Category Archives: Property/Casualty

Time to Get Serious About Climate Change Risks

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While arguments from climate change deniers have subsided, there is still discussion about the cause of climate change—natural or man made? But these arguments are mere time-wasters. Right now it’s critical to put the focus on managing this risk.

Insurers have it right. For years they have been pointing to the urgent need to deal with the issues surrounding climate change. Insurers know this global risk needs to be dealt with now—and in the future—and they can’t afford to get it wrong.

Johnny Chan, Ph.D., director of the Guy Carpenter Asia-Pacific Climate Impact Center said it best: “The debate on climate change and global warming has been intensely polarized. A great deal of this ‘noise’ has clouded the very real and emerging issues that we as an industry and society need to address. In order to adapt to climate change and the changing risk landscape, it is necessary to cut through this noise and focus on objective decisions to mitigate both the financial and social risks associated with climate change.”

Guy Carpenter said in a study on the risks of global warming that the biggest threat is rising sea-levels. According to the report, the greatest concern is coastal flooding, projected to increase as sea levels rise at least one to two feet by the end of the century. In other words, storms such as Superstorm Sandy on the U.S. East Coast and Cyclone Nilam in Eastern India are expected with greater frequency and severity.

Post-Sandy, we’ve seen how far-reaching the effects of a mega-storm can be. In fact, 25 miles or so away from the New York/New Jersey shoreline, northward along the Hudson River where I live, homes, businesses and communities were devastated by the storm surge. A number of businesses have closed and damaged homes still stand boarded and empty.

Bloomberg Businessweek reported that as the Federal Emergency Management Agency moves forward with its plans to update flood maps nationally, 350 coastal counties—and 32,000 homes—will be impacted. Homeowners and business owners are reeling from the price of flood insurance, which will escalate even more in designated areas unless they raise structures. One couple in Old Greenwich, Conn., will pay $300,000 to raise their home 15.5 feet, according to the article. Residents of towns that elect not to adopt the maps will not be eligible for National Flood Insurance Program coverage.

Hard-hit New York and New Jersey are taking the threat of rising seas seriously with announcements that a number of coastal structures will need to be raised. New York City Mayor Michael Bloomberg in June declared a sweeping plan to help combat future flooding. The plan, which would include building flood walls, levees and bulkheads along 520 miles of coast, was projected to initially cost $20 billion.

Guy Carpenter’s report recommends that coastal areas re-examine their flood strategies including dykes and seawalls. Inland urban communities aren’t immune, as winds and heavy rains can cause flooding. These areas need to have storm water management infrastructure in place to accommodate larger volumes of rainwater and should upgrade codes and standards for infrastructure and land use that permits rainwater catchment basins.

While these preparations should be a priority for governments, they also compete with the need to replace aging infrastructures everywhere. Bridges, roads and water systems need repairs or replacement in every corner of the country. But many communities, crippled by debt and shrinking workforces, no doubt are focusing on needs as they arise. Hopefully the two can go hand-in-hand so that risk managers can build in flood control and other upgrades as they make the improvements so badly needed.

Hurricane Sandy Rebuilding Task Force Releases Recommendations

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Hurricane Sandy damage to New Jersey boardwalk

President Obama’s Hurricane Sandy Rebuilding Task Force released their findings yesterday, sharing 69 recommendations to repair existing damage and strengthen infrastructure ahead of future natural disasters.

The task force encouraged an emphasis on new construction over simple repair, citing the impact of climate change on severe weather events.

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“More than ever, it is critical that when we build for the future, we do so in a way that makes communities more resilient to emerging challenges such as rising sea levels, extreme heat, and more frequent and intense storms,” the report said. Construction designed for increasingly dangerous storms, infrastructure strengthened to prevent power failure and fuel shortage, and a cellular service system that can subsist during disasters are all critical investments to prevent future loss.

Recommendations included streamlining federal agencies’ review processes for reconstruction projects, revising federal mortgage policies so homeowners can get insurance checks faster, and making greater use of natural barriers like wetlands and sand dunes.

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The team also said that planners need better tools to evaluate and quantify long-term benefits of future projects along the shoreline, but did not detail what would be best ecologically and economically.

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According to USA Today, Sen. Charles Schumer (D-N.Y.) said the Sandy task force report shows that “we have much work to do hardening our energy, telecommunications and transportation infrastructure,” and that “the federal government must be a proactive partner with local governments and the private sector.”

Some of the task force’s suggestions have already been put into place. As the AP reported, this includes the creation of new Federal Flood Reduction Standard for infrastructure projects built with government funds and promotion of the Sea Level Rise Tool, which will help builders and engineers predict where flooding might occur in the future.

The government has closed over 99.5% of over 143,000 National Flood Insurance Program claims related to Hurricane Sandy and paid out more than $7.8 billion to policyholders, according to the task force report. The federal government should support local efforts to mitigate future risk by funding local disaster recovery manager positions and encouraging homeowners to take steps to reduce the risk of future damage, which will also make rising flood insurance premiums more affordable, the report said.

The team has also launched Rebuild by Design, “a competition that will attract world-class talent to develop actionable plans that will make the Sandy-impacted region more resilient.”

Buyers Dealing with Rise in Total Cost of Risk

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Keeping insurance costs down is a priority for risk managers, but with the total cost of risk up 5% since last year, according to the newly released RIMS Benchmark Survey, this task has become increasingly difficult. One risk manager at a live web event last week said he is looking closely for coverage overlaps in his international operations.

A key finding of the 2013 RIMS Benchmark Survey, released this month, was that the average total cost of risk (TCOR) for all companies increased 5%, from $10.19 per ,000 of revenue to $10.70 per $1,000 of revenue – the result of hard market conditions.

The drivers of these increases were global catastrophes, including the tsunami/earthquake in Japan, flooding in Australia and Thailand, and earthquakes in New Zealand and Turkey – which impacted property rates, explained Wesley DuPont, executive vice president and general counsel at Allied World.

On the casualty side, “There has been an uptick in loss severity,” DuPont said. “Claims that had previously settled for less than $5 million were settling for more than $5 million.”

Danny Holtsclaw, director of risk and insurance for the Wildlife Conservation Society, said he is working to keep the cost of risk down by examining duplication of coverage globally. “There has to be an internal review on the risk manager’s side to make sure we don’t have overlapping coverage and if we do, we try to minimize that as much as possible,” he said.

He is also “getting back to the basics of loss control,” by doing “what we do best internally to mitigate the risks we have.” But at the same time, “as our premiums and our cost of risk are growing, we’re looking to our risk partners – not only our carriers, but also our brokers.”

Despite all efforts to evaluate exposures for accuracy, however, at renewal time underwriters are requesting “better data.” Meanwhile, Holtsclaw said, “I’m giving the best data I have, but it’s still not enough.”

What’s more, at midyear renewals, “if you’re adding particular exposures, there seems to be more supervisory underwriting review,” he said, adding that “Sometimes a handshake is not necessarily a handshake – you have to wait for validation to come back. I’m seeing that for the first time in the last year.

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Bobby Bowden, executive vice president, marketing and communications with Allied World said that risk managers can get a better response from insurers by having thorough knowledge of their business and industry. “To come in and know your business inside-out gives us a better understanding,” he said. Better understanding allows the underwriter to price properly, “and ultimately the best deal is the result of that communication,” he added.

What Holtsclaw looks for from carriers is, “for those experts to become an added extension of my team, to help implement our risk management goals.

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” Because at the end of the day, “I’m having to do more with less and I’m trying to take advantage of those resources.”

Companies with advanced enterprise risk programs are proving to have an advantage, said Carol Fox, director for strategic and enterprise risk practice for RIMS. “We found a correlation in a study we did a number of years ago, that companies with better ERM programs had better credit ratings.

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So it’s not just the insurance piece, but making the organization more efficient overall and protecting the value of the organization.”

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.