Category Archives: Insurance

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NFIP, TRIA and FIO: Points of Focus for House Financial Services Committee

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The House Financial Services Committee has released its oversight plan for the 113th Congress. This is a nonbinding plan that each standing committee must submit at the start of each new legislative session spelling out the committee’s agenda for the session.

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While much of the House Financial Services’ plan includes review of Dodd-Frank implementation and other banking related issues, it also includes three issues of importance to risk management: extension of the Terrorism Risk Insurance Act (TRIA), the National Flood Insurance Program (NFIP) and the Federal Insurance Office (FIO).

On TRIA:

“The Committee will examine the private sector’s capacity to assess and price for terrorism risk. The Committee may also consider proposals that would phase out the Terrorism Risk Insurance Program by encouraging private industry to develop dedicated capital for underwriting terrorism risks, and significantly reducing the potential Federal exposure and participation in terrorism insurance over time.”

TRIA is set to expire on December 31, 2014 with many in the industry, including RIMS, pushing for an extension of the program to 2019. The committee’s plan signals that the fight for an extension will not be an easy one.

On the NFIP:

“The Committee will monitor the implementation of the Biggert-Waters Flood Insurance Reform Act of 2012, paying particular attention to the reforms that encourage more private sector participation in the flood insurance market. The Committee will also review and consider further reforms to the National Flood Insurance Program with the goal of ending taxpayer bailouts of the program and transitioning to a private, innovative, competitive and sustainable flood insurance market. Since 2006, the GAO has designated the NFIP as a high-risk program because of its potential to incur billions on dollars in losses and because the program faces serious financial, structural, and managerial challenges.

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Due to extraordinary losses incurred following the hurricanes in 2005 and Superstorm Sandy in 2012, the program carries a debt of well over $20 billion as of January 1, 2013.”

The debate over the NFIP, which many assumed was settled in 2012, was renewed following the destruction caused by Superstorm Sandy. Committee Chairman Jeb Hensarling (R-TX) has expressed his opposition to the NFIP in the past so it comes as no surprise that the committee plans to continually review the program’s viability and sustainability.

On the FIO:

The committee’s plan also scrutinized the FIO for missing deadlines on several reports to Congress related to the insurance industry. The FIO is being urged to release “these long overdue reports without further delay.” Two of the more anticipated reports include recommendations to modernize and improve the insurance regulatory system and a report on the global reinsurance market.

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Treasury Department Under Secretary for Domestic Finance Mary Miller recently testified before the Senate Banking Committee that the modernization report would be released soon and that the FIO will be releasing other reports in the coming months.

It’s going to be a busy legislative session.

The New Reality of Risk

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In wondering what the new year has in store for the insurance industry, Marsh hosted “The New Reality of Risk – U.S. Insurance Markets and Risk Trends in 2013,” a webinar produced on the heels of their Insurance Market Report 2013 publication. The webinar touched on firming in the market, Superstorm Sandy, cat models and workers comp, among other things, with insights from:

  • Dean Klisura, U.S. risk practices leader for Marsh
  • Cliff Rich, managing director in Guy Carpenter’s global business intelligence unit
  • Duncan Ellis, Marsh’s U.S. property practice leader
  • Jon Zaffino, Marsh’s U.S. casualty practice leader
  • Chris Lang, U.S. placement leader for Marsh’s FINPRO practice
  • Claude Yoder, head of Marsh global analytics

Catastrophe Market

“One thing we have seen change dramatically in the past two years relates to cat losses,” said Klisura. As he noted, insured losses over the past 10 years have averaged $50 billion, with a spike in 2011. The industry has experienced two straight years of well above average losses — coupled with feeling the effects of low interest rates and a shaky economy. “However, the industry still remains well capitalized,” Klisura remarked.

Klisura doesn’t envision a hardening environment, but claims certain sectors of the market are in transition. “A few things risk managers should keep an eye on in 2013 are cat exposed property risk, including risk with flood zone exposures — it will be a big one,” said Klisura. He also noted that certain sectors of workers comp market will may experience changes along with complex financial institution risk and competition among insurers, which is expected to remain intense in 2013.

Reinsurance

The reinsurance market at January 1 was characterized as stable. Superstorm Sandy, crop losses and other severe weather outbreaks resulted in global losses of $60 billion, which was less than 2011 losses, but the sector continues to be challenged by the macroeconomic environment — namely, the economy. “Casualty rates increased modestly in 2012 but at January 1, 2013, renewal rates, casualty pricing stabilized,” said Cliff Rich.

Cat Limits

According to the panelists, carriers are being a little more stingy around cat limits. For cat sub limits, they are seeing carriers limiting the amount of flood coverage. For deductibles, they’re seeing a push for per-location deductibles on flood vs traditional per-occurrence deductibles. For premiums, there is renewed pressure on some cat exposed insureds and on a client by client basis. “For 2013, I think it’s much of the same we’ve seen,” said Ellis. “2012 could be the third year in a row that property insurers have not realized a profit. The big unknown? 2013 losses.” There is a potential for “trading” between retention and premium, he explained.

Cat Models

In terms of catastrophe models, Ellis feels they will change to take into account both Irene, which had insured losses of $4.4 billion, and Sandy, which had insured losses of $18 to $25 billion. This drives home the point that insureds should provide high quality data for models. “What I’ve heard is that losses from Sandy are what was expected from modeling,” Ellis said. “But models will change.”

There are several widely used models for wind and earthquake, Ellis pointed out. But that’s not the case with flood, despite flooding being the loss leading peril over the last few years. “There’s nothing consistent market-wide yet,” he said.

Casualty Market 

Jon Zaffino explained that insurer competition is strong. However, challenges may arise from clients with difficult loss experience and certain individual risks, or line of business characteristics. “It’s a tug of war between the technical and trading environment,” he said. “We may see rates flattening in some lines in 2nd half of 2013.”

  • Technical – macro factors such as loos-cost trend, interest rates, etc.
  • Trading – insurance supply/insurer appetite and market depth and breadth

Workers Comp

This segment continues to operate at historically unprofitable rates for insurers. Marsh illustrates this with a graphic based on their client accounts.

“Medical expenses as a percentage of toal claims continues to rise, along with the escalation of prescribtion drug use and abuse,” said Zaffino.” Active pre- and post-loss programs, medical cost containment measures and a variety of other technigues help clients manage their claims.

“The largest trend we’re really seeing in casualty is the need to create a comprehensive view of total cost of risk, or TCOR,” said Yoder. “For workers comp, there is much available data, advances in the way insurers calibrate their underwriting and pricing, and a wave of claims-based modeling. Plus, predictive analytics use in claims modeling is accelerating.”

Directors and Officers 

According to Chris Lang, rates in the management liability market are trending upward. As 2012 progressed, leading insueres obtained upwards of 10% increases, and average program rate increases of 5%. “Smaller sized market companies are experiencing higher rate increases than are larger companies,” said Lang. “In 2013, expect insurers’ rate discipline to continue.”

Regulatory actions are increasing. According to NERA, in 2012, settlements rose 6.6% compared with 2011, to 714.

 

Managing Risk at America’s Big Game

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As the Super Bowl gets under way Sunday in New Orleans, event organizers will be working feverishly behind the scenes, making certain that all aspects of the game go off without a hitch. From plans that focus on the potential for severe weather to controlling alcohol intake by fans to ensuring the halftime show goes on, organizers and insurers are working around the clock leading up to, during and immediately after the game. I contacted Chris Rogers, director of risk control at Aon Risk Solutions and Lori Shaw, sports and leisure practice leader for Aon Risk Solutions to get their take on the risks and how they are handled.

RM: New Orleans is known for its party atmosphere.

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How will event organizers protect employees, fans, vendors and facilities from crime and unruly visitors?

Chris Rogers: Event organizers will work closely with local law enforcement personnel and emergency response personnel to assess any risks to employees, fans, vendors or the facilities. A threat assessment will be completed and preparations made and put into place that serve to mitigate or eliminate those threats. The NFL and team owners have made a commitment to providing a safe and secure venue for everyone’s enjoyment.

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They have also worked closely with organizations, such as [Techniques for Effective Alcohol Management] T.E.A.M. Coalition, to promote the responsible use of alcohol and have provided VIP tickets for the winners of designated driver contests held throughout the season. Event organizers have received outlines and guidelines relating to security matters that are intended to be shared with their personnel and event attendees that provide additional support for those events during this time.

RM: What types of insurance needs to be in place to protect event organizers from myriad of possible risks?

Lori Shaw: Event organizers need to consider not only the traditional lines of insurance purchased by a business enterprise, such as general liability, property, workers compensation and auto, but also specialty coverages designed to protect event-specific activities, such as athletic participant legal liability, volunteer and participant accident, liquor liability, directors and officers, coverage for pyrotechnics, third-party property damage, terrorism (and threat of terrorism) and event cancellation, including adverse weather, communicable disease and non-appearance of essential performers/players/entertainers.

RM: How do event organizers navigate advertising and sponsorship exposures?  

Shaw: For large events, the advertising risk is usually carried by the broadcaster. The risk of broadcast interruption could be passed to the event organizer, and if that is the case, the event organizer would look to secure broadcast interruption insurance.

RM: What happens in the case of extreme weather, such as an off-season hurricane or rare Louisiana snowstorm?

Rogers: The NFL and other sporting organizations have developed plans over the years to address the additional and unique challenges posed by extreme weather. These plans have been developed in conjunction with public and private weather services to ensure that the best information is available to event organizers so that they can respond properly and in a timely manner. These plans are further augmented by the development of emergency contingency plans that address what will be done if the weather affects the game, either just prior to the beginning, or even during the game. If something occurs during the game, the stadium’s “shelter-in-place” plan would have to be activated.

RM: What if the half-time headlining act cannot go on? Are event organizers prepared with a backup plan?

Rogers: A backup plan will greatly depend upon when it becomes apparent that the headliner cannot go on. If it is a few days before the event, a substitute act could possibly be arranged. If the change is something that is sudden and occurs just before halftime, it will mostly depend upon who is involved and what might be an alternative. Perhaps the rest of the pageantry can be expanded or they could cut to the broadcaster’s booth for additional commentary on the game.

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Hurricane Sandy Revives Debate Over NFIP

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A building in Sheepshead Bay, Brooklyn, is flooded from Hurricane Sandy.

When the five-year extension of the National Flood Insurance Program (NFIP) was signed by President Obama in July 2012, the debate over whether the federal government had a vital role in the flood insurance market seemed to be settled. From 2008 to the signing of the long-term extension, the NFIP had been given an estimated 17 short-term extensions and been allowed to lapse on two separate occasions. Supporters, including RIMS, hoped that the long-term extension’s passage would finally bring certainty to the market, but Hurricane Sandy has once again revived debate over the program.

The NFIP was originally created in 1968 as a way to provide affordable flood insurance to those who lived in the most flood prone areas. The program remained solvent until 2005 when Hurricane Katrina put the program billion in debt.

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It remained alive by borrowing from the Treasury, but Hurricane Sandy has again placed it in financial crisis.

As the New York Times reports, “Early estimates suggest that Hurricane Sandy will rank as the nation’s second-worst storm for claims paid out by the National Flood Insurance Program. With 115,000 new claims submitted and thousands more being filed each day, the cost could reach billion at a time when the program is allowed, by law, to add only an additional billion to its onerous debt.”

Several reforms were included in the 2012 long-term extension that were meant to place the program on more financially solid ground, including: removing subsidized rates for non-primary residences, businesses or severe repetitive loss properties; increasing the limit for annual rate increases from 10 to 20%; and phasing in rate increases until actuarial rates are achieved. The legislation also requires the Federal Emergency Management Agency and the Government Accountability Office to study potential privatization of the NFIP, while the Federal Insurance Office is required to study the current market for natural catastrophe insurance, including issues of affordability.

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Supporters of the NFIP argue that these reforms should be allowed to take effect before any further changes to the program are considered, but many critics argue that more drastic reforms are needed immediately. Some critics go so far as to argue that the program should be entirely privatized.

House Financial Services Committee Chairman Jeb Hensarling has vowed to take up legislation that would do just that, stating, “As Chairman of the Financial Services Committee, I wish to inform all members in this Congress, our committee will take up legislation to transition to a private, innovative, competitive, sustainable flood insurance market.”

As long as the NFIP remains in financial trouble, expect this debate to continue.