T H U R S D A Y ,  J U N E   1 9 ,  2 0 0 8 

Big “I” National News

P&C Trends
The Small Commercial Crusade
Study says the fight for business in the small commercial market is intensifying.

A battle is waging among property-casualty insurers competing for business in the small commercial market with as much as $95 billion in premium potential at stake, according to Conning Research and Consulting, an insurance industry analysis firm.

Since the beginning of 2008, the question for the p-c industry hasn’t been so much of will there be a war for business in the small business market --- but where will it be most intense and which strategies will be the most successful?

“The small commercial market has become increasingly competitive in recent years because more insurers have entered or expanded their footprint in this market. Insurers are attempting to compete for business through use of technology, product development and market specialization,” says Clint Harris, analyst at Conning Research and Consulting. “However, smaller regional companies are holding their own, and may are out performing the larger writers.”

According to Conning, the fight for a piece of the market share began in 2006 and continues today as insurers are now offering a variety of new products and services targeted toward small businesses. The soft market is also contributing to the competition as insurers vie for business and Conning expects it to increase due to current economic conditions.

“Certainly, conditions in the underwriting cycle are driving some of this SCM (small commercial market) development as insurers scrap for business. However, a greater use of predictive analytics and development of a more holistic view of customer value are likely contributing to the current attention in SCM,” says Conning’s report, “The Property-Casualty Small Commercial Market: Redefining Battlegrounds and Rules of Engagement.” “With an apparently inexorable march toward a progressively more competitive insurance marketplace and with a general economic recession threatening, it is possible that the results gap among SCM insurers will widen.”

Conning’s last study of the small commercial markets, in 1998, revealed that some insurers were struggling to gain a competitive advantage over the market through superior expense management, express-line processing efficiencies and/or development of niche specialties. A decade later, the management of small business underwriting is expanding to include qualification of the impact of this market on insurer’s overall risk, yet many of the techniques for success have remained the same: efficient processing without compromising the underwriting process and product customization that attracts and retains business.

Today, technology is also playing a major role in the development of the small business market as insurers increase their automated processing capabilities.

“As insurers have increased their abilities to process larger and more complex accounts, they have redefined their SCM underwriting windows,” the report says. “Increasing technological sophistication should continue expanding the definition.”

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
Fitch Adjusts 2008 Forecast for P-C Industry
Modest underwriting losses predicted by ratings agency.

After reviewing industry year-end data for 2007 and first quarter 2008 results, Fitch Ratings has updated its 2008 forecast for the property-casualty insurance industry due to deteriorating underwriting performance and the continued decline in premium rates across the market.

“Fitch believes that the market has crossed a tipping point in the underwriting cycle, such that industry returns on capital for current accident-year business has slipped to inadequate levels, though a number of more proficient individual underwriters will still produce sufficient returns,” the forecast says. “The market environment is anticipated to deteriorate further going forward, and it is difficult to project the length and extent of the current soft market, and the circumstances that will promote a shift to hardening market rates.”

The p-c industry’s strong underwriting profit and operating performance in 2007 were the beginning of the end of the hard market experienced in the previous five years. However, the prior years’ success created more competitive market conditions and a decline in insurance premium rates, which has led to less favorable underwriting performance and profitability that could spell trouble for the industry, according to the ratings company.

Fitch’s original 2008 forecast, released in December 2007 predicted a 98.1% combined ratio, however, the ratings company is now projecting modest underwriting losses for the year. The underwriting result, partnered with a slight decline in estimated investment income, has let to a decline in projected net income, causing the estimated return on surplus to fall from 9.2% to 7.6%.

Fitch projects calendar-year underwriting performance to continue to benefit from favorable loss reserve development from prior underwriting periods. However, the ratings agency says it’s difficult to predict the timing of reserve releases and believes the industry still has a modest reserve redundancy. It also is less than optimistic about pricing trends taking a positive turn in the next year.

“Looking ahead to 2009, underwriting results and operating profits are likely to continue their downward trend,” the report says. “Though the industry is not producing returns on par with its cost of capital, strong market capacity and other competitive factors are still driving prices to less attractive levels. Currently there are no catalysts evident for a shift to a hardening market trend, and it will likely take larger underwriting losses or some other significant event that removes capital from the market for pricing to shift. Fitch does not envision any meaningful shift in pricing trends until the second half of 2009 at the earliest.”

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
No Rest for Insurers and Insolvencies
Insurance insolvencies are at an all-time low, but it may not be time to relax.

A.M. Best reports that 2007 was the year of the lowest rate of insolvencies in nearly 40 years, but it may not be time to relax.

With seven of the top 10 catastrophes occurring since 2001, an economic downturn may be upon the industry. With the softening market starting to affect insurance company results, industry watchers seem less sanguine that the low rate of insolvencies will continue.

According to A.M. Best, there were only four p-c insolvencies in 2007, including two non-standard automobile insurers, a risk retention group and an extended vehicle service contract provider in South Carolina. As a result, 2007 was a year when very few agents and their insureds had to deal with the consequences of insurer insolvency. Industry watchers A.M. Best and S&P both attribute the low impairment rate to a favorable p-c insurance pricing environment, a strong industry capital position and the lack of major, multiple state catastrophes in 2006 and 2007. Looking at the remainder of 2008 and beyond, however, the very reasons for the low frequency rate may be changing and the trend may not continue.

A good benchmark for the impact of insurance company insolvencies on agents and insureds is activity recorded by the guaranty fund system. The guarantee fund system began in the 1940s and focuses on workers’ compensation and automobile insurance.  State guaranty funds assess solvent insurers in a state when another insurer in the state is unable to pay claims. This system of “passing the hat” amongst regulated insurers in a state to pay for an insurer that has gone bankrupt has been adopted in all states and D.C., and essentially the system provides FDIC-like assurance to policyholders that a bankruptcy of an insurer regulated by the state will not go completely unpaid.

As seen in the graph below, the amount guaranty fund assessments varies greatly year to year, but it generally is low compared total p-c industry premiums. The number of major catastrophes is also quite high since 1995 with Sept. 11, 2001 and six of the top eight hurricanes (in terms of insured damages) occurring in the last 13 years.



Source: Insurance Information Institute

Editor’s Note: Next week’s edition of Insurance News &Views will look at the changing causes of insurer insolvencies and what they might portend for the coming years.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage^SM and a licensed p-c agent.




L&H Trends
More Candles on the Cake
As life expectancies increase, agents can help their insureds maintain their financial freedom.

The average U.S. life expectancy jumped three months in a single year from 77.8 in 2005 to 78.1 years in 2006, according to the most recent report by the National Center for Health Statistics, making it more important than ever for Americans to have a realistic game plan for financial independence in retirement.

Women continue to outlive men --- with average longevity of 80.7 years versus 75.4 years. And while increasing life expectancy is a positive development, there is still a disparity in average life expectancy among ethnic groups, as white males averaged 76 years and black males averaged 70 years. For white females the average was 81 years and for black females it was 76.9 years, although the averages represent record-high life expectancies for all groups. 

There are two primary threats to retirees’ standards of living when they retire: (1) inflation’s impact on the purchasing power of their retirement funds and (2) health care and long term care costs. Currently, Social Security does have a cost-of-living-adjustment (COLA) component based on changes to the consumer price index (CPI-Urban).  While economists debate the accuracy of the index as it relates to retirees’ actual “basket” of expenses, it has become exceedingly important given the longevity of retirees. Also, Social Security benefits are either reduced or increased depending on the actual date the recipient commences benefits based their normal retirement age (currently 66 years for people born in 1943). As people continue to live longer, the actuarial factors may have to be adjusted to reflect longer payment periods. The second major factor: health care and long term care costs represent risks that independent insurance agents can help their clients prepare for by discussing the use of immediate annuities, health savings accounts, Medicare supplements and long-term care insurance (LTCi) to pre-fund for health expenses and transfer risk to insurance companies. 

With 2008’s increase in overall prices coupled with an increase in longevity, agents should consider the cost and use of inflation riders to protect the purchasing power of the benefit that will be received or paid out. Assuming just a 3% rate of inflation yields a decrease of 50% in 12 years. Insurance companies have been providing more policy riders for agents to use --- for example, one LTCi policy rider allows a spouse to use any of the other spouse’s lifetime maximum benefits if they have exhausted the policy limits under their own policy.

Take a moment to discuss increasing longevity with your agency’s customers and let them know you can assist them in meeting the challenge of planning for retirement.

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




Forms & Substance
Unclogging Overflow Issues
Experts provide advice on accidental discharge and sewer backup.

The Big “I” Virtual University receives a lot of questions about whether or not homeowners policies cover damage from the overflow of toilets, sinks and washers. This issue has been debated for years and sometimes involves balancing the covered peril of accidental discharge from a plumbing system, with the exclusion for the backing up of sewers or drains.

An agent recently wrote in with the following question:

“I have an insured with a current ISO HO-3. When the washer ran, water filled up the sinks and toilet and overflowed from these appliances into the bathrooms. Tile flooring, carpet, interior doors and a first floor ceiling were damaged as a result. We have determined that the drain lines in the house are either worn out or clogged. We have also determined that tree roots have closed the drain line that runs to the sewer connection in the street. Is this covered?”

Courts have often wrestled with the question of whether the policy excludes these losses as sewer backup or covers them under the peril of accidental plumbing discharge (a peril that appears in the HO-2 for damage to the dwelling, but not in the HO-3 per se). A number of state courts have ruled that when the problem is in the insured’s plumbing system, before it connects to the city’s sewer main, it should be covered as accidental discharge from the insured’s plumbing system. The courts’ reasoning is usually that the intent of the sewer backup exclusion is to remove coverage only for those losses that “backflow” from the sewer utility lines.

One argument for coverage is that virtually all overflow of water from “within” a plumbing system involves blockage of a drain. If the exclusion is applied to any blockage, then the overflow coverage is of no value. The exclusion, then, should be applied narrowly to the “backing up through” sewers or drains. Also, the damage is caused by the overflow of near potable water because it has nowhere to go, not the backup of sewage water.

Another argument is that the efficient proximate cause of the overflow is the backing up of a sewer line or drain; that, without the blockage, there would be no overflow. That position supports the premise that the covered peril should be restricted to normal potable water supply line breaks and not to any nonpotable water that backs up from a sewer or drain. Persons taking this position say that “overflow” refers to a tub, sink or malfunctioning washer that overflows its containment (though it’s hard to see how the overflow is from “within” the plumbing system).

VU experts can see an argument for both sides but, this dichotomy appears to arise out of an ambiguity. When that exists, courts will usually take the side of coverage. According to the Property Loss Research Bureau (PLRB), “The sewer backup exclusion was given widespread use after heavy rains in the late 1950s resulted in extensive basement flooding. The continual expansion of cities resulted in a frequent overload of antiquated and inadequate municipal sewerage systems. Insurers were not prepared to assume these regularly occurring, nearly catastrophic losses, and the exclusion was inserted.”

If that historical perspective is accurate, then it could be argued that the purpose of the exclusion is to exclude the catastrophic potential of water backing up from public through private sewer systems, as opposed to localized blockage. According to PLRB, in several court cases, sewage water backed up through a toilet and into a home. Since the water originated outside of the insured’s plumbing system, the court said the exclusion applied. According to the decision, the accidental discharge peril did not apply because that peril only provides coverage where the water originates “from within” the insured’s plumbing system. In each of these cases, a governing factor was the presence of sewage in the overflow.

So, the VU’s position would be that, if the overflow results from a localized blockage in the plumbing system and does not constitute a backup of sewage water, then coverage should apply. Two points, however, should be made. First, if this is a recurring problem, even if the sewer backup exclusion isn’t applicable, the HO policy contains a “neglect” exclusion that precludes coverage unless an “insured” uses all reasonable means to save and preserve property at and after the time of loss. Therefore, the insured has an obligation to remedy the problem when the damage occurs. Second, if there’s any doubt, the insured should purchase ISO’s or the carrier’s sewer backup endorsement. Typically, this coverage costs about $50.

To read the entire article, click here.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.