A recent article in Insurance Journal by Amy O’Connor discusses a new wave of insuring reputational risk due to the exposure created by the boom in the social media.  Your first question might be, “What is reputational risk as it pertains to insurance?”  In the article, the author defines reputational risk as “a company’s risk of having its reputation damaged because of certain events or incidents and the fallout that takes place because of these incidents.”  Another article in the same publication by author Seamus Gillen states that pure reputational risk does not exist but that it occurs “when operational risk and reputational risk combine to create a perfect storm.”  Furthermore, the article cites the BP Deepwater Horizon oil leak in the Gulf of Mexico, Toyota’s failing brakes on its cars, and the hacking of Sony’s customer data as illustrations of reputational risk and describes the process as:

• “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.

Florida requires drivers to have $10,000 of Personal Injury Protection (PIP) to compensate persons injured in accidents regardless of fault and property damage insurance.  PIP coverage provides reimbursement for 80% of reasonable medical expenses, 60% of loss of income and 100% of replacement services, for bodily injury sustained in a motor vehicle accident without regard to fault.  The property damage liability coverage must provide a $10,000 minimum benefit.  A $5,000 death benefit is also provided.

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.

Recently, the Weiss Ratings for Florida Property Insurance Companies were reported.  After a review of the results, the first question that comes to mind is, “Who uses these ratings?”  But a further review of the ratings paints an interesting picture for the Florida Marketplace, and begs two more important questions: “Where are we now? Where are we going?”

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.

Enterprise risk management is a hot topic.  The charge of Enterprise Risk Management is to identify and quantify an organization’s current and potential risks and opportunities, determine the company’s risk tolerance, and decide on risk-taking and risk-avoidance strategies.  Insurance professionals are especially attuned to the lessons of risk management.

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.

The number of private property and casualty insurers has declined by 25% within the last 20 years.  The good news is that this trend has stabilized in recent years.  However, recent mergers and acquisitions by large insurers in the personal lines market have certainly increased market concentration among the market share leaders, with strong implications for the future of the industry.

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.

Governor Robert Bentley is planning to call a special legislative session in January to address the affordability and availability of homeowners insurance in Alabama.  Thousands in Alabama have lost their insurance due to recent catastrophes. 

Initially, he named the panel the Governor’s Coastal Insurance Commission to examine the problem of purchasing homeowners insurance on the coast.  After Hurricane Ivan in 2004 and Hurricane Katrina in 2005, many homeowners lost their coverage.  According to the Governor, 13,000 people across the state lost their homeowners insurance.   Coverage on a $200,000 home has risen to $7,000 a year in some areas.  Before he finished naming the members of the panel, the tornadoes struck on April 27, 2011, killing 250 people.  Tuscaloosa was one of the hardest hit cities, with 50 deaths.

Governor Bentley renamed the panel the Alabama Affordable Homeowners Insurance Commission and added members from throughout the state.  It will be headed by county probate judge Tim Russell and will include State Insurance Commissioner Jim Ridling and State Revenue Commissioner Julie MaGee, along with 21 others.

The Alabama Insurance Underwriting Association, also known as the Alabama Beach Pool, provides coverage to those who cannot receive coverage elsewhere.  According to their Web site, the number of policies in force has risen from just under 3,000 in 2004 to over 22,000 in 2011.  The total insured value of the properties has risen from $337 million in 2004 to $3.9 billion in 2011.

One of the ideas from the Commission to address the problem is to form a captive insurance company that could accumulate reserves tax free.  It would provide cheaper reinsurance to companies that cover Alabama homeowners.

Let us know what you think. What do you think the commission should focus on? Who should own the captive and manage it?  Will they be able to solve the problem?   What is the solution to the rising cost of insurance in Alabama and other states facing similar concerns?

The latest issue of Medical Liability Monitor does a good job of summarizing the latest Texas tort reforms that went into effect September 1, 2011.  These reforms, known as House Bill 274, are connected to 2003′s House Bill 4, legislation that put Texas on the leading edge of medical liability tort reform.  The following reforms are part of HB 274: 

• Adopts rules allowing a defendant to move for dismissal of a case before discovery begins.
• Loser pays provisions related to a motion to dismiss, allowing the prevailing party to recover costs and reasonable attorney fees from the losing party under certain scenarios.
• Removes several impediments to obtaining interlocutory appeal.
• Several provisions designed to encourage settlement.
• Eliminates an existing provision allowing defendants to identify, and plaintiffs to join, a responsible third party after the statute of limitations has ended.

Will these reforms allow claims that have merit to reach a judgment more quickly?  Will they reduce medical liability insurance costs?  Will they reduce health care costs?  Are there other reforms that should be implemented?  Should other states follow Texas’ lead?  Let us know what you think.