Category Archives: Insurance

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After 3 Years of Increases, Total Cost of Risk Down 1%

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Buyers of commercial insurance, who have seen relatively stable to slightly increasing rates over the past three years, reported paying 1% less to cover their total cost of risk than in 2013, according to the 2015 RIMS Benchmark Survey.

“The 2014 survey results reflect the overall stability of the U.

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S. property/casualty market. One notable driver is the increasing role of alternative capital in assisting reinsurers to deal with economic uncertainties. A related factor is the rising importance of predictive models among insurers, not only in the area of property, but also for cyber and casualty,” Jim Blinn, executive vice president and global product manager at Advisen, said in a statement.

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Looking ahead to the second half of 2015, Blinn said commercial property/casualty insurers are beginning to see a softening market. “We are looking at a period of rate decreases in insurance premiums owing to rising competition in the market and more than enough available capacity.”

The survey, which encompasses industry data for more than 52,000 insurance programs from over 1,400 organizations, found that risk managers and underwriters have identified climate change as one of this decade’s defining issues. “It continues to be a cause of concern among companies and organizations as evidence linking it to flood and other natural disasters continue to mount. Already, regulators such as the U.S. Environmental Protection Agency (EPA) are sounding the alarm for the high economic cost of climate change,” according to the study.

Key findings in 2015 include:

  • Slight decrease in TCOR following three years of increases.
  • Average TCOR fell 1% from $10.90 per $1,000 of revenue in 2013 to $10.80 in 2014.
  • Management liability, workers compensation, liability, and property costs declined.
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  • Risk management administration costs dropped 5% as costs for both outside services and risk management departments declined.

Cyber Blackout Could Cost Insurers $71 Billion, Lloyd’s Reports

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A cyberattack targeting the U.S. power grid would have widespread economic implications, resulting in insurance claims of between $21.4 billion and $71.1 billion in a worst case scenario, according to a report by Lloyd’s.

Lloyd’s and the University of Cambridge’s Centre for Risk Studies recently released “Business Blackout,” which examines the insurance implications of a major cyberattack using the U.S. power grid as an example. In the scenario outlined, malware is used to infect control rooms for generating electricity in areas of the Northeastern U.S. The malware goes undetected and locates 50 generators that it can control, forcing them to overload and burn out. The scenario, described as “improbable but technologically possible,” leaves 15 states in darkness, meaning that 93 million people are without power.

Economic impacts include direct damage to assets and infrastructure, decline in sales revenue to electricity supply companies, loss of sales revenue for businesses and disruption to the supply chain. The total impact to the U.S. economy is estimated at $243 billion, rising to more than $1 trillion in the most extreme version of the scenario.

Claimant types fell into six categories:

Power generation companies

• Property damage to their generators.

• Business interruption from being unable to sell electricity as a result of property damage.

• Incident response costs and fines from regulators for failing to provide power.

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Defendant companies

• Companies sued by power generation businesses to recover a proportion of losses incurred under defendants’ liability insurance.

Companies that lose power – companies that suffer losses as a result of the blackout.

• Property losses (principally to perishable cold store contents).

• Business interruption from power loss (with suppliers extension).

• Failure to protect workforces or causing pollution as a result of the loss of power.

Companies indirectly affected – a separate category of companies that are outside the power outage but are impacted by supply chain disruption emanating from the blackout region.

• Contingent business interruption and critical vendor coverage.

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• Share price devaluation as a result of having inadequate contingency plans may generate claims under their directors’ and officers’ liability insurance.

Homeowners

• Property damage, principally resulting from fridge and freezer contents defrosting, covered by contents insurance.

Specialty

• Claims possible under various specialty covers, most importantly event cancellation.

 Other key findings of the report include:

• Responding to these challenges will require innovation by insurers. The pace of innovation will likely be linked to the rate at which some of the uncertainties revealed in this report can be reduced.

• Cyberattack represents a peril that could trigger losses across multiple sectors of the economy.

• A key requirement for an insurance response to cyber risks will be to enhance the quality of data available and to continue the development of probabilistic modelling.

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• The sharing of cyberattack data is a complex issue, but it could be an important element for enabling the insurance solutions required for this key emerging risk.

Linking ERM and the Insurance Underwriting Process

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Enterprise Risk Management (ERM), in one form or another, has been around for almost two decades. The number of publicly traded companies, especially those in highly regulated industry sectors, have been deploying the ERM process primarily because they were pushed (explicitly or implicitly) to do so by the major credit rating agencies, government mandates such as SEC 33-9089 or Dodd-Frank, their internal/external auditors, or members of the board of directors.  No matter where the spark came from, however, the number of companies utilizing the ERM process continues to grow.

CFOs, CROs, and risk managers that have been practicing ERM for years have been incurring the expenses for doing so. As ERM programs mature it might be time to consider, in monetary terms, the value the company and its insurers places on all the work that has been done over the years. CFOs ask questions about return on investment (ROI) all the time – why not about ERM? Linking enterprise risk management and the insurance underwriting process is one approach to produce a tangible result. Because the vast majority of commercial insurance renewals are Jan. 1, CROs and risk managers should consider initiating a discussion with some of their insurers to determine the potential credits for having a functioning ERM program.

Brokers typically represent the vast majority of larger middle-market and Fortune 1000 publicly traded accounts. Brokers start to work with their larger accounts months before renewal dates and assemble a submission package for insurance underwriters. The inclusion of a timely and relevant ERM report to the underwriting submission that demonstrates the changes to the risk profile of the company should make a stronger case for favorable rate considerations for their clients. The general headings that we recommend for discussion within the underwriting submission include:

• Risk organization and governance

• Risk appetite, tolerance and limits

• Risk metrics and measurement

• Risk management process, procedures and controls

• Risk monitoring, reporting and communication

These are the same general areas that insurers themselves are being asked to discuss with their own regulators as part of the new Own Risk and Solvency Assessment (ORSA) soon to be issued by the National Association of Insurance Commissioners. If the broker or insurer does not think that having a functioning ERM program does not merit a price reduction – especially for directors & officers liability insurance – investigate further and dig deeper. Early in the renewal process is a good time for the risk manager, CRO, or CFO to meet directly with underwriters to discuss their ERM from two different perspectives: the amount of rate reduction, or the steps that could be taken to improve the risk profile enough to warrant a premium reduction.

Executive management of a company that adopted and implemented an ERM program five years ago should be considering the return on the investment that the company has made over the years. It will be up to the CFO and risk manager to demonstrate how the ERM process has been used to either change or improve the company’s risk profile from what it had been. We suggest a close working collaboration between the company and their insurance broker to craft an underwriting submission that details the benefits of the ERM program.

The collaboration would also be enhanced by including a company representative such as the CFO on the team, to represent the company in front of underwriters that may be encountering this negotiating tactic for the first time. Since the majority of corporate insurance renewals take place on Jan. 1, initiating a conversation in the summer with the insurance broker(s) involved would not be a bad idea. One caveat however, ERM in one company is not ERM in another. Completing a risk identification and assessment does not an ERM program make.

P&C Rates Remain Flat

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The property and casualty insurance market remained flat through the first four months of this year, with many large P&C insurers holding a steady line, as rates, for the most part, have remained unchanged, according to MarketScout.

“We are in the insurance doldrums. There really isn’t even a breeze of significant movement anywhere,” Richard Kerr, CEO of MarketScout said in a statement. “The absence of rate movement could be yet another signal that insurers simply are not going to participate in a price-slashing war as was done in previous market cycles. Low interest rates and better underwriting tools are making insurers cautious.”

By coverage classification, only one line—business interruption—was down from last month at minus 1% versus flat, or zero increase. Workers compensation, directors and officers and EPLI were up from flat to plus 1%, according to the report.

Industry classes balanced out rate movement with contracting adjusting from plus 1% to flat, habitational from plus 1% to plus 2%, and public entity up from flat to plus 1%.

Measured by account size, small accounts (up to $25,000 premium) were up from plus 1% to plus 2%. Large accounts were down from flat to minus 1%. Rates for all other account sizes remained unchanged.

The National Alliance for Insurance Education and Research conducted pricing surveys used in MarketScout’s analysis of market conditions.

Following is a summary of June 2015 rates by coverage, account size  and industry class: