Category Archives: Property/Casualty

Proposal Would Increase Earthquake Coverage in CA

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Surprisingly, only about 12% of insured households in California currently have earthquake insurance. For such an quake-prone area, 12% is just not enough and, luckily, a new initiative may provide a sharp increase in the number of households with coverage against such catastrophes.

According to a RAND Corporation study, a proposal for the federal government to support state-run catastrophe insurance programs would increase the number of people buying earthquake coverage in California. The plan would also lower both uninsured losses and government assistance following a major quake. The four main tenents of the Catastrophe Obligation Guarantee Act (COGA) are:

  • lower insurance costs
  • more households with earthquake insurance coverage
  • decrease in uninsured losses
  • decrease in demand for federal disaster assistance

The RAND Corporation’s study estimates that lower premiums will produce a 13.2% increase in the purchase of earthquake insurance from the California Earthquake Authority, the privately-funded organization that provides earthquake insurance to the state’s residents.

“While catastrophe obligation guarantees could substantially reduce earthquake insurance costs in California, they would ultimately have a modest effect on decreasing uninsured losses and reducing the amount of disaster assistance spending.” said Tom LaTourrette, lead author of the study and a senior physical scientist with RAND, a nonprofit research organization.

So, though the study predicts an increase in the purchase of earthquake insurance, a substantial portion of earthquake losses are expected to fall below policy deductibles. Thus, an increase in coverage would translate to “less than a 1% increase” in the amount of losses that would be reimbursed. So while COGA is expected to decrease the amount of uninsured losses after a California quake, it is not a total solution. The study suggests that officials consider other avenues for increasing earthquake insurance coverage, such as public education and marketing and new, more attractive earthquake insurance products.

Groundbreaking Flood Models for Latin America

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Willis Re has introduced long-awaited flood models for Latin America through their research arm Willis Research Network (WRN). The models focused on large event scenarios for key cities such as Sao Paulo, Santiago and Bogota.

“The flood models provide South American insurance and reinsurance firms, as well as local governmental organizations, with new information that helps to identify and manage their exposure to flash floods caused by heavy rains and riverine overflow. Related results will be available for individual companies as well as the market as a whole and will have implications on planning, reinsurance and risk mitigation.”

The news was presented during the Geneva Association‘s 2nd Climate Change and Insurance meeting held in Sao Paulo last month by Dr. Juan Enlgand of Willis Re, who stated that these models might be used to consider the potential impact of climate change.

These models are greatly needed to say the least. Last year, floods and mudslides in Brazil caused 44 deaths and an estimated $1 billion in damages. In April, more than 250 died in Rio de Janeiro after torrential rains caused massive flooding and landslides. In June, more flooding in Brazil killed at least 41 and left more than 120,000 homeless. As Margo Black, CEO of Willis Re Brazil commented:

“Urban flood risk is an acute concern for Latin American re/insurers who have been challenged by growing losses and the lack of models to guide risk management.”

With Willis Re’s new models, it is hoped that future losses from almost-certain floods will be lessened in the ever-growing, major cities of South America.

P/C Insurers Going Strong for First Half of 2010

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It seems the P/C market continues to rally. The Insurance Information Institute (III) issued a release stating that private U.S. property/casualty insurers’ net income after taxes rose to $16.5 billion in the first half of 2010 — up from billion in the first half of 2009.

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“Property/casualty insurers’ positive results for first-half 2010 are yet another testament to the conservative investment strategies and superior risk management that enabled insurers to emerge from the financial crisis and great recession essentially unscathed,” said David Sampson, PCI’s president and CEO. “Combining insurers’ $530.5 billion in policyholders’ surplus as of June 30 with their 6.

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1 billion in loss and loss adjustment expense reserves and their $202.3 billion in unearned premium reserves, insurers had nearly $1.3 trillion on hand to pay claims and meet other contingencies — up from $1.2 trillion at June 30, 2009. This means we can all be confident that insurers have the financial resources to fulfill their obligations to policyholders when catastrophes strike.”

It’s not all good news, however. Insurers’ net losses on underwriting grew to $5.1 billion for the first half of this year, compared to .

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1 billion for the same period of 2009. Below are the financial results for private U.S. P/C insurers, courtesy of III.

First Half 2010 Financial Results *
($Billions)

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We must take good or optimistic financial news for this industry with a grain of salt. There are still many challenges facing P/C insurers, including the excruciatingly slow pace of the economic recovery and fierce competition in the commercial insurance markets.

Lunch with William R. Berkley

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I was fortunate enough to attend the W. R. Berkley Corporation’s annual luncheon yesterday at the Red Eye Grill here in Midtown Manhattan. Bill Berkley, chairman and CEO of W.R. Berkley Corp., is known for not only his intelligence and success within the insurance industry, but also for his blunt remarks and honest opinions — listening to him speak is exciting and interesting.

As one would imagine, talk of the Deepwater Horizon incident and the insurance implications surrounding it emerged. Berkley, one of the many insurers of Transocean, said his company lost $5 million from the offshore accident, but that number is far from what Llyod’s, Excel and ACE lost. Berkley, however, was not upset at the relatively small chunk of change his company lost. Rather, he was excited that his firm, for the first time, was able to raise prices 40 to 50% for offshore insurance — calling the Gulf of Mexico disaster both very unfortunate and an opportunity for insurers.

I asked Mr. Berkley if he perceived the Deepwater Horizon incident as an enormous lack of risk management. He reponded:

“I don’t think it’s an enormous lack of risk management in the offshore drilling industry, no. I think it was more a lack of understanding of all the alternative things that could go wrong.”

The very definition of risk management is to identify and assess any and all risks of an operation and then work to minimize, monitor and control the probability and/or impact of unfortunate events. Maybe I’m crazy, but the Deepwater Horizon catastrophe seems like an enormous lack of risk management to me.

The topic of discussion soon turned to the topic of financial regulation, to which Berkley agrees is needed. But he also wonders what other aren’t asking:

“If all these giant financial institutions are taking on such great risks, how come they have such crummy returns? No one is asking that.”

Indeed, I have not heard anyone asking that question.

Then questions about the P/C market prices arose. He was asked why he saw prices starting to firm up and he answered:

“You can only hide from reality for a certain length of time. You’re going to see some people go broke because they’ve mispriced their business. They won’t survive through the good times, maybe not even through the first quarter of 2011.

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People are accumulating adverse reserve deficits and that will affect them soon.

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“

And when asked how he would grade the government’s involvement with AIG, Berkley confidently responded, “D,” citing that “part of the problem with government is that process becomes more important than outcome.

True words indeed from a well-respected figure in the insurance industry.

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Even if I do disagree with him about the failure of risk management in regards to the Deepwater Horizon situation, he is a wise man that has proven his knowledge of the industry with the success of his own company.