Industry experts say the increases are due to two main reasons – catastrophe claims and insurance fraud, primarily roofing scams.  2011 had more federal disaster declarations than any other year in history, which has severely taxed insurance companies’ reserves.  For every $1.00 paid in premium, insurance companies are paying out $1.085 in claims.  Reinsurance prices have also been on the rise, forcing insurance companies to pass on this expense to consumers.

Coupled with the trend of rising insurance prices, is the fact that home prices in Atlanta just reached their lowest point since 1998.  Many people are stuck in homes they cannot afford to sell, and are having trouble purchasing insurance. 

What do you think the solution is?  Should insurance companies be capped at how much they can raise their rates in any given year?  Should they be able to deny coverage renewal to current clients that have never filed a claim?  Should the government step in and subsidize insurance for homeowners that can no longer afford their insurance?

The study found that RRGs have been profitable and growing, and have helped improve the availability of commercial liability insurance, especially in niche markets.  However, differing interpretations of LRRA have led to varying state regulations and disputes between RRG managers and state regulators.  For example, some states interpret LRRA to allow RRGs to write contractual liability coverage, whereas other states do not allow this coverage to be written by RRGs.  In 2010, more than 80% of RRGs were domiciled in Vermont, South Carolina, the District of Columbia, Nevada, Hawaii, and Arizona, whereas about 95% of their premium is written outside of their state of domicile.  Presumably, RRGs are often domiciled in these states due to financial and regulatory advantages.

What do you think of the Risk Retention Modernization Act?  Do you think allowing RRGs to provide commercial property insurance would benefit the industry?  Do you believe that clarification of LRRA would encourage the growth of RRGs and improve the availability of commercial insurance?

• “Something goes wrong inside a company which is serious enough to threaten some significant aspect of its operations, and a material part of the related revenue generation which underpins the business model. Investors lose confidence – initially because they perceive a threat to the company’s potential for earnings growth, then more substantially when they see no quick fix to the company’s difficulties. These insecurities grow – and this is the important part – when other key stakeholders, whose support is needed to reestablish the equilibrium of the business model, also lose confidence, and leave in droves.”

A second question might be: “Is it an insurable risk?”  The answer: Apparently so.  Ms. O’Connor’s article references three recent programs by Aon with Zurich, Willis, and Chartis that address exposures of reputational risk and offer risk management services to help corporations keep their reputations intact.  Further, an article by Charles Boyle gives a general description of the coverage offered by Aon with Zurich is discussed which offers advice on pre-crisis planning in addition to coverage for losses.  In Ms. O’Connor’s article, Robert Yellen, chief underwriting officer for the executive liability division of Chartis in New York, states that the company’s product provides two categories of coverage.  The first covers “reputation attacks” defined as “a public attack upon a company’s reputation” and the other covers “reputation threats” defined as “acts or events that the company believes, if made public, would have a material impact on the company’s reputation and would be seen as a breach of trust by the company’s stakeholders.”   The Willis product is targeted toward hotels and responds to incidents that lead to, or are likely to lead to, hotel business losses from adverse publicity through any medium and provides cover for lost revenue based on a hotel industry metric that measures revenue per available room.

Do you think reputational risk is the next big thing in insurance coverage?  Can/will the coverage be profitable?  How does one determine that the initial rates are adequate?   What pitfalls do you see in offering this coverage and how susceptible is it to fraudulent claims?  Tell us what you think.

The Florida Office of Insurance Regulation (OIR) indicates that the number of personal injury protection claims has increased during the past four years even though there is no evidence that the number of crashes or drivers has increased.  According to the OIR, the number of PIP claims has increased 28% since 2006, and the payment of claims also has increased during the same time, spiking in the last two years.  Over a four-year span insurers paid $8.7 billion in claims.  The number of PIP-related lawsuits has also increased during that same time period.

Among reasons for repealing the PIP requirement are the following:

• PIP is unfair because it causes people with insurance to pay for injuries caused by drivers with no insurance.
• PIP has serious problems with insurance fraud that make the program too costly.  According to a presentation made by Insurance Consumer Advocate Robin Westcott in November 2011, the amount of fraud in the PIP system totals $910 million annually.

Among reasons for not repealing the PIP requirement are the following:

• Without the coverage, chaos would ensue and courts would be overburdened with cases.
• It’s intended to protect Floridians who don’t have health insurance, and to avoid lawsuits and their costs for minor injuries.

Do you think that PIP requirement should be repealed?  How do you think the PIP system should be amended to deal with the fraud issue and control the costs?  Let us know.

IAIS, the world’s largest group of insurance regulators and supervisors, said the 2008 and 2009 financial crisis showed that “in general, the insurance business model enabled the majority of insurers to withstand the financial crisis better than other financial institutions.”  The IAIS said that insurance underwriting risks are, “in general, not correlated with the economic business cycle and financial market risks and that the magnitude of insurance liabilities are, in very broad terms, not affected by financial market losses.”

However, the financial crisis revealed that insurance groups and conglomerates operating in traditional lines of business may suffer considerable distress and become globally systemically important when they expand significantly in non-traditional and non-insurance activities.  The paper describes how insurance groups and conglomerates that engage in non-traditional or non-insurance activities are more vulnerable to financial market developments and thus more likely to amplify, or contribute to, systemic risk. Examples of such non-traditional and non-insurance activities include credit default swaps transactions for non-hedging purposes or leveraging assets to enhance investment returns.

The IAIS findings echo comments from individual insurers and insurance groups who have been saying that insurers shouldn’t be lumped together with banks, especially at a time when financial industry regulations are being revised following the global financial crisis.  Peter Braumüeller, chairman of IAIS’s Financial Stability Committee, noted: “Based on information analyzed to date, for most lines of business there is little evidence that traditional insurance generates or amplifies systemic risk within the financial system or the real economy.  However, supervisors need to monitor very closely those insurance activities that deviate from the traditional insurance model.”

What are your thoughts on the insurance industry’s contribution to global systemic risk?

Weiss Ratings is an independent rating organization for the financial sector that covers banks and insurance companies.  These ratings are a summary of Weiss’ judgment of a company’s ability to stay out of regulatory control, pay all the obligations from their insurance contracts, and maintain operations long term.  Weiss maintains its independence by not taking compensation for their ratings.  Additionally, they reach their conclusions and publish results without a preview or influences from the company.  On their Web site they display their track record by showing failed insurance companies over the last four years with the Weiss carried rating at time of failure and one year prior.  They appear to do a solid job in reviewing the financial sector including insurance companies.

For the Florida property market overall, the recent results were scathing.  Below is a table with the Top 25 carriers in terms of policies in force at 6/30/2011 based on QUASAR reports:

These grades should raise alarms that the overall marketplace is in trouble.  But, it really all starts at the top.  The largest carrier in the state is Citizens and, according to Weiss, they are the strongest insurance company in the state.  So let’s examine Citizens for a moment.

Citizens Property Insurance Corporation is a state-run insurance company that is subject to statutory guidelines.  According to their Web site, Citizens is a “not-for-profit, tax-exempt government corporation whose public purpose is to provide insurance protection to Florida property owners throughout the state.  Citizens operates according to statutory requirements created by the Florida Legislature and a Plan of Operation approved by the Florida Financial Services Commission. The corporation is governed by a Board of Governors that administers its Plan of Operation. Florida’s Governor, President of the Florida Senate, Speaker of the Florida House and the state’s Chief Financial Officer each appoint two members to the Board.”

While I am sure that Citizens insures many properties that might not be able to find coverage, there are now tens of thousands of risks in Citizens solely because Citizens provides the lowest cost of insurance; Citizens is a real market competitor.  But, back to the financial ratings: How is Citizens considered the most financially sound insurance company in the state?

The key component of the Weiss ratings is financial stability to maintain operations.  How does Citizens score so well with these criteria?  Citizens operates under the statutory authority with the backing of assessment capability against most insurance contracts in Florida.  The entity is backed by insurance contracts from all carriers for most lines of insurance.  Under Citizens’ original structure, the rates were tied to be in excess of the 20 largest carriers.  When this provision was removed and annual caps were placed on rates, it created this monster corporation in the marketplace.

Now Citizens operates virtually as a full competitor in the market but continues with all the financial guarantees through assessment authority.  The potential assessments Citizens would need in the event of a major catastrophe run into the billions of dollars (Example: $10.2B for a 1 in 100 event at $23.2B).  The Citizens deficit created by a 1 in 100 event would be funded by 15% policy surcharges to Citizens policyholders and assessments up to 10% for Citizens and 16% for all other policy holders in Florida.    About 80% of Citizens deficits for a 1 in 100 event would be funded by assessments coming from non-Citizens policyholders

This all assumes the current marketplace survives a 1 in 100 event.  Going back to the Weiss rankings, you have to question what the market will look like if a 1 in 100 event hits Florida.  There is no doubt that the biggest risk (among many) in Florida is still hurricanes, and a 1 in 100 hurricane is going to impact many to all carriers at once.  How many carriers will not be able to survive a 1 in 100 event?  According to these Weiss ratings it could be a material issue.  Citizens is designed to survive through assessments to policyholder for all companies.

Should Citizens continue to be able to operate in this capacity?  The simplest solution to correct Citizens issues is to raise rates and return the entity to the market of last resort.  Of course this would require rate increases for Citizens in excess of 50% for some policyholders.  The 2011 legislative session started out with hope that Citizens would begin this transformation.  In the end there was little change from the Florida legislature to Citizens’ market position, and the largest carrier in the state continues to grow and the potential deficit grows. 

Insurance rates still remain as a big political issue in Florida.  While the public is mostly blind to the deficits that will result with a major catastrophe, everyone is sensitive to price increases.  Therefore, it is time to start the search for alternative solutions.  Trying to make Citizens the market of last resort is doomed by the political process.  Therefore, it is time to correct the biggest mistake made from when Citizens was first formed under the Florida Residential Property and Casualty Joint Underwriting Association.  It is time to make Citizens the product of last resort.

There is old adage, “You get what you pay for.”  If Citizens policyholders want to continue to pay low prices through legislative restrictions to rate increase, it is time to adjust the product to match the program.  There are many coverage options within the Citizens policies that are not necessary.  It is time to examine all the coverage options in Citizens and make the product cover what is necessary only for the real estate transaction.

Allow the market to decide if they want that product or want to purchase alternatives in the private market.  This will allow the market to compete again based on coverage, service and price versus the current market of an underpriced insurance product from Citizens.  Maybe that will help improve the Weiss ratings for all the carries and put them in a better financial condition to fund potential deficits from Citizens. 

Peter Scourtis, FCAS, MAAA, is a principal and consulting actuary at Merlinos & Associates.

There is one risk that persists in all enterprises: human error.  No matter how expert or how careful an individual is, there will come a point at which he makes a significant mistake. 

We frequently have people close to us who may notice our errors before serious damage is done – these people may be supervisors, peers, or people who report to us.  Unfortunately, when the person noticing the error is in a junior position, the dissenter’s voice may go unheard.

The book “Sway – The Irresistible Pull of Irrational Behavior,” by Ori and Rom Brafman, discusses the positive power of dissent, especially the dissent of subordinates, whether in a board room, a cockpit, or a surgical suite.

On March 27, 1977, two Boeing 747 passenger aircraft, KLM 4805 and Pam Am Flight 1736, collided on the runway of Los Rodeos Airport in the Canary Islands, killing 583 people.  According to “Sway”, subsequent investigation and review of the black box records show that a mistake by Captain Jacob van Zanten, the pilot of KLM 4805, resulted in the crash.  The runway was foggy and Captain van Zanten had only been granted one of the two types of clearance necessary for takeoff.  The first officer of the flight, Klaas Meurs, tried to point out that Van Zanten did not have the necessary second clearance, but was disregarded.  At the time, Van Zanten was the head of safety for KLM and had an impeccable record.

Several years subsequent to the Canary Islands disaster, NASA initiated a study on “Cockpit Resource Management” (or “Crew Resource Management”).  One finding of the study is that it is essential for subordinates to have effective tools to communicate possible mistakes to their supervisors, and it is essential for supervisors to tune in and listen.  Since then, several commercial airlines have implemented communication protocols to be used by the copilot or staff when they see a mistake in progress.  The crew is trained in how to make their statements most effective, and the pilots are trained to stop and listen.  Similar initiatives are being implemented in hospitals and other health care facilities, such that the concerns of a nurse or resident will be considered by the attending physicians and surgeons.

What do you think?  How would you grade your organization on “tuning in” to sources of concern?  Are they considered on the merit of the argument or on the basis of who is speaking?  If you work in the insurance or risk management field, how can your organization create an environment in which legitimate concerns are heard, no matter what the source?  The answers to these questions can make a difference in any industry, and certainly in the risk management industry.

OVERVIEW

Bad economic conditions are accelerating loss trends overall.  In Florida, Louisiana, Mississippi, and South Carolina, the average paid loss per policy in force is continuing to trend upward while Alabama appears to be leveling off.  Georgia, however, is improving.

FLORIDA

When we looked at the relative change since the 4^th quarter of 2006, we found that the loss trend in Florida is extreme compared to the other Southern states.  Florida non-catastrophe costs have doubled in four years while costs in the other states and nationwide are 37% to 62% higher.

FREQUENCY OR SEVERITY?

We believe that, if the state economies stay in the current malaise for an extended time, we will see the other states start a new upward trend.  This leads to the question: What is driving this change, frequency or severity?

Here is the loss frequency, the number of claims for every 100 policies:

And, the relative change in frequency:

There is a definite upward trend visible in the top graph.  Note that Alabama and Louisiana are at about the same level now as 2006.  It should be noted that Louisiana’s data has some bias in 2008 due to leakage of a large catastrophe event into the non-catastrophe data.  We expect that Alabama will see a bump as well in 2011-2012 due to the tornado losses in April.  Since the end of 2007, South Carolina has deteriorated quickly.

When we examine severity — the average dollars paid on each claim — Florida again has results well above average, and the other states are grouped within a limited range.

Here is the relative change since 2006 in severity:

Overall, the deflationary effects of the recession have kept loss inflation in a reasonable range for these states and countrywide — less than 7% annual trend. 

Let us know what you think: What is driving the trends in Florida?  Why is the average paid loss per policy in force getting worse in some states and improving in others?  Do third-party influences like public adjusters impact loss trends (positively or negatively)?  Why has the loss situation in South Carolina deteriorated quickly in the past four years?

Download the Homeowners Loss Data Report

A recent article posted by the Insurance Journal takes a look at the potential usefulness and challenges related to using social network data as an indicator for pricing premiums.  According to the article, sifting through social network pages is already a common practice in helping to identify potentially fraudulent claims, thus emphasizing that you should always be careful what comments, photos, or other details you post on the Internet.  And to take it further, just as insurers are becoming more responsive to the connection between an insured’s credit score and their potential risk for loss, the connection between the activities you engage in online and your riskiness as an insured is starting to become a hot topic as well. 

The things that you communicate online via public forums, wall posts, activity and interest selections, status updates, etc. can be used by insurers to develop a risk profile based on your perceived lifestyle.  Not only can your own activities and posts be used, but insurers are developing a “social graph” that shows how individuals are connected with one another through friending, friends of friends, or followers on Twitter.  According to the article, these graphs can give information on how an insured may perform as a risk based on the behavior of the friends that he or she is connected to. 

“Privacy settings,” you say? Well, even if you feel like your online profiles are in constant lock-down, unable to be breached by even the most adamant of social network stalkers, you still may be in danger of relaying more information to others than you might think.  The article further details some ways that persons trying to gain access to information on your account go about doing so.  Do you have a Facebook friend that accepts the friendship of literally anyone who asks?  That could lead to a breach if you haven’t blocked access to your account through friends of friends.  Did you forget to block access to all photos in your profile, or are you tagged in photos on other friends’ accounts?  Oops, another potential breach.  If you think about it, the list of potential “Oops” just keeps growing.

There are definite obstacles that insurers face that will impede the speed-to-market of using social networking data in underwriting criteria.  Developing advanced data analysis techniques and methods for procuring and validating information are the first steps towards translating social data into an underwriting tool.  Also, one would have to imagine that passing these new underwriting rules through regulatory channels will be a challenge in itself.  There are also the questions related to the ethical and legal nature of extracting information about an insured without their express knowledge.  The article suggests that one way of dealing with the issue is to seek the permission of insureds to use their social data, and to even offer discounts if permission is granted.

What do you think?  Will companies use social data as part of their underwriting in the next three years as the article suggests?  What will you do and how will you feel if your insurance company begins examining your social networking sites to gain information on you as a risk?

The Nationwide-Harleysville merger is a typical example of a large insurer acquiring another large insurer that complements and expands the buyer’s book of business.  It was wasn’t long ago that Nationwide acquired Allied Insurance, both expanding and complementing Nationwide’s distribution channels and geographic footprint.  The 2008 financial crisis prompted AIG to put nearly its entire personal lines book on the block, which was subsequently purchased by Farmers (aka Zurich), again expanding and complementing the buyer’s distribution channels and geographic footprint.  Other recent acquisitions that fit the same mold are Liberty Mutual’s acquisition of Safeco and Allstate’s acquisition of Esurance.

One clear implication of these large scale acquisitions is having a number of massive insurers, each with equally massive stockpiles of data, which can conceivably be used to “out-segment” smaller insurers.  We are starting to see wholesale increases in the amount of segmentation in the rate manuals for these larger insurers.  Will smaller insurers still be able to compete?  Will increased segmentation of insureds create a more efficient market or lead to other issues?  Only time tell.

These acquisitions will have upsides as well.  Significant efficiencies of scale can drive down the cost of claims handling, regulatory and compliance costs should be less, etc.

Is the market better served by higher concentrations of business among the market leaders, or do the downsides outweigh the upsides?  Let us know what you think.