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Big “I” National News

P&C Trends

The Warming Trend
What is global warming’s impact on insurance industry?

A $100 billion catastrophe or the continued softening of the market are typical worries for agents, but most probably aren’t losing sleep over a light unnecessarily left on or their daily commute to work, yet these things could have a much broader impact on the insurance industry.

Carbon dioxide emitted from vehicles or even light bulbs is the primary component of greenhouse gas, the culprit behind a growing global warming problem that is wreaking havoc on the environment and climate. For years, scientists have warned about the devastating impact global warming could have if greenhouse gas emissions aren’t decreased. Now, the warnings are becoming a reality and, as earth’s temperature rises, many people are focusing on “going green” and reducing their carbon footprint (the amount of carbon dioxide a person releases). Yet the damage already done has started to impact every facet of life, including insurance, according to a report, “Blown Away: How Global Warming is Eroding the Availability of Insurance Coverage in America’s Costal States,” released earlier this week from the Environmental Defense group.

Greenhouse gases increase Earth’s temperature, leading to more extreme weather, including hurricanes, which get their strength from warm ocean waters. In the past, a major hurricane, fire or flood may have occurred once every 10 years, allowing insurers to price premiums according to that probability. However, global warming has made those risk models less accurate as catastrophes increase and grow stronger, the study says.

In 2005, the Massachusetts Institute of Technology found that duration and wind speeds of hurricanes have doubled since the 1970s and the frequency of Category 4 and 5 storms have doubled because of warmer ocean water temperatures. These changes leave the industry with greater exposure to risk.

The 2004-2005 storm season included seven of the costliest hurricanes in U.S. history, including the record-breaking Hurricane Katrina. Insurers paid out more than $55 billion in claims from the 2005 storms alone. As a result, many insurers in the south and along the coastline have been forced to increase premiums for home and business owners or cancel polices all together in an effort to keep up with the increased risk, according to the report.

The 2004-2005 hurricanes caused more than $35 billion in insured losses in Florida and the average homeowners’ premium spiked by 77% between 2001 and 2006. Louisiana paid out more than $25 billion in losses --- three times more than any other state --- and overall insurance premiums have increased 65.2% during the same time period. Insurance premiums in South Carolina also climbed an average of 56.4% and insurers have dropped more than 20,000 coastal policies since August 2006, according to the study. However, these numbers are relatively small in comparison to what could happen if global warming continues.

According to the U.N. Environment Program’s Finance Initiative report, climate change driven by natural disasters could cost the world’s financial institutions as much as $150 billion per year over the next decade. And a 1.8 degree rise in the average global temperature could have an economic impact of up to $2 trillion worldwide by 2050.

While hurricanes make up the largest weather-related threat, forest fires and extreme storm surges also are expected to increase as earth’s temperature rises. According to the report, rising sea levels, due to thermal expansion of seawater and more-rapidly melting glaciers, pose a serious threat to coastal areas and increase the risk of flooding.

“Over the next several hundred years, melting ice sheets and the expansion of seawater from higher temperatures could bring a rise in sea level of up to nearly 40 feet, which would essentially inundate many American coastal cities,” the report says. “Increased winter precipitation in the form of rain, rather than snow, and more rapid melting of snow pack are already contributing to earlier and higher spring floods. And forest fires --- spurred by higher temperatures and drier conditions --- are driving up insurance claims in the western United States.”

Even the Midwest, with its vast farming community, is in danger, as the crop insurance market also faces global-warming challenges. A 2002 study by NASA, using crop model simulations, found that agriculture losses due to excessive rainfall as a result of global warming could double in the next 30 years and cause an estimated $3 billion in damages.

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

VIEW: P&C Trends

Mirror, Mirror on the Wall
Insurance, gasoline not fairest industries of them all.

Remember when the queen in “Snow White” asks her mirror who is fairest in the land? If “fairness” was reasonable pricing and the queen was the U.S. Congress, the mirror would answer: “almost any industry but insurance and gasoline.”

Insurance and its enabling cousin reinsurance are some of the most unpredictably priced products in the economy, and this volatility results in consumers and small businesses having fits as falling prices in soft markets are followed by high prices in hard markets. Add seemingly unpredictable prices to a lack of available coverage and there is a potent mix that could affect the likelihood insurance regulation could change for independent agents.

In the chart below, data from A.M. Best Aggregates & Averages is provided along with government sources for the consumer price index (CPI) and gasoline prices. The chart shows the year-to-year percentage price change in total premiums versus average prices. The industry’s volatility is not far off from the bad boy of pricing volatility, gasoline, which should quell some of the frustrations about the unpredictability of the industry. After all, with insurance and gasoline, customers get the same satisfaction from each purchase yet prices can swing wildly. This is made even clearer when one compares the average change in all prices as measured by the consumer price index, which is a nearly constant 3% increase.



As Congress debates insurance, independent agents must fully appreciate that insurance can look like a mean and capacious industry because of its pricing. Lack of supply and feeling vulnerable to catastrophes only adds pressure on Congress to “solve” the problem. Stay tuned to IN&V as Congress debates federal charters for insurance companies and producer licensing. The federal government affairs staff will keep members informed on the issues and may need help in lobbying representatives. Also watch for information on the coming Big “I” Legislative Conference & Convention, April 2-4, 2008, in Washington, D.C.

So what about the fairytale ending?

When the queen in “Snow White” turns herself into the witch and conjures her magic, was Walt Disney predicting Congress would go after insurance regulators with a poisonous apple? Following the fairytale to the end, if the industry ends up with some form of federal charters, who would be the seven dwarfs who watch Congress fall into the abyss of insurance regulation? Only time will tell.

Editor’s note: This is the forth installment in a series examining A.M. Best’s 2007 Aggregates and Averages. To read the first installment, “By the Numbers,” click here. To read the second installment, “Medical Malpractice: Lessons for a Soft Market,” click here. To read the third installment, “Premium Trends: Top 10 Personal Lines Writers,” click here.

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

L&H Trends

Here We Go Again: Insurance Receiving Negative Publicity
Larry King lawsuit puts industry under unwarranted media glare.

One of the worst situations insurance agents and carriers face is when the media focuses on a situation of questionable conduct and then generalize it as symptomatic of typical agent or carrier behavior.

First, there was the undisclosed “placement fee” issue back in 2005 which led to a misunderstanding and castigation by the consumer media of contingent compensation, activity by attorneys general and a change in compensation practices by a few national carriers. Next, there was the attention focused on a number of personal lines’ carriers for their adjudication of “water vs. wind” claims. Now a new high-profile lawsuit could result in unwarranted criticism of insurance agents.

In a suit filed in U.S. District Court in Los Angeles, television talk show host Larry King claims he was targeted in a 2004 scheme perpetrated by the Maryland-based Meltzer Group. In his Oct. 22 complaint, King charges that the insurance company convinced him to engage in a series of “highly complex life insurance transactions” that resulted in the purchase and flipping of insurance policies with an aggregate value of $15 million. In one instance cited in the lawsuit, King purchased a $10 million policy and, at Meltzer’s direction, immediately sold it for a $550,000 profit. King also sold his interest in an older $5 million policy for $850,000. The lawsuit alleges that the deals disproportionately benefited Meltzer through large commission, bonus and override payments. Of special interest in the lawsuit is the reference to the term “trusted insurance agent” and the accusation that the agent was acting as a “fiduciary.” The lawsuit charges Meltzer with breach of fiduciary duty.

It will be interesting to see if King will use his celebrity status and show to discuss his lawsuit. Hopefully, if this case is discussed in the media, there will be a balanced presentation that highlights the fact that this is an atypical insurance transaction. However, if insurance agents are painted in a broad brush, be prepared to discuss the unusual circumstances of this case with clients who bring it up. They may not understand the distinctions between “viatical settlements,” which involve purchasing an insurance policy by a third party (with the value of the transaction taxable to the extent it exceeds the aggregate insurance premiums), instead of the usual purchase of a life insurance policy to provide replacement income in the event of the premature death of the insured.

While independent agents can only control their own behavior and professionalism, it is important to understand that high profile cases can result in unusual media scrutiny.

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

On the Hill

Senators Clinton, Nelson Introduce Natural Disaster Legislation
Homeowners’ Defense Act will help spur debate on growing issue.

Senators Hillary Clinton (D-N.Y.) and Bill Nelson (D-Fla.) introduced the Homeowners’ Defense Act of 2007, intended to address the growing problem of the availability and affordability of natural disaster insurance.

The legislation is companion legislation to H.R. 3355, introduced earlier this year by Reps. Ron Klein (D-Fla.) and Tim Mahoney (D-Fla.). The proposal contains two titles, one to create a National Catastrophe Risk Consortium and one to create a National Homeowners Insurance Stabilization Program. Both programs are intended to help prevent potential insolvencies and make the private insurance market more stable, ultimately making catastrophe insurance more available before and after a major disaster. The consortium program would allow multiple states to pool their catastrophic risk, thereby hopefully achieving an economy of scale and risk diversity that will lead to a lower cost of reinsurance than states could achieve independently. The stabilization program would allow the treasury department to make loans to states and their reinsurance plans to ensure their continued liquidity in the aftermath of a natural catastrophe.

“The Big ‘I’ is pleased that Senators Clinton and Nelson have introduced this legislation aimed at easing the natural disaster insurance crisis facing many communities,” says Charles Symington Jr., Big “I” senior vice president of government affairs and federal relations. “Natural disaster risk requires a national solution, and we applaud the senators for advancing a proposal to attempt to solve this problem. Introduction of this legislation in the Senate, coupled with expected House action on the issue this week, is focusing attention on the severity of the problem. The Big ‘I’ thanks Senators Clinton and Nelson for proposing a concrete solution.”

The Big “I” has been a leader in advocating for natural disaster solutions, testifying on several occasions before the House Financial Services Committee and the Senate Banking Committee on the need for Congress to consider legislation to stabilize the insurance market for natural disaster risk.

“As the representatives of the independent insurance agents who sell homeowners’ insurance, we are grateful to Senators Clinton and Nelson for their leadership in advancing an idea that could encourage both a healthy and vibrant private market as well as secure state and regional reinsurance programs,” says John Prible, Big “I” assistant vice president for federal government affairs. “Specifically, the creation of a National Catastrophe Risk Consortium could offer both states and private market participants an opportunity to benefit from a pooling of catastrophic risk diversified by type of peril and geographic region. The creation of a National Homeowners’ Insurance Stabilization Program, meanwhile, could provide for a level of stability for state and regional reinsurance programs that is currently absent.“

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.

Agency Management

Preparing for the Unexpected
Protect your agency against worst-case scenarios.

Imagine this worst-case scenario: A server overheats, starting a fire that consumes the computer room of an agency before the sprinkler system kicks in and completes the disaster process. Facilities, hardware, network and data are all lost. Now what?

To effectively operate an information system, you need four primary assets: facilities, hardware, network and data. In the unfortunate event of a disaster, hardware and networks can be replaced and facilities can be moved to a new location. In fact, with the exception of data, virtually every company asset can be replaced. Therefore, the top priority should be to protect the asset that is most at risk and hardest to replace --- data.

Agencies need to strike a balance between the level of business risk they can tolerate and the cost of perfect security. Initially, all businesses would say they can’t afford to lose any data and they can’t tolerate any downtime. But protection on that scale is probably cost-prohibitive and overzealous. It’s unlikely that all applications are equally mission-critical and all systems are equally vital. That’s where metrics like RTO and RPO enter the discussion.

International Data Corporation research determined that 98% of all companies are adversely affected by unscheduled downtime. This speaks directly to the need for recovery time objectives (RTO) to guide an agency when any disruption occurs. Proven and tested RTO metrics will give an agency confidence in how quickly it can recover critical systems and be back in business serving customers.

In addition, Gartner Group research found that 93% of organizations that experience a significant data loss are out of business within five years. This research confirms the need for recovery point objectives (RPO); once an agency’s systems are back online after a disaster, RPO standards helps keep data loss to a minimum.

Business continuity plans start by determining the RTO and RPO for a particular agency’s applications. The relative importance of RTO and RPO is different for every agency. After determining an agency’s RTO and RPO, it’s time to make sure there are backup and recovery solution to supports them.

Businesses should look for a solution that incorporates the following four components:

Requirement 1 - Continuous Backup: Only half of U.S. businesses perform data backup, and surveys find these businesses do not always do an adequate job. Because some agencies have limited or no IT staff, they perform bulk server backup sporadically, use traditional tape for backup and typically perform the task after business has closed for the day. That means companies can only expect to recover data from the previous night. How can agencies eliminate this window of vulnerability? Ask your provider for continuous backup that allows data to be captured as it is changed --- essentially in real-time.

Requirement 2 - Automatic Offsite Storage: Even if a business is rigorous about backup, is it equally rigorous about ensuring the tape is safely stored offsite? Does your agency invest in scheduling the time to backup, physically remove tapes and arranges for pickup by a third party to transport them to a remote vault? Look for a service that provides safe and accessible data-vaulting and transmits the data via the Internet, so physical damage to tapes or theft of tapes is avoided entirely and the data is immediately available for system recovery.

Requirement 3 - Immediate Recovery: Recovery is the process of restoring operations and, specifically, data after an outage or disaster. It’s an obvious point, but often overlooked. Being able to immediately recover data is critical to ensuring business continuity. Online services provide a means of recovering data immediately from any Web interface. Look for a service that offers this level of convenience and control.

Requirement 4 - The Guarantee: Backup and recovery software vendors will have RTO and RPO ranges within their service level agreements, but none will provide an absolute guarantee because there are too many elements outside of their control, like tape quality or the ability of the internal IT staff. Online backup and recovery services, however, are able to provide the luxury of a guarantee because the entire process is managed by experts at the service provider and the technical components of the service are fully automated. When evaluating any backup and recovery solution provider, ask if it guarantees the recovery, rather than just the backup of data.

Establishing business continuity metrics such as RTO and RPO is critical in business continuity planning. Devoting attention to RTO and RPO is the only way to guarantee an agency will still be able to operate in the event of a disaster.

To read the entire article, click here. 

Bob Chaput (rchaput@amtechgroup.com) is president of American Technology Group, Inc., a disaster recovery and data protection services firm.