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Big “I” National News

P&C Trends

NOAA Releases Forecast for 2007 Hurricane Season
Above-average number of storms predicted for Atlantic.

With the beginning of the hurricane season just a week away, the National Oceanic & Atmospheric Administration (NOAA) Climate Prediction Center is forecasting a high probability of an above-average Atlantic hurricane season.

During a Tuesday press conference in Washington, D.C., NOAA announced that there is a 75% chance that 2007’s hurricane season will bring an increase in the frequency and severity of storms.

“For the 2007 Atlantic hurricane season, NOAA scientists predict 13 to 17 named storms, with seven of the 10 becoming hurricanes, of which three to five could become major hurricanes of category 3 strength or higher,” says retired Nave Vice Adm. Conrad Lautenbacher, undersecretary of commerce for oceans and atmospheres and NOAA administrator.

The average hurricane season has 11 named storms, six of which become hurricanes, including two major storms.

NOAA attributes this year’s higher-than-average predictions to the ongoing multi-decadal signal (the set of ocean and atmospheric conditions that spawn increased Atlantic hurricane activity), warmer sea surface temperatures and the El Nino/La Nina cycle. These conditions have been responsible for the above-average hurricane seasons in nine of the past 12 years and are expected to continue to increase storm activity as the Atlantic experiences an “active hurricane era,” which can last between 25 and 40 years, says Gerry Bell, lead seasonal hurricane forecaster at the NOAA Climate Prediction Center.

The previously mentioned conditions were all present in 2006, causing NOAA to predict another active storm season; however, an unexpected El Nino rapidly developed making it difficult for hurricanes to form in the Atlantic.

“Looking back for a moment at last year, we over-predicted the 2006 Atlantic Hurricane season and that was mainly because of a rapidly developing El Nino (cycle) during August and September that subsequently shut the activity down,” Bell says. “This year we’re not in that situation, instead we’re looking at an opposite condition where we may be transitioning into a la Nina.”

With one pre-season storm, Andrea, already on the 2007 books and approximately 53% of the U.S. population living within 50 miles of the coast, NOAA and other government agencies are urging everyone to be prepared.

“The fact is that no matter how good your local responders are, your state responders or your federal responders, they will not be there instantly at the time a hurricane arrives. It is the preparation of individuals, families and business that makes the difference of between survival and disaster when a hurricane hits,” says Secretary of the Department of Homeland Security Michael Chertoff. “Last year was an unexpectedly easy season; there’s no guarantee that this season is going to be anything less than very tough. Complacency and disarming yourself are the biggest threats that people face in terms of getting themselves prepared. It is a big mistake to count on being lucky, your much better off preparing yourself for the worst and then if you get lucky that’s a bonus.”

The Atlantic hurricane season runs from June 1 through November 30, with peak activity in August to October. NOAA will release an updated seasonal forecast in August, prior to the peak season.

For more information, visit www.noaa.gov.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

P&C Trends

Improve Your D&O IQ
Tillinghast offering free D&O survey report.

D&O insurance is at the top of business news these days. A report by The Wall Street Journal that directors at the defunct cobbler, Just For Feet, lost $41.5 million of their own cash has board members everywhere paying attention. Following that report came speculation that Dow Jones’ over-disgruntled shareholders potentially missed the big Rupert Murdock payoff and news of Tyco tapping the majority of its $200 million in D&O limits for a class-action suit. It seems like almost overnight the average cocktail chatter has turned to the advantages of Side-A D&O coverage.

Several weeks ago, Towers Perrin, for the first time ever, began providing Web-access, free of charge, to their D&O Survey Report, “2006 Survey of Insurance Purchasing and Claims Trends.” (Click here for the press release and click here for the complete survey in PDF.) Towers Perrin does charge for individual D&O and company peer group analysis, and information on that service is provided in the survey report, but the base report contains a wealth of information sure to equip agents for nearly any general question from clients on D&O insurance.

For example, the first thing nearly everyone wants to know about an insurance policy they don’t have is: How much does it cost? Everyone knows how to address that question generally, but look at this survey and see how solidly it equips agents to handle questions only a specialist-broker could take a shot at.


Say customers aren’t that interested in D&O as they are not publicly traded? Don’t be fooled into that thinking---or some major sales opportunities could be missed.

Due to increased publicity, inquiries about D&O insurance are way up at all organizations. The survey shows the highest rate of inquiry about D&O insurance actually is coming from private company directors and even nonprofit companies logged potential inquiries by their directors 32% of the time.

“Directors of all types of organizations are taking a more proactive role in understanding their D&O coverage and in some cases even demanding changes to the coverage,” says Michael Turk, senior consultant at Towers Perrin. “We believe that this trend is also shown in the growing popularity of Side-A only policies and may lead to increased purchases of policies that protect only outside directors.”

This is a unique time. Insurers are hungry, publicity is providing motivation and the current soft D&O market is a great opportunity to add valuable coverage for clients. Being informed before heading off to a client visit is the number one way successful agents and brokers increase sales.

Next week look for insights into which insurers are the big players, along with some key coverage strategies to pique the interest of decision makers at prospects and clients alike.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage^SM.

P&C Trends

What if the Great Mississippi Flood Happened Today?
According to study, event similar to 1927 flood would cause more devastation than Katrina.

In 1927 the Great Mississippi Flood, the worst flood disaster in the nation’s history, caused an estimated $250 to $350 million in damages, but what would happen if a similar disaster occurred in 2007?

According to a study by Risk Management Solutions (RMS), a California-based catastrophe risk analysis company, the devastation could be upwards of $160 billion, far surpassing the $110 billion in damages caused by Hurricane Katrina in 2005.

The RMS study, published on the 80th anniversary of the flood, examines the long-term impact of the event on risk management in the United States, as well as the potential for levee failures during future Mississippi floods and the potential effects a similar event might have on the insurance industry.

In the spring of 1927, the Mississippi River flooded causing massive flooding in seven states: Arkansas, Illinois, Kentucky, Louisiana, Mississippi, Missouri and Tennessee. The water covered approximately 27,000 square miles and destroyed 137,000 buildings and countless crops, left 700,000 people homeless and killed 250. Eighty years ago, the event was ruled a regional disaster; however, if a flood of a similar magnitude occurred in the same area today, RMS estimates the event would be ruled a national disaster and have potential effects on the global economy if the Port of New Orleans was shut down for any period of time as it was post-Katrina.

Today there are approximately 1.9 million people living in the area of the 1927 flood, according to the latest estimates from the U.S. Census Bureau, almost double the estimated 930,000 who resided there 80 years ago. And, according to RMS, the total economic damage to the area today would be between $130 and $160 billion, 65% of which would be residential loss and 35% in commercial loss. Louisiana would likely sustain the bulk of the damage, close to 40%, if a flood similar to the one in 1927 were to occur today, according to the report.

The effects on the area in the aftermath of such an event would be similar to those felt by the Gulf Coast following Katrina.

“Significant pressure could be placed on insurers to pay some part of the loss under the terms of fire insurance coverage. Lawsuits could be filed, claiming that the damage was a consequence of levee failure, debris damage or contamination rather than simply flood inundation,” the study says. “There could also be significant political fallout from a disaster of this magnitude and its economic consequences in the lower Midwestern states---as was the case in1927. The large majority of people in the affected area would not be able to live in their homes and would be forced to relocate or to live in temporary accommodations. Once could expect large levels of permanent migration out of the region and the relocation of businesses.”

While the likelihood of a future event of the same magnitude as the Great Mississippi Flood is not probable due to stronger and higher levees, the failures sustained during Katrina proved that even a small malfunction can have devastating results and recent studies suggest that climate change and global warming are contributing to an increase in the potential for increased river flows in areas including the Mississippi. And while home and business owners in the area now have the National Flood Insurance Program, there are only 220,000 polices covering $37 billion in exposure across the 100 counties that would potentially be affected---representing a mere 16% of the total exposure value and leaving the remaining 84% of loss outside the realm of insurance. This would create a higher dollar amount of uninsured loss that was experienced after Katrina, according to RMS.

Michelle Payne (michelle.payne@iiaba.net) is a Big “I” writer/editor.

Agency Management

The Best Investment an Agency Can Make
Offering tuition benefits may keep employees around longer.

Everyone likes to have a good stock tip or hot investment. Of course, information that is too good, i.e. inside information, is not a recommended approach and given the Enron, Worldcom and other corporate meltdowns, the hot stock may cool down. So what is a good investment?

For agency principals, a recent Wall Street Journal article indicates that providing tuition benefits or tuition aid to employees actually helps retain productive employees. The prevailing notion held by many employers is that providing tuition benefits may actually backfire by increasing the value and marketability of an employee. So, paying for employees to better themselves may lead to an earlier exit from the company.

In light of this commonly held notion, the conclusion reached by Stanford graduate student Colleen Flaherty might surprise a lot of agency principals. Her research indicated that instead of serving as a vehicle for employees to leave early, the converse was true. Her study showed that among employee hired the year after the program started, only about 33% of participants had left the employer within five years, compared with about 33% of participants had left the employer within five years, compared with about 60% of employees hired the same year who didn’t use the tuition program.

So the research indicates that rather than being an unwise investment, investing in employee education actually pays dividends. What kind of curriculum makes the most sense? It depends on the employee. The perfect way to broach the subject is during the employee’s review when there is a dialogue about the employee’s future in the agency. For some employees, the right class might be about technology, marketing or accounting. For agencies looking to get into a new market niche, it might a specific class like professional liability or directors and officers liability coverage. There also might be professional designation classes like the ACSR personal lines or commercial lines designation.

Some agency principals may be concerned that offering tuition benefits will also mean giving the employee time off from the agency to take a class which creates staffing and productivity concerns. This concern has been alleviated by technology. The Big “I” Virtual University offers a variety of classes---both technical/professional and “soft skills”---that allow employees to improve their knowledge and skills during lunchtime or at home. These online classes allow employees to monitor their progress and identify specific areas that they need to reread and grasp before progressing on to the next chapter. And, if desired, the agency principal can monitor the online progress of their employees.

Determining a career path within the agency with the requisite technical and professional skills allows the employee to grow and boosts the productivity of the agency. Agency principals should remember they can avail themselves of coursework which is a tax deductible expense to the agency and the best investment they can make.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA contributing editor.

Forms & Substance

CGL Additional Insureds --- A Risky Business
Why every insured should have a CGL policy for liability protection.

The CGL often is used to insure exposures that involve a multitude of parties. In many instances, a party will only enter into a contract or job if named an additional insured on the CGL policy of one or more other parties. The Virtual University "Ask an Expert" service recently received the following question from an agent regarding this issue:

"Our prospective insured has asked us a question that I am hard pressed to answer in the affirmative. They are beginning a night club in our city. We have obtained quotes for GL and builders risk coverages while the building is going through some renovations. They have come back to us saying that the general contractor has obtained the builders risk coverages and then they asked, ‘If we are named as an additional insured on the CGL of the general contractor, wouldn't that solve the problem while the building is undergoing reconstruction and therefore I will not have a problem?’ I did warn them that they have no control on whether or not the CGL will continue to pay their premiums or may run out of coverage by using up their aggregate, and that they may not be aware of these problems as, even though they have a certificate of insurance, they may not get notified. But other than that, is there any reason I shouldn't go along with her solution?”

An insured should never rely exclusively on additional insured (AI) status for liability protection. Virtually every insured needs its own CGL policy.

If the sub is just added as an AI to the general's CGL policy, the sub is completely reliant upon the general for coverage. What if the general's policy cancels for non-payment? What if the limits are too low (all parties must share those limits)? What if the aggregate has been burned up?

What if the general has other claims pending that may leave no funds for claims of the sub? How can the sub present evidence of insurance to get future jobs? Are only on-going operations covered---what about completed operations?

Keep in mind that AI status only grants coverage while working on behalf of the general contractor, typically for that specific job and often only on the premises. Obviously, the sub is going to have liability exposures far beyond one job.

The AI status provides no automatic insured status.

Also, most forms today provide vicarious liability only---this is simply inadequate to protect the full exposure. If a loss arises out of the sole negligence of the additional insured, an anti-indemnification statute may be applicable, not to mention the referenced forms.

For more information, click here.