Author Archives: Caroline McDonald

About Caroline McDonald

Caroline McDonald is a writer and former senior editor of the Risk Management Monitor and Risk Management magazine.
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First Quarter 2017 Sees Upward Rate Movement

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U.S. insurance buyers may see higher rates this year, as the composite rate index for commercial accounts increased plus 1% for the first time in 20 months, MarketScout reported today.

Rates for business interruption, inland marine, workers compensation, crime, and surety coverages held steady in the first quarter, while rates for all other coverages either moderated or increased.

“The plus 1% composite rate index was driven by larger rate increases in commercial auto, transportation, professional and D&O rates,” Richard Kerr, CEO of MarketScout said in a statement. “We also recorded small rate increases in the majority of coverage and industry classifications. So, 2017 begins with insurers moving away from the rate cuts of 2016.”

Small accounts (up to $25,000) were assessed a 1% rate increase in the first quarter of 2017. Medium accounts ($25,001 to $250,000) were flat, while both large ($250,001 to $1 million) and jumbo accounts (more than $1 million) saw rate decreases of minus 1% and minus 2% respectively, MarketScout said.

By industry class, every industry experienced a move toward higher rates in the first quarter, with transportation seeing the largest rate increase at plus 5%.

Lloyd’s to Establish EU Base in Brussels

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One day after the U.K. set in motion its process for withdrawal from the European Union by triggering Article 50, Lloyd’s announced that it has chosen Brussels as the location for its European Union subsidiary.

A market of syndicates in London, Lloyd’s said its intention is to be ready to write business for the Jan. 1, 2019, renewal season. The move will enable the company to write risks from all 27 European Union countries and three European Economic Area states once the U.K. has left the EU. Because Britain remains a full member of the EU for at least two more years, there is no immediate impact on existing policies, renewals or new policies, including multi-year policies written during this period of time, according to the insurer.

In 2015, the EEA accounted for £2.93 billion ($3.66 billion) or 11% of its gross written premium, the organization said.

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“It is important that we are able to provide the market and customers with an effective solution that means business can carry on without interruption when the U.K. leaves the EU,” Lloyd’s Chief Executive Inga Beale said in a statement. She added that Brussels met the critical elements of providing a robust regulatory framework in a central location.

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“We are a market, we are unique, we are not like an insurance company – we needed to find a regulator with the resources and the bandwidth to regulate the Lloyd’s market,” Chairman John Nelson told Reuters.

Nelson said the Brussels subsidiary would employ dozens of staff in areas such as compliance and information technology, unlike banks that have said they may move hundreds of staff to the EU. The regulated company will also have its own board.

U.S. insurer AIG recently announced it was moving its headquarters from London to Luxembourg, and Lloyd’s insurer Hiscox is in the process of choosing between Luxembourg and Malta.

While the United Kingdom’s relationship with the European Union may have sometimes been a fractious one, the decision by 52% of its voters to leave the world’s biggest single market was an outcome that many experts and businesses did not expect, Neil Hodge wrote in the August 2016 Risk Management Magazine.

A month before the June 23 referendum, the 100 Group, which represents finance directors from the U.K.’s biggest companies, conducted a survey that found that not one of its members supported a British exit—or “Brexit”—from the EU. This view was echoed by Carolyn Fairbairn, director-general of the U.K.’s leading pro-business lobby group, the Confederation of British Industry (CBI). “The decision to leave the EU is not one that business would have chosen to take,” she said. “We know that the majority of our members wanted to stay in.”

Increasing Risk Complexity Outpaces ERM Oversight

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More organizations are recognizing the value of a structured focus on emerging risks. The number of organizations with a complete enterprise risk management (ERM) program in place has steadily risen from 9% in 2009 to 28% in 2016, according to the N.C. State Poole College of Management’s survey “The State of Risk Oversight: An Overview of Enterprise Risk Management Practices.”

Yet this progress may lag behind the increasingly complicated risks that need addressing. Of respondents, 20% noted an “extensive” increase in the volume and complexity of risks the past five years, with an additional 38% saying the volume and complexity of risks have increased “mostly.” This is similar to participant responses in the most recent prior years. In fact, only 2% said the volume and complexity of risks have not changed at all.
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Even with improvements in the number of programs implemented, the study—which is based on responses of 432 executives from a variety of industries—found there is room for improvement. Overall, 26% of respondents have no formal enterprise-wide approach to risk oversight and currently have no plans to consider this form of risk oversight.

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Organizations that do have programs continue to struggle to integrate their risk oversight efforts with strategic planning processes.

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“Significant opportunities remain for organizations to continue to strengthen their approaches to identifying and assessing key risks facing the entity especially as it relates to coordinating these efforts with strategic planning activities,” the researchers found.

According to the study:

Many argue that the volume and complexity of risks faced by organizations today continue to evolve at a rapid pace, creating huge challenges for management and boards in their oversight of the most important risks. Recent events such as Brexit, the U.

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S. presidential election, immigration challenges, the constant threat of terrorism, and cyber threats, among numerous other issues, represent examples of challenges management and boards face in navigating an organization’s risk landscape.

Key findings include:

Software May Help Oil Companies Determine a Location’s Earthquake Potential

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New software for monitoring the probability of earthquakes in a targeted location could help energy companies determine where they can operate safely.

The free tool, developed by Stanford University’s School of Earth, Energy & Environmental Sciences, helps operators estimate how much pressure nearby faults can handle before rupturing, by combining three important pieces of information:

  • Location and geometry of the fault
  • Natural stresses in the ground
  • Pressure changes likely to be brought on by injections

“Faults are everywhere in the Earth’s crust, so you can’t avoid them. Fortunately, the majority of them are not active and pose no hazard to the public. The trick is to identify which faults are likely to be problematic, and that’s what our tool does,” said Mark Zoback, professor of geophysics at Stanford, who developed the approach with graduate student Rail Walsh.

Fossil fuel exploration companies have been linked to the increased number of earthquakes in some areas—Oklahoma in particular—that have been determined to be the result of fracking. According to the Dallas Morning News:

Only around 10% of wastewater wells in the central and eastern United States have been linked with earthquakes. But that small share, scientists believe, helped kick-start the most dramatic earthquake surge in modern history.

From 2000 — before the start of America’s recent energy boom — to 2015, Oklahoma saw its earthquake rate jump from two per year to 4,000 per year. In 2016, its overall number fell to 2,500, but its quakes grew stronger.

Five other states, including Texas, Arkansas and Kansas, have seen unprecedented increases in ground shaking tied to the wells, although North Texas had no earthquakes strong enough to be felt last year.

The insurance industry has also been monitoring the rise in temblors. A Swiss Re report concluded, “It’s highly likely that this dramatic rise in earthquake occurrence is largely a consequence of human actions.”

According to the report:

Along with the increase in seismicity, Oklahoma has seen a growth in its oil and natural gas operations since 2008, specifically hydraulic fracturing (often referred to as “hydrofracking” or “fracking”) and the disposal of wastewater via deep well injection. Both hydrofracking and deep well injection involve pumping high-pressure fluids into the ground. A consensus of scientific opinion now links these practices to observed increases in seismic activity. Earthquakes where the cause can be linked to human actions are termed ‘induced earthquakes,’ and present an emerging risk of which the insurance industry is taking note.