RMS: Storm Surge Risk Greater Than Hurricane Wind

As we approach the peak of hurricane season, catastrophe modeler RMS has warned that storm surge poses a greater risk than hurricane wind.

RMS says its updated North American hurricane model shows there is a 20 percent chance that storm surge loss will be greater than wind loss for any U.S. hurricane that makes landfall. And for the northeast coast of the U.S. the risk is even higher.

Dr. Claire Souch, vice president, model solutions at RMS says:

Our model shows there is a 20 percent chance that storm surge loss will be greater than wind loss for any U.S. hurricane that makes landfall, which rises to almost 40 percent along the northeast coast of the United States – this is a risk the market can no longer afford to ignore.”

RMS’ updated North Atlantic hurricane model suite includes the ability to fully quantify the risk from catastrophic hurricane-driven storm surge.

An earlier paper by RMS on Superstorm Sandy made the point that storm surge loss can drive more insurance loss than hurricane wind.

In the paper RMS noted that while Sandy was not even classified as a hurricane at landfall, it caused a Category 2 storm surge in New York City:

This is not the first time that storm surge has had a dominant effect. It was responsible for more than half of the total loss from 2005’s Hurricane Katrina, which was a Category 3 storm at landfall, but had a Category 5 equivalent storm surge.”

Recent analysis by CoreLogic estimates that more than 4.2 million U.S. residential properties are exposed to storm-surge risk valued at roughly $1.1 trillion, with more than $658 billion of that risk concentrated in 10 major metro areas.

According to I.I.I. facts and stats on flood insurance, Hurricane Sandy was the second costliest U.S. flood, based on National Flood Insurance Program (NFIP) payouts as of July 12, 2013.

Disparity Between Economic and Insured Loss Widens

Around 24 percent of global economic losses due to natural catastrophes during the first half of 2013 were covered by insurance, slightly below the 10-year (2003-2012) average of 28 percent, according to Aon Benfield Impact Forecasting.

In its 1H 2013 Global Natural Disaster Analysis, Aon Benfield says the larger disparity between the economic and insured loss is due to multiple significant catastrophe events occurring in areas where insurance penetration or specific peril coverage remained low.

The analysis shows that economic losses from global natural disasters during the first half of 2013 totaled $85 billion – around 15 percent lower than the 10-year average of $100 billion. Insured losses for the period reached $20 billion – some 20 percent below the 10-year average of $25 billion.

Roughly 50 percent of the insured losses resulting from natural disaster events were recorded in the United States, down from 83 percent in the first half of 2012.

In order of size the five largest economic loss events in the first half of 2013 were: the Central Europe floods during May/June ($22 billion); the China earthquake on April 20 ($14 billion); the Brazil drought ($8.3 billion); the U.S. severe weather outbreak from May 18-22 ($4.5 billion); and the China drought ($4.2 billion).

Meanwhile, the first half of 2013 comprised seven billion-dollar insured loss events, of which five were in the U.S.: the Central Europe floods during May/June (USD5.3bn); the U.S. severe weather outbreak of May 18-22 (USD2.5bn); the U.S. severe weather outbreak of March 18-20 (USD1.25bn); the U.S. severe weather outbreak of May 26-June 2 (USD1.20bn); the Australia floods during January (USD1.04bn); the Canada floods during June (USD1.0 billion); and a U.S. winter storm in early April (USD1.0bn).

*By the way, the latest edition of Cavalcade of Risk, a round-up of risk-related posts from around the blogosphere, is now live over at Insurance Coverage Law in Massachussetts. It includes a link to our recent post New York MTA in Storm Surge Catastrophe Bond First.

Terrorism Risk and Insurers

Ratings agency Fitch has warned that failure to renew the federally backed Terrorism Risk Insurance Program could have a significant impact on the availability and pricing of workers compensation and commercial property insurance coverage.

Insurer credit ratings and the commercial mortgage backed securities (CMBS) market would also be affected.

The report comes as at least 19 U.S. embassies and consulates in the Middle East and North Africa remain closed through the week after the State Department issued aglobal travel alert to U.S. citizens due to potential terrorist threats.

Fitch notes that workers compensation insurers could be particularly vulnerable to large losses if an extreme terrorist event takes place without the federal terrorism reinsurance program in place:

Recognition of this vulnerability may lead to a withdrawal of insurer’s underwriting capacity from the workers’ compensation market, particularly in industries and geographic areas with greater perceived risk of terrorism-related losses. Reduced workers’ compensation coverage availability would generate broader economic consequences for employers.”

Another major line of business that is highly sensitive to changes in the terrorism risk insurance program is commercial property insurance.

Fitch says withdrawal of the federal backstop without readily available substitute coverage would likely move commercial property insurers to exclude terrorism from property coverage.

Fitch notes that demand for private market terrorism insurance protection will inevitably increase and premium rates will significantly rise if the terrorism risk insurance program is not extended beyond its December 31, 2014 expiration, or coverage is materially reduced.

The private market is unlikely to duplicate the coverage limits available under the current federal program if renewal is unsuccessful, Fitch says.

PC360 has more on this story.

Typhoon Haiyan: The Insurance Perspective

Amid the pictures and stories of destruction from Typhoon Haiyan come some facts that put the damage from this storm in perspective, at least in insurance terms.

Typhoon Haiyan hit the central Philippines as an extreme Category 5 storm, with winds of 195 miles per hour as well as a massive storm surge on November 8. It then traveled across the South China Sea and made landfall on the north Vietnam coast as a Category 1 storm with 75 mile per hour winds on November 10.

Latest media reports put the death toll in the city of Tacloban alone at more than 10,000. While this figure seems high, the Capital Weather Gang blog notes that even if the death toll estimate holds up Haiyan would rank outside the top 35 deadliest tropical cyclones on record.

For comparison, the most deadly tropical cyclone on record was the Great Bhola Cyclone that claimed 300,000-500,000 lives in Bangladesh in November 1970.

According to Swiss Re sigma statistics, Haiyan may also fall outside the top 25 worst catastrophes in terms of victims (1970-2012).

Insurance industry experts predict that while the economic impact of Typhoon Haiyan will be significant, insured losses are likely to be low.

AIR Worldwide reports that the economic cost of the typhoon is expected to be the highest from a natural disaster in the Philippines’ history, although only a small portion of it is expected to be insured.

Officials suggest more than two million families (nearly 10 million people) have been affected by Haiyan in the Philippines, with more than 650,000 people displaced, AIR Worldwide adds.

Dr. Robert Hartwig, president of the Insurance Information Institute (I.I.I.) notes that the Philippines is a very small market for property/casualty insurance, with premiums written in 2012 of just $1.23 billion. On a per capita basis, this works out to just $12.70, compared with $1,223.90 in the United States.

Another reason why insured losses may be nominal, Dr. Hartwig says, is that the storm did not make a direct hit on Manila, the capital and largest city in the Philippines.

The I.I.I. reports that prior to Haiyan, the strongest storm to hit this region was Super Typhoon Megi in October 2010, which impacted the Luzon region. Insured losses for that storm were estimated at less than $150 million.

Check out this satellite image of Haiyan, as it moved over the central Philippines November 8, courtesy of NASA:

Life Insurance Retained Asset Accounts: A Perspective

We take a break from our vacation to bring you our first ever post on a life insurance topic. I.I.I. senior vice president and chief economist Dr. Steven Weisbart offers an insightful perspective on an established life insurance industry practice that is coming under fire.

A life insurance industry practice that has served beneficiaries well for a quarter century and has generated few if any complaints to state insurance departments came under withering fire last week via an article published online and scheduled to appear in the September issue of Bloomberg Markets magazine. The article focused on how the industry practice affected the beneficiary of a $400,000 life insurance policy – the mother of an army sergeant who died in Afghanistan while saving the lives of three others.

Seemingly within minutes of the article’s appearance, the acting under secretary for benefits at the U.S. Department of Veterans Affairs, Michael Walcoff, announced an investigation, and New York Attorney General (and candidate for New York Governor) Andrew Cuomo subpoenaed a half dozen life insurers as part of another investigation. A few days later, U.S. Representative Debbie Halvorson (D-IL) introduced a bill that would set new rules for life insurers using this practice.

What practice caused this furor? In the absence of any other selected settlement option, life insurers place death benefits in the equivalent of an interest-paying checking account. Beneficiaries get checks with which to withdraw/spend the money, which stays in the life insurer’s general account until it’s withdrawn. Materials provided to beneficiaries make clear that the account is not FDIC-insured and periodically report on interest credited and the remaining balance.

So what’s wrong with this? According to the Bloomberg article, virtually everything. The article suggests the practice cheats the families of those who die, stealing money from the families of our fallen servicemen. This unregulated quasi-banking system operated by insurers has none of the protections of the actual banking system, the article reports. Next, life insurers are accused of not disclosing that the funds aren’t FDIC-insured, so beneficiaries are misled into thinking the funds are in an FDIC-insured bank. The industry does this to hold onto death benefits that they’re not entitled to. The article notes that life insurers earn interest on the funds at their corporate rate yet credit uncompetitive rates on death benefit balances, resulting in secret profits for insurers. And so on.

The article is such a one-sided diatribe that it’s hard to know where to start. It treats an FDIC-insured bank account as safer for death benefits than the general account of a life insurer, ignoring the state guaranty laws that insure death benefits for $300,000 to $500,000, depending on the state (vs. FDIC’s $250,000 limit, which was $100,000 at the time the death of the army sergeant occurred). It ignores the bank failure rate of the past few years vs. the superior rate of almost no life insurer failures. It says life insurers shouldn’t earn a higher rate on the funds and credit a lower rate, but says the money should go into a bank account (where it ignores the fact that the bank would do the same thing). It says the insurer should send the beneficiary a check for the entire amount instead of holding onto the money, ignoring the likelihood, based on long insurer experience, that when insurers did that the checks often either went uncashed for long periods of time or were spent/invested unwisely and effectively lost. This practice, at least, credits interest uninterruptedly at a rate that is comparable to accounts with instant liquidity.”

Regulatory Focus on Use of Retained Asset Accounts

The use of retained asset accounts by some life insurers was a key topic of debate at a quarterly meeting of the National Association of Insurance Commissioners (NAIC) in Seattle yesterday.

The NAIC recently created a new working group to review the use of retained asset accounts by insurers and to study whether appropriate consumer protections are in place.

It has also issued a consumer alert on retained asset accounts explaining what consumers need to know about life insurance benefit payment options.

The increased regulatory scrutiny follows a Bloomberg markets magazine article that focused on how the industry practice affected the beneficiary of a $400,000 life insurance policy – the mother of an army sergeant killed in Afghanistan.

A weekend column in the Wall Street Journal by Leslie Scism and Erik Holm poses the question: are life insurers playing fair?

In a Q&A format, the article explains how retained asset accounts work and attempts to sort out whether beneficiaries understand their payout options when an insured person dies.

I.I.I. chief economist and senior vice president Dr. Steven Weisbart recently noted that the use of retained asset accounts is a life insurance industry practice that has served beneficiaries well for a quarter century and has generated few if any complaints to state insurance departments.

Women and Life Insurance

March is Women’s History Month, an important time to empower women about their finances, and one area women underestimate their contribution to their families’ economic well-being is by lacking sufficient life insurance, says the Insurance Information Institute (I.I.I.).

The I.I.I. raises an important point. A national poll by wholesaleinsurance.net found that 43 percent of adult women have no life insurance and among those that are insured, many are severely underinsured, carrying just one-fourth of the amount that would likely be needed by their life insurance policies’ beneficiaries.

Indeed, women who are a family’s primary breadwinner carry 31 percent less life insurance than their male counterparts, even as a growing number of women earn as much, if not more, than their husbands, says the I.I.I.

Loretta Worters, vice president with the I.I.I., notes:

Ironically, 100 years ago women weren’t even able to buy life insurance. Today, women can protect their finances, but they aren’t buying the coverage or, if they are, it isn’t enough.”

This leads us to wonder why more women don’t buy adequate life insurance.

Metlife’s 2012 Protecting a Diverse Workforce report offers some interesting perspective on this issue. Its findings confirm that women are less insured with only twice their income in life insurance coverage, compared to men, who are covered for nearly three times their earnings.

However, the tendency for women to be underinsured is not due to a lack of awareness about life insurance. Metlife reported that 50 percent of women who earn $50,000 or more in income believe they don’t have as much coverage as they need, versus 39 percent of men.

Instead, the report found that more women than men find the process of choosing the right life insurance product to be complex. Some 67 percent of women believe that selecting the right life insurance product is a complicated process, compared with 59 percent of men.

MetLife noted that this belief also extends to selecting the right amount of coverage, where some 59 percent of women feel it can be a complicated process, compared to 50 percent of men.

Another key takeaway from the MetLife study is a difference in the perceived purpose of life insurance among men and women.

Not only do men place a higher value on insuring their income and protecting their financial security than women, but about half of women view life insurance primarily for burial and final expenses, compared to 40 percent of men.

As MetLife says:

This presents the opportunity to educate and reinforce the income protection role of this product, especially with women.”

Florida Drivers Paying For Auto Fraud

Florida is a hotbed for auto insurance fraud and the problem is growing worse, according to a new study from the Insurance Research Council (IRC).

The IRC findings confirm recent Insurance Information Institute (I.I.I.) analysis that staged accidents, excessive or unnecessary medical treatment and inflated or questionable claims are driving up the cost of auto insurance for Florida drivers.

Elements of fraud appeared in 10 percent of all Florida no-fault auto insurance claims – known as personal injury protection (PIP) claims – closed in 2007, according to the IRC.

Almost one in every three no-fault auto insurance claims closed in Florida in 2007 appeared to involve the exaggeration of an injury or to be inflated by unnecessary or excessive medical treatment. The IRC sums up the problem:

The apparent amount of fraud and excessive billing by some health care providers in Florida is growing rapidly. Although these findings describe conditions of more than three years ago, indications are that the situation has continued to deteriorate.”

The IRC found that average no-fault claim losses per insured vehicle grew 55 percent in just the last two years, from $100 in 2008 to $155 in 2010. Claim fraud and abuse were major factors in that growth.

Some 30 percent of Florida claims appear to involve either overbilling or excessive utilization of medical services, known as claims buildup.

I.I.I. analysis recently found that no-fault fraud has already cost Florida vehicle owners and their insurers an estimated $853 million since 2008. The cumulative costs from 2009 through 2011 could exceed $1.5 billion if current trends continue.

I.I.I. Florida representative Lynne McChristian has more on this story in her Straight Talk blog.

Check out the I.I.I. white paper No-Fault Auto Insurance In Florida.

IRC Warns On Rising Auto Injury Claims Costs

Insurers and drivers awoke to some not so good news this morning. According to new findings from an Insurance Research Council (IRC) study of auto injury claim trends, insurance claim costs countrywide have recently increased, reversing previous trends of declining or relatively stable costs.

The IRC reports that although injury claim severity (the average cost of injury claims) has been increasing steadily in the last several years, much of the increase has been offset by declining claim frequency, producing relatively stable injury claim costs per vehicle.

However, recent data indicate that claim frequency on a countrywide basis is no longer decreasing.

In the case of personal injury protection (PIP) claims, the effect of rising claim severity has been magnified by a simultaneous increase in claim frequency. PIP claim costs per insured vehicle countrywide increased by more than 18 percent from 2008 to 2010, the IRC said.

For bodily injury (BI) liability claims, the effect of rising claims severity has been mitigated somewhat by stabilization, rather than an increase, in claim frequency. However, 2010 marks the first year since 1994 that BI claim frequency did not decline.

Elizabeth Sprinkel, senior vice president of The Institutes, summed up the findings:

While we hope these findings represent temporary conditions, we can’t be sure that is the case and can’t afford to ignore the factors driving rising claim costs.”

The IRC notes that much of the deterioration in PIP trends has been concentrated in three of the largest states with no-fault approaches to compensating auto injuries – Florida, Michigan and New York.

In Florida, the average PIP claim cost per insured vehicle in the state jumped 62 percent in just two years (2008-2010).

PIP costs per vehicle in Michigan have been increasing rapidly for several years now – rising more than 120 percent over the last decade, while the New York system has been on a roller coaster of rising and falling costs driving by a surge in suspected claim abuse.

Insurance Fraud Has Greater Impact Than Previously Estimated

It’s been commonly understood that insurance fraud accounts for up to 10 percent of property/casualty insurance industry losses, but a new survey of U.S. insurers indicates that fraud may be much more prevalent.

Some 45 percent of insurers responding to the FICO and Property Casualty Insurers Association of America (PCI) survey estimated that insurance fraud costs represent 5-10 percent of their claims volume, while 32 percent said the ratio is as high as 20 percent.

The survey also found that more than half (54 percent) of insurers expect to see an increase in the cost of fraud this year on personal insurance lines, while less than three percent of insurers expect to see a decline in the cost of fraud on personal lines.

Insurers responding to the survey said they expect the most significant increase in the cost of fraud will affect personal property, workers’ compensation and auto insurance. The majority (61 percent) attribute the increases in fraud to sustained economic hardship by policyholders.

While only 17 percent of insurers attributed the expected increase in fraud to a rise in the sophistication of criminal gangs, 60 percent expect a rise in workers compensation fraud rings, and 61 percent expect a rise in auto fraud rings.

The survey also found that 76 percent of insurers believe there is increased risk of fraud in no-fault states compared to states with tort systems.

When asked about fraud-fighting initiatives that can have the greatest impact on insurance fraud, predictive analytics was identified as the most effective by 45 percent of respondents.

Insurers also included the use of anti-fraud teams for specific books of business (37 percent), link analysis for detecting fraud (31 percent), business rules for stopping known fraud types (29 percent), and external databases (29 percent) as other useful approaches to fight fraud.

In a press release, Russ Schreiber, who leads FICO’s insurance practice, says:

The insurance fraud problem is estimated to exceed $40 billion globally and is showing no signs of abatement. The findings of the FICO PCI Insurance Survey demonstrate that insurers recognize the problem and are looking to improve ways to detect and prevent fraud earlier in the claims process.”

NICB Analyzes Organized Crime In Insurance Fraud

A new report from the National Insurance Crime Bureau (NICB) has found a strong correlation between organized crime and staged auto accidents.

Covering the period from January 1, 2008, through June 30, 2012, analysts reviewed 13,014 questionable insurance claims.

Questionable claims (QCs) are claims that NICB member insurance companies refer to NICB for closer review and investigation based on one or more indicators of possible fraud. A single claim may contain up to seven referral reasons.

For this report, just QCs with a referral reason of “organized group/ring activity” (OGA) were identified.

Overall, there were 13,014 OGA QCs referred to NICB during this period. The top five states that generated the most were: Florida (3,530), California (2,679), Michigan (1,080), Texas (1,050) and New York (765).

The top five cities generating the most were: Los Angeles (752), New York (595), Miami (575), Detroit (545) and Tampa (545).

The insurance policy type most represented in the NICB analysis was “personal automobile,” accounting for 10,659 referrals. NICB says:

This suggests a rather strong correlation between the kinds of alleged fraud schemes most perpetrated by OGAs —staged and caused accidents.”

Further proof of this connection is evident when looking at these QCs by loss type. The referral reason most often coupled with the OGA referral was by far “staged/caused accident” — indicated 4,347 times. The loss type with the most referrals was bodily injury with 4,401 referrals.

NICB notes:

The results of this QC analysis correlate with what NICB agents and analysts are seeing in their cases—particularly in the no-fault, personal injury protection (PIP) states like Florida, Michigan and New York.”

The NICB defines organized crime groups as “any specific group made up of entities and/or individuals who systematically and repeatedly conduct pre-planned activities for the purpose of generating fraudulent insurance schemes.”

Staged/caused accidents are perpetrated by individuals who are skilled in committing insurance fraud. Those “accidents” set the stage for subsequent acts of fraud ranging from faked or exaggerated injuries to unnecessary or excessive medical treatment.

California Wildfire Risk Analysis County-by-County

More than two million California homes face extreme wildfire hazards and many of these homes are located in densely populated suburban neighborhoods, according tonew industry research.

Analysis by the Insurance Information Network of California (IINC) and Verisk Insurance Solutions – Underwriting, reveals that the majority of these high-risk homes are located in Southern California, though Northern California has a higher percentage of high risk homes.

Candysse Miller, executive director of IINC, says:

Nearly 15 percent of the 13.5 million homes in California face severe wildfire risk. That’s nearly as many homes as are in the entire state of Colorado. Wildfire risk is not exclusive to mountain or rural communities. Many of these homes are in densely-populated suburban neighborhoods.”

More than 417,000 of these high-risk homes are located in Los Angeles County and Southern California counties represent 53 percent of the high-risk homes statewide, the study found.

However, Northern California has a higher percentage of high-risk homes. The counties of Alpine, Mariposa, Tuolumne and Nevada account for more than 95,000 homes, but more than 77 percent of these, or nearly 74,000, are considered high-risk.

Statewide, insurers protected more than $3 trillion of residential property in 2011, according to the California Department of Insurance, less than 1.25 percent of which was insured by the California FAIR Plan, the state’s insurer of last resort. As a result, private insurers cover nearly 99 percent of the insured residential properties in the state.

For a county-by-county view of California’s wildfire risk, check out this interactive map on the IINC website.

IRC: Rapid Rise in Homeowners Claim Costs

The cost of homeowners insurance claims has been rising rapidly due to increases in claim severity and frequency, and insurers face significant challenges in responding effectively and managing the volatility of catastrophe-related claims, according to a new study from the Insurance Research Council (IRC).

Consumers should also consider steps to control their personal exposure to risk and to mitigate the damages and costs associated with severe weather events, the IRC said.

The IRC study of homeowners insurance claims found that from 1997 to 2011, the average claim payment per insured home countrywide rose 173 percent, from $229 to $626. In 2011 alone, homeowners insurance claim costs per insured home increased 27 percent.

Over the entire 15-year study period, the annualized rate of increase was 7.4 percent.

The IRC examined separately claim trends for claims not related to catastrophic events and those that were related to catastrophic events.

It found that trends in average claim severity (the average claim payment per paid claim) for both groups were similar in some respects.

For both groups of claims, countrywide claim severity increased almost 200 percent and ended the 15-year period in 2011 with similar values—$8,077 for noncatastrophe-related claims and $7,553 for catastrophe-related claims.

Significantly, however, the trend in catastrophe-related claim severity was much more volatile from year-to-year, with dramatic increases and decreases over the study period.

With respect to trends in homeowners claim frequency (the number of paid claims per 100 insured homes), the IRC said these were very different for the two groups of claims over the study period.

The frequency of claims unrelated to catastrophic events fell substantially from 1997 to 2005. Since 2005, however, noncatastrophe-related claim frequency has increased at an annualized rate of 2.9 percent.

Catastrophe-related claim frequency, while much more volatile, remained fairly flat through much of the period.

The study also found that catastrophe-related claims played a significantly greater role in overall claim trends in the second half of the 15-year period. Catastrophe-related claims accounted for 25 percent of overall claim costs countrywide from 1997 to 2004, on average, but 29 percent of overall claim costs from 2004 to 2011.

Check out this PC360 article for more on this story.