance-related revenue. BHCs' insurance brokerage fee income increased 10.6 percent from $10.98 billion in 2005 to a record $12.14 billion in 2006.
"While insurance underwriting income has grown at a compound annual rate of 3.1 percent since 2001, insurance brokerage fee income has been racing upward at a compound yearly average of nearly 20 percent during that same period," said Valerie Barton, ABIA executive director. "Its growth was slowed in 2006 by softening of property/casualty premiums and declines in some agencies' contingent commissions. Insurance brokerage remains healthy, and the prospects for continued growth in bank insurance revenues are very positive."
The analysis includes a ranking of the top 50 bank holding companies on the basis of the absolute dollar amount of total insurance revenue (earnings from sales and underwriting) and on the basis of total insurance revenue as a percentage of the institution's total non-interest income.
SEC agrees to ease Sarbanes-Oxley rules for small firms
The Securities and Exchange Commission board has officially endorsed changes in the Sarbanes-Oxley compliance rules that should particularly benefit smaller companies.
The SEC commissioners voted to allow more flexibility in the rules, particularly the guidelines developed by the independent board that oversees the accounting industry. The new rules are expected to be approved by June in time for 2007 financial audits.
The commissioners "urged the SEC staff to continue to work closely with the Public Company Accounting Oversight Board (PCAOB) to make the internal controls provisions of Section 404 of the Sarbanes-Oxley Act of 2002 more efficient and cost effective."
The 2002 law, which requires companies to adopt internal controls to prevent fraud, has been criticized by small business lobbyists for creating an unnecessary burden. Under the SOX Act, PCAOB audit standards must first be approved by the SEC and cannot take effect without a vote of the commission. The commission expects the new PCAOB standard will be submitted for SEC review by the end of May or early June.
"These needed improvements in the Sarbanes-Oxley process are especially urgent for smaller companies, who will begin complying with Section 404 this year," said SEC Chairman Christopher Cox. "The result of the new auditing standard for 404, together with the SEC's new guidance to management, should make the internal control review and audit more efficient by focusing the effort on what truly matters to the integrity of the financial statements," he added.
SEC staff will focus the remaining work in four areas: aligning the PCAOB's new auditing standard (AS-5) with the SEC's proposed new management guidance under Section 404; scaling the 404 audit to account for the particular facts and circumstances of companies, particularly smaller companies; encouraging auditors to use professional judgment in the 404 process; and following a principles-based approach to determining when and to what extent the auditor can use the work of others.
Lloyd's posts more than $7 billon in record pre-tax profit
What a difference a year makes. On March 29, Lloyd's announced pretax profits for 2006 of $7.2 billion compared to the $202 million loss it posted in 2005.
Lloyd's also achieved an extremely good combined ratio of 83.1 percent, compared to 2005's 111.8 percent. The figure looks even better when compared with "an estimated average of 93 percent for U.S. property and casualty insurers, 95 percent for U.S. reinsurers, 94 percent for European insurers and reinsurers and, 86 percent for Bermudan insurers and reinsurers," according to Lloyd's announcement.
Assets in Lloyd's Central Fund increased by 14 percent to $2.856 billion from $2.487 billion in 2005. Other highlights included the following: Gross written premiums up 9.6 percent to $32.25 billion; Net written premiums rose 12.1 percent to $25.94 billion; Net earned premiums up 7.7 percent to $24.93 billion; Net claims incurred down 34.6 percent to $12.22 billion; Net operating expenses up 18 percent at $4.21 billion.
Lloyd's combined ratio in all classes of business was less than 100 percent with the lowest figure being 65 percent in "aviation" and the highest a 99 percent ratio in "energy." "Motor" (auto) was the only sector to show an increase, moving from 91 percent to 96 percent. "Reinsurance" dropped from a dizzying 135 percent to a very respectable 81 percent, while "property" went from 119 percent to 82 percent. "Casualty and "marine" were both at 89 percent.
Lloyd's Chairman Lord Levene and CEO Richard Ward noted that "we benefited from strong underlying conditions and an exceptionally low level of catastrophes." Ward stressed Lloyd's "strong competitive position" and said its results "compares well with our global peers."
Both leaders inveighed against complacency. Levene indicated "it would be unrealistic to expect such a favorable claims experience this year. With a trend for more frequent and severe natural catastrophes." While Ward stressed that "retaining our competitive edge requires an unrelenting focus on all our customers."
Levene's remarks addressed two themes: 1) Lloyd's reputation, and 2) its leading position in the UK's financial services industry.
Financial giant in U.K. and beyond
Turning to the importance of the financial sector to the UK's economy, Levene pointed out that Lloyd's "is a major component of the Financial Services industry of the UK. Indeed, we represent over 50 percent of the total London market business.
Richard Ward, who replaced Nick Prettejohn as Lloyd's permanent CEO a year ago, has emerged as a forceful leader, dedicated to reforming Lloyd's antiquated business practices. He's determined to do away with the famous slip cases full of paper documents and the four tons of paper Lloyd's produces every day. Following breakthroughs with service providers Xchanging and RI3K, as well as some of the leading brokers and Syndicate managers, he's well on his way to achieving that goal. Lloyd's Syndicates are already at 85 percent of contract certainty.
Ward's next task, taming the cycle, won't be so easy, but he's upbeat. "There is clear evidence that the market, having worked with the Franchise Performance Directorate over a number of years, is now better prepared to manage the insurance cycle," he stated. "Through a combination of underwriting for profit rather than market share, the use of state-of-the-art modeling tools and better availability and application of data, it is hoped that the market can shield itself from the worse effects of the cycle."
In his final remarks Ward thanked Lloyd's staff, indicating they have "provided strong leadership over the past year and have been instrumental in the delivery of our objectives."
