Category Archives: Property/Casualty

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Planning for Extreme Floods

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Flooding

Companies in the United States should begin preparing now for climate change, which is predicted to cause extreme weather conditions, according to FM Global’s report, The Impact of Climate Change on Extreme Precipitation and Flooding. As the climate warms, areas that are dry will become drier and moist areas will see higher precipitation. The characteristics of precipitation will also change. “We feel cli­mate change not so much through subtle changes in the mean, but through changes in the extremes,” MIT Prof.

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Kerry Emanuel said in the report.

While the overall amount of precipitation might remain the same, it will become less frequent but more intense.

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A specific region of the country that has historically seen 10 inches of rain each May might see the same volume that month, for example, but those 10 inches may occur in a much shorter period of time, increasing the risk of flooding, according to the study.

By the end of the century, as temperatures rise, it is possible for precipitation to change by 8%, which could exacerbate wildfires in some areas and flooding in others.

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The danger is that, because these extreme events are infrequent, they lack urgency, so planning can easily be put off. Risk managers are advised to check their facility’s resilience in terms of the building’s ability to withstand flooding, focusing on 500-year flood levels rather than 100-year.

Extreme wet or dry conditions can affect a company’s buildings, machinery, data centers, transportation networks, supply chains, people and sales. Organizations should focus on water management—diverting water from property, optimizing drainage and protecting water supplies, and they should consider new weather extremes when managing supply chains.

Flood hazard mapping is increasingly proving helpful as understanding of water risk is improving, Louis Gritzo, vice president and manager of research with FM Global, wrote in “Mitigating Evolving Water Threats,” from this month’s Risk Management Magazine. Advances in technology have led to improvements in weather satellites, geospatial data acquisition and physical model development, making old models obsolete. Anyone working with information from a flood map that is more than 15 years old should consider an update, he wrote.

Those with a flood map should make sure it includes potential coastal flooding areas as well as river flooding, also taking into account the local topography of coastal locations. “Areas along the coast that are surrounded by hills and mountains will likely experience far more wind-blown water (storm surge), as the local terrain directs more water in spaces between steeper slopes,” Gritzo wrote.

Terrorism Incidents Down, Disruption Up in 2015

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A number of high-profile terrorism attacks worldwide have raised people’s fears this year, but the reality is that the number of attacks and deaths from such attacks actually decreased in 2015, according to Marsh’s 2016 Terrorism Risk Insurance Report.
Marsh2

The report summarizes terrorism risk insurance trends, benchmarks terrorism insurance take-up rates and pricing, and offers risk management solutions for terrorism exposures.

The more current attacks, often perpetrated by a single individual or small group, are different from those carried out in the 1990s and 2000s when high profile locations were targeted. Individuals carrying out the more recent attacks may have no direct contact with a known terrorist organization, but could be drawn to them through writings and video, particularly on the internet, Marsh said.

These events can be very disruptive to operations in some companies. In the travel industry, for example:

  • About 10% of American travelers canceled booked trips due to the recent attacks in Egypt, France, Lebanon and Mali, which impacted $8.2 billion in travel spending, according to a survey by YouGov.
  • Booking losses for Air France were estimated to be €50 million ($56 million), the company said in a statement.
  • Airlines, hotel chains and travel websites experienced drops in their stock prices after this year’s airport bombing in Brussels.

In the United States, the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) offers businesses a federal backstop against terrorism-related losses. While the overall take-up rate for TRIPRA coverage in the U.S. increased slightly in 2015, it has remained in the 60% range since 2009, Marsh said.

Managing terrorism risk requires a combination of strategies that protect people, property and finances. On the financial side, the choice is whether to retain or transfer the risk with insurance. But the changing pattern of terrorism risk has some companies asking if they are adequately insured for business interruption and related losses. They also wonder how to prepare for potential losses from cyber terrorism and other events.

Other key takeaways from the report include:

  • As small group and “lone wolf” terrorist attacks appear to be the changing face of terrorism, many organizations are assessing their coverage for indirect losses stemming from business interruption risks.
  • Following the 2015 passage of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), take-up rates in the US edged up for TRIPRA terrorism coverage embedded in property programs.
  • Among industry sectors, media organizations had the highest take-up rate for terrorism insurance in 2015.
  • Workers’ compensation markets for terrorism risks generally stabilized.
  • The number of Marsh-managed captives accessing TRIPRA increased by 17% from 2014 to 2015, but many captives that could offer a terrorism program do not.
    19906-TRIR-Infographic

 

July P&C Composite Rate Steady, Transportation Increases

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The property and casualty composite rate for July was the same as June’s rate, which was minus 1%, MarketScout reported today, adding that insurers are working to stop the downward trend.

“While insurers continue to grant minor rating concessions, many are pushing for an end to any further rate reductions,” Richard Kerr, CEO of MarketScout said in a statement. In the transportation sector, however, pricing is increasing “on all but the very best accounts. The poor loss experience in transportation has prompted underwriters to demand rate increases and restrict underwriting appetite.” Insureds that are unable to convinceBarometer underwriters they can control losses are left with few options “and ultimately end up paying a much higher rate/premium which impacts their profit margins,” he said.

Kerr continued that insurance buyers in the transportation industry are complaining about the lack of cooperation they are seeing from insurers as they try to manage their risk portfolio. “Business owners and corporate CEOs are concerned their insurance premiums will be larger than what was budgeted therefore negatively impacting net profits,” he said.

He advised these insureds to “allocate capital towards implementing loss control and companywide safety programs. That is how they will get cooperation from their insurers.”

A comparison of June 2016 to July 2016 rates by coverage classification reveals that workers compensation and property coverages were the most aggressively priced at minus 2%. Business interruption, business owners policies (BOP), fiduciary and directors & officers all moderated by moving rates from minus 1% to flat, or no increase. Professional liability rates moved from down 2% to down 1%. Rates for all other coverages were unchanged.
Rates-coverage class

There were no rate adjustments by account size from June to July.
Account size

By industry classification, rates for public entities moved up from minus 1% in June to flat or no increase in July. Transportation accounts were assessed at the largest rate increases from up 1% in June to up 3% in July, according to MarketScout.
Industry class

P&C Insurers Face Lower Profit Margins

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High insured losses from natural catastrophes, challenges from the personal auto business and pricing competition will make it more difficult for the property and casualty industry to maintain the favorable underwriting results it has seen for the past three years, according to S&P Global Market Intelligence.

In its U.S. P&C Insurance Market Report, S&P predicts an increase in the industry’sDown chart2 statutory combined ratio to 99.5% in 2016 from 97.6% in 2015 and reduction of pretax returns on equity to 8.7% from 10.8%—or to 7.5% from 9.9% when adjusting for the impact of prior-year reserve development.

“Profit margins are projected to be much narrower than they have been in the last few years, unless something dramatic happens,” report authors Tim Zawacki, senior editor and Terry Leone, manager of insurance research at S&P Global Market Intelligence said in a statement. “While insurers have wisely accounted for the fact that they haven’t been able to depend on investment gains to subsidize underwriting losses, they still need to practice restraint as they seek growth.”

Commercial Lines
The commercial lines combined ratio is projected to increase to 95.1% from 93.4% for 2015, which represented the third-consecutive year that the measure of underwriting profitability had ranged between 93.3% and 93.5%.

According to the report, premium growth in the commercial lines has benefited from factors such as slow, but steady macroeconomic growth and rate increases in commercial auto business, offset by continued downward pressure on commercial property rates. The outlook anticipates that the 93.9% combined ratio in the workers compensation line in 2015—which marked the first sub-100% result in that business since 2006—will not be repeated and that historically favorable results of the past three years in commercial multiperil and the fire and allied lines will begin to normalize over time.

Factors such as abundant reinsurance capacity, favorable underwriting results and relatively high levels of capitalization have contributed to downward pressure on commercial lines rates. The outlook assumes that carriers will continue to exhibit discipline in their underwriting, as recent contractions in Treasury yields in the aftermath of the U.K.’s June Brexit vote offer a reminder of the reinvestment risk the industry continues to confront, in what remains a low-for-long interest rate environment, S&P said.

Key observations
• Reduced Profitability: The P&C industry’s pre-tax ROE is projected to decline about 2 percentage points in 2016 while its combined ratio, which measures expenses incurred relative to premiums earned, is projected to increase to 99.5%, the highest level since 2012.
• Increased Investment Risk: Declining Treasury yields in the aftermath of the U.K.’s Brexit referendum have reinforced the challenges the industry faces to earn reliable, low-risk investment income, putting additional pressure on underwriting discipline.
• Weak First Half: Large increases in the amount of insured catastrophe losses during the first half of 2016 will negatively impact loss ratios in several business lines that have produced historically favorable results during the past three years.
• Personal lines: Historically unfavorable results in the private-passenger auto business are projected to deteriorate further in 2016 as miles driven by Americans continue to rise due to low gas prices. They will begin to improve once broad-based rate increases fully take hold, but this will take some time.
• Financial Results Hinge on Auto Line Performance: Private auto lines accounted for 34.4% of the industry’s 2015 direct premiums and, as financials demonstrated, the performance of those lines have played a significant role on the fate of underwriting.
• Future Issues: Favorable reserve development, broad access to reinsurance capacity, and a series of benign hurricane seasons have provided tailwinds to the industry in recent years. But none of those elements will continue in perpetuity and the absence of any one of them could create additional hurdles for the industry from a profitability perspective in 2016 and beyond.