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?

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• “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.

Our captive actuarial experience includes work in Alabama, Arizona, Anguilla, Barbados, Bermuda, Cayman Islands, Colorado, Delaware, Kentucky, Nevada, Nevis, South Carolina, Turks & Caicos Islands, Utah, Vermont, and Washington DC.  Our consulting includes services for 831(b) captives.

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?