Category Archives: Insurance

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Senior Insurance Executives Offer Advice on How Risk Managers Can Thrive in a Hard Market

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The property/casualty insurance market cannot yet be called hard. But “firming” is the most popular word of the week here at the RIMS 2012 Conference & Exhibition in Philadelphia. The rates for different lines of coverage are increasing at different levels, and some are even remaining flat. But there is no doubt that the extended soft market that insurance buyers have been enjoying for much of the past decade is about to disappear. If it hasn’t already.

For risk mangers, this presents some hard choices.

Aon Risk Solutions CEO of U.S. retail business Eric Andersen summed up the main challenge well today at the conferences senior executive panel discussion: “you’re forced to make choices inside a budget that’s not increasing” as the cost of coverage does.

Fortunately, he and the other insurance titans in the room had some advice for risk managers who will have to live through a hardening market with more expensive insurance. “No one is budgeting more money for insurance,” said Andersen. “And if the prices are going up, you’ve got to figure out where you need it, where you like it and where you can do without it.”

Forgoing coverage means losing some peace of mind, of course, but that can be eased if it comes along with a change in mindset. “Today we tend to buy insurance from the bottom up,” said Andersen. “We get as much as we can.”

Switch your mentality to instead focus first on the must-haves. Then, fill in the other key gaps. After that? Well, you will just have to live with some added risk. But as long as you’re protected against those truly catastrophic risks that could take down you company, the new risk tolerance is one the company should be able to accept. What it really comes down to, said Andersen, is “knowing where you can take losses inside your own organization … and then buying things that actually matter as opposed to what you’ve always bought.”

Aon’s chief rival, David Bidmead, the U.S. CEO of Marsh, said that this new reality also means risk managers will need to be more innovative if they want to continue to help their companies thrive. “Don’t get too comfortable with the ongoing suitability of what you’ve done in the past,” said Bidmead.

Just because something “may have worked for the past decade—and it may have worked really well—doesn’t mean it’s going to work in the future,” said Bidmead. Instead, he said, risk managers need “to challenge convention, to explore and identify credible alternatives to the way that you’ve done things in the past, to be open to new ideas, to be creative.”

Fortunately, all news isn’t bad news.

The market doesn’t lack capacity and while prices will increase, you should be able to navigate through the rougher waters as long as you keep the lines of communication open with your bosses. Essentially, just make sure they know that the same protection you formerly purchased now costs more and that some of that security may disappear if your budget stays the same.

“Make sure you’re well informed where the market is through your brokers and insurance partners and communicate that with your management to set the expectations early,” said John Lupica ACE USA’s chairman of insurance. “It’s still a very tradable market—there’s ample capacity to get your risks placed. It may cost more in certain lines of business, but it’s one thing you can manage through with good, open communication.”

And according to FM Global CEO and Chairman Shivan Subramaniam, things could be worse. This looming market turn will certainly not be as friendly as that past few years have been, but at least this won’t be your father’s hard market. In one key way, this upcoming hard market will be much easier for risk managers than the last one was.

“[You] have far more analytics, far more technologies and far more models at your disposal to present your case much better than what you had in 1986,” said FM Global CEO and Chairman Shivan Subramaniam. “You have a lot of knowledge available to you at your finger tips to help you prepare for any kind of market. And I think that’s something that you need to take advantage of.”

Property Insurance Rates Still Rising

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Risk managers have long been hoping that the soft insurance market would never end. For years, rates have been low and risk transfer has been relatively cheap. Increasingly obvious signs of a market turn have been surfacing for a while now, so the fact that rates are now hardening isn’t exactly a shock. But it is nevertheless difficult medicine to swallow. And when it comes to insuring commercial property, especially when it has natural disaster exposure, the good ol’ days are now essentially over.

A first quarter pricing report from Marsh confirms the bad news, showing that property insurance rates have increased between 10%-20% for natural-catastrophe-exposed property. Even accounts with no disaster risk are about 10%.

“In the U.S., the property market continues to be in a state of transition with insureds more likely to experience rate increases than those renewing with flat or modest rate decreases,”  said Dean Klisura, leader of Marsh’s U.S. risk practices unit. “We believe that this trend will continue in the short term, with the average rate of increase continuing to rise month over month.”

As they say, everything ends badly — otherwise it wouldn’t end.

Billy Beane and Baseball’s Big Spenders

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For me, the surest sign that spring has arrived is the beginning of the baseball season. And although the season officially kicked off with a series of games between the Oakland Athletics and Seattle Mariners last week in Japan, it really began in earnest last night when the defending World Series champion St. Louis Cardinals beat the new-look Miami Marlins on Opening Night.

In the spirit of the new baseball season, I recently had the chance to speak to Billy Beane, the general manager of the aforementioned Oakland A’s and the subject of the book and movie Moneyball, for the latest issue of Risk Management. Beane will also be delivering a keynote address at the upcoming RIMS 2012 Annual Conference & Exhibition in Philadelphia. In our interview, Beane discussed how he uses data to run a competitive baseball team and addressed some of the risk management and insurance concerns that a general manager of a baseball team has to face.

One comment I found particularly interesting was the following:

About 10 years ago, we’d insure player contracts. What’s interesting is that, for years, say you signed a player to a five- or six-year contract, you could get that entire contract insured. And I remember one time [our insurer] came to us and said they’re no longer going to insure contracts for longer than three years. After three years, they need to be underwritten again. And my assistant and I said, “that’s an insurance company telling us that it’s not a good idea for us to sign players beyond three years.”… So that was basically them telling us these aren’t good bets.

What makes this comment so interesting is that it doesn’t seem like this philosophy is shared around the league. For instance, this past offseason the Los Angeles Angles of Anaheim signed first baseman Albert Pujols to a 10-year, $240 million contract while the Detroit Tigers gave first baseman Prince Fielder $214 million over 9 years. Not to be outdone for the privilege of paying players $20 million a year, just last week the Cincinnati Reds gave their star first baseman Joey Votto a 10-year, $225 million contract extension, while the San Francisco Giants extended pitcher Matt Cain’s contract by 5 years for $112.5 million.

Regardless of the value of these contracts, they all go against Beane’s (and his insurer’s) no-more-than-three-years rule and it’s hard to see how these players will deliver full value on their deals. Granted they are some of the best players in the game right now but injury and age could take their toll on performance at any time. Pujols, in particular, may be one of the greatest baseball players of all time, but he is 32. Not many players, no matter how good, are still productive (or even able to play) in their 40s. These signings seem to illustrate the difference between baseball’s big markets haves and it’s small market have-nots like the Oakland A’s. The richer clubs are simply able to take on risks that Beane cannot.

Or maybe there’s a more insidious method to their madness, as Jonah Keri writes on ESPN’s Grantland:

Sweating potential value, opportunity cost, and other related principles might be focusing on the wrong details. The recent $2 billion Dodgers sale points to a baseball landscape that has changed dramatically. Current and prospective owners see an industry that grew revenue through a tough recession and now stands poised to rake in far more money, with media deals rising, the economy improving, and the game in the midst of its longest period of uninterrupted labor peace since the advent of free agency.

According to Keri, these owners are making what they think are smart choices given the current market. But these choices may be based on the assumption that that the value of their clubs can only go up into the rarefied billion-dollar air.  So what’s a few hundred million here and there? A baseball team is basically a license to print money. Obviously, nothing can ever go wrong with that strategy. Right, housing market?

Storm Risk Reaches Well Beyond Tornado Alley

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We’ve heard it over and over again: 2011 was the costliest year on record for natural disasters. From triple-digit heat waves and devastating drought to overflowing rivers and deadly tornadoes, the U.S. rang up natural disaster costs in the billions and much time and effort of rebuilding.

But what wasn’t talked about so much was the fact that much of the tornado risk was located outside of the traditionally storm prone tornado alley, according to a new report by CoreLogic. “The apparent increase in the number of incidents and shift in geographic distribution of losses that occurred last year in the U.S. called the long-held notion of risk concentration in Tornado Alley into question, and is leading to changes in risk management policy and procedure,” said Dr. Howard Botts, vice president and director of database development for CoreLogic Spatial Solutions.

CoreLogic’s “Tornado and Hail Risk Beyond Tornado Alley” report analyzes hazard risk at the state-level across the U.S using the company’s wind and hail data layers. Key findings include:

  • Tornado risk actually extends across most of the eastern half of the U.S. rather than being confined to the Midwest
  • According to data from the National Oceanic and Atmospheric Association (NOAA), of the top ten states with the highest number of tornado touchdowns between 1980 and 2009, only three actually fell within Tornado Alley
  •  At least 26 states have some area facing extreme tornado risk
  • At least 11 states have significant areas facing extreme hail risk, and almost every state east of the Rocky Mountains has some area facing a moderate or higher level of hail risk
  • The area of highest hail risk extends outward from the central Great Plains to include states as far east as Georgia and the Carolinas

These findings have obvious insurance implications, but it goes beyond that to disaster preparation and natural catastrophe risk management in areas not historically prone to such events. CoreLogic released the maps below, indicating tornado peril in non-tornado alley states.

Insurers and residents alike should be aware of the high risk of tornadoes, wind and hail in these areas. For the complete report, including and in-depth descprition of how CoreLogic created the above maps, click here.