In recent years, the insurance industry and the general public have experienced significant losses from hurricanes and tornados.  According to the Insurance Information Institute, of the 14 most costly U.S. disasters, 12 are hurricanes or tornadoes:

IBHS has developed programs for new (FORTIFIED for Safer Living) and existing (FORTIFIED for Existing Homes) homes which specify standards for building and retrofitting homes to better withstand these natural disasters:

• FORTIFIED for Safer Living is a package of code-plus construction requirements that strengthen a home’s roof and wall systems, openings (e.g., windows and doors), and foundation.  Currently about 200 homes meet the Fortified for Safer Living requirements.
• FORTIFIED for Existing Homes was launched in 2010, and provides standards for strengthening existing homes through retrofit techniques at the bronze, silver and gold levels:

The bronze level addresses improving the roof system and attic ventilation system.

The silver level addresses improving exterior opening protection, in addition to meeting bronze requirements.

The gold level addresses, in addition to meeting bronze and silver requirements, the design and installation of a continuous load path, which is a method of construction similar to a chain that ties the house together from the roof to the foundation

FORTIFIED construction has been tested in real life.  Prior to Hurricane Ike, IBHS designated 17 FORTIFIED for Safer Living homes in Galveston, TX.  Of these 17 homes, 14 survived Hurricane Ike.  The three homes that did not survive were damaged by neighboring houses that did not meet FORTIFIED requirements.  These neighboring homes were washed off their foundations and slammed in to the FORTIFIED homes.

BEFORE HURRICANE IKE:

AFTER HURRICANE IKE:

In addition to these real-life tests, which we hope are few and far between, IBHS has a Research Center, which was inaugurated in 2010.  The Center is designed to allow researchers to test various construction materials and systems for the purpose of building homes that can better resist nature’s perils.  In one test at the Center, two homes, one FORTIFIED and one not, are subjected to simulated category 3 hurricane winds.  The FORTIFIED home survived with minor damage while the other home was destroyed.

Of course, the protection of FORTIFIED construction comes at an additional cost.  It is currently estimated that FORTIFIED construction adds 5% to 10% to building costs.  In an effort to demonstrate that FORTIFIED construction is within reach of the average home buyer, Habitat for Humanity has built a home in Alabama which received the FORTIFIED designation.  It was estimated that meeting the FORTIFIED requirements cost Habitat a total of $1,000 to $1,500 more than a home built to the standard code.  In return, however, homeowners receive discounts on insurance premiums, and most of all, peace of mind.   Is FORTIFIED construction worth the additional cost?  What do you think?

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?

What do you think? Do actuaries have a place alongside marketing and communication personnel at insurance companies?  How can insurance companies leverage the power of social media given the complexities of different policies in different states? Let us know.

The authors of the article describe a “bad faith setup” where a plaintiff (whether claimant or insured) makes a settlement offer with unreasonable deadlines or other technicalities that are difficult to meet.  Even though the insurer and insured agree to the settlement, the plaintiff withdraws the offer when the deadline or technicality is unmet.  Then, the plaintiff brings action against the insurer claiming bad faith, possibly turning a low limit policy into “limitless, court-ordered insurance.” 

The authors propose a revision to Florida statute requiring that the claimant make a timely & specific settlement demand, allow reasonable time for acceptance, identify the type of release it is willing to provide, and cooperate fully in submission of any supporting documents relevant to the case.  The claimant would also have to provide a reasonable showing by evidence establishing that it made a good faith effort to settle.

In the March, 2011 edition, Rutledge R. Liles argues that insurers can protect themselves from bad faith claims simply by doing what the statute compels them to do – act “reasonably in the discharge of the fiduciary duty they owe their policy holders.”  And, he argues, the proposed statutory revisions would eliminate the common law duty of good faith that insurers owe their insureds.  He cites Florida cases where courts ruled that failure to meet unreasonable deadlines or technicalities did not, in fact, constitute bad faith.

What do you think?  Is Florida, and the P&C industry in general, in the midst of a “bad faith crisis?”  Particularly given Florida’s climate of sinkholes, public adjusters, PIP abuse, and ever-changing regulation, do insurers need legislative protection from the “bad faith setup?” Let us know.

A recent article at the National Underwriter’s propertycasualty360.com urges insurers to begin exploring the possibilities that smartphone applications can bring to their company.  Reporting claims and making premium payments are just the beginning.  Imagine being able to take and upload pictures of a car accident scene before the police even arrive, or being able to record the other party’s insurance information in five easy steps.  Some companies allow their customers to photo and document personal property items in their home, and download receipts for big purchase items.  Proof of loss and claims adjusting could be streamlined with the touch of a few buttons.

The article also makes note of consumers’ expectations regarding the new app trend.  Recent generations are growing up surrounded by the digital age and will expect the products they consume to be growing digitally as well.  Pulling up a company’s current website via mobile phone no longer makes the cut for today’s tech-savvy population.  Customers will be looking for mobile applications that meet their on-the-go needs, and take messy and difficult to navigate sites and make them easily accessible and functional at a moment’s notice.  We are a fast-paced, on-the-move, touch-of-our-fingers society, and we are always looking for ways to improve on those things. 

Some may savor the days when we weren’t always so busy; when customer satisfaction meant face-to-face contact and personal assurance from a real, live company representative.  What do you think?  Will modernizing the insurance world into the mobile app age benefit customer relations?  Do you think insureds will eventually be more inclined to shop for a better app rather than a better rate?

“They have been playing baseball for more than 100 years.  And for more than 100 years, more runs have scored with a man on first and nobody out than with a man on second and one out. This has been true every single season for more than 100 years.  Every single one.” 

Yet, despite the statistics, baseball managers still try to manufacture runs by bunting the runner over to second base and sacrificing the batter.

Some people may take the view that analytics should solely drive one’s business decisions, others may go strictly on instincts, while others may, and probably do, fall somewhere in between.  Where do your views fall?  Does it depend on the circumstances such as pricing vs. reserving?  Does it depend on whether it’s commercial lines vs. personal lines?  How about the audience to whom the information will be presented such as company management vs. regulators?  Or maybe there is something else?  Let us know what you think.

An insurance company which uses credit information in pricing may receive a potential or current insured’s “insurance credit score” from a third-party vendor, or may have its own model for assigning an insured to a credit category based on certain financial information.  Based on this credit score or category, a factor is applied to the insured’s premium, making it higher or lower.

Arguments in favor or against the use of this rating variable abound.  Some of the arguments advanced by advocates of its use include:

• Insurance credit score has been demonstrated to be correlated with loss experience.
• The use of credit score or category as a rating variable is no different than the use of gender or age in personal auto as a rating variable. 
• If an insured characteristic is demonstrated to correlate with loss experience, it is actuarially sound to include this characteristic in pricing so that insureds with higher credit scores do not subsidize insureds with lower credit scores.

Some of the arguments advanced by those opposed to the use of credit information include:

• Any cause and effect relationship between credit score or category and loss experience is conjectural at best and has not been fully explained.
• The models used by third party vendors are typically “black boxes.”
• Charging an insured a higher premium at a time when he or she is experiencing financial difficulty seems unfair or even discriminatory.

Casualty actuaries named the credit score debate as one of the top ten casualty actuarial issues in 2010.  Some recent developments on the credit scoring issue include:

• The United States House of Representatives debated whether the use of credit scores should be allowed in insurance rating.
• The National Association of Insurance Commissioners (NAIC) drafted a credit scoring model law regarding regulation of credit scoring companies.
• The Maryland legislature rejected a bill that would have banned the use of credit scores in the rating of personal auto insurance.

What do you think?  Should the use of insurance credit score be allowed but tempered, fully advocated, or rejected?

• Declines in frequency of claims slowing
• Injured employees are staying out of work longer
• Medical costs continue to rise
• Safety and wellness begin to integrate
• OSHA everywhere
• Litigation swells
• Misclassification of independent contractor’s hot issue
• Medicare set-aside arrangements baffling many
• Telecommuting
• Social media
• Uncertainty in the insurance markets

 How important do you think these 11 will be? What other workers’ compensation developments will you be watching in 2011? Let us know.

Merlinos & Associates is a sponsor at this invitation-only gathering of legislators, policymakers, and market experts who review the previous year and provide insight into the 2011 insurance marketplace in Florida.  The Summit is hosted by the law firm Colodny, Fass, Talenfeld, Karlinsky & Abate, leaders in insurance regulatory law.

M&A is a leader in coastal property and casualty insurance risk management and actuarial services.  For more information on our coastal consulting, please visit our Web site.

• Incentives to preserve environmentally sensitive land
• Promote risk mitigation among property owners
• Greater protection of coastal wetlands that act as a flood buffer
• Reduced risk for taxpayers that support NFIP now

 What do you think? Does the NFIP need reform? Should the NFIP be privatized? What impact would major reform have on the flood insurance marketplace? Let us know.