Wednesday, December 31, 2008

Pa. Eyes Bill To Ban Ed, Occupation Factors In Auto Rating

Industry officials cautioned against a Pennsylvania legislator’s plan to introduce a bill in January that would ban the use of education and occupation as auto insurance rating factors in the state.

A recent news report in the Pittsburgh Post-Gazette noted that State Rep. Anthony DeLuca, D-Penn Hills—who chairs the Pennsylvania House Insurance Committee—plans to introduce the bill because he believes using education and occupation as auto rating factors is discriminatory.

Loretta Worters, spokesperson for the Insurance Information Institute (I.I.I.), did not comment on the bill proposal specifically but said restrictions in actuarially valid underwriting criteria would lead to uncertainty, higher prices and less competition.

“Despite what Rep. DeLuca claims, all underwriting factors used by auto insurers, including occupation and education, have been actuarially demonstrated to enhance the insurer's ability to predict loss,” she said via e-mail.

She also pointed out that a June 2006 Maryland Insurance Administration study concluded that occupation and education, when used as rating factors for auto insurance, are actuarially predictive of loss and are not unfairly discriminatory.

Dave Snyder, vice president and assistant general counsel of the American Insurance Association (AIA), pointed to a formal administrative law proceeding that occurred in New Jersey, which also found that using education and occupation as rating factors is not discriminatory.

Mr. Snyder said AIA does not necessarily endorse using education, occupation, or any other specific rating factors, but he said banning a practice that is legal and effective is not good for consumers and could lead to better risks subsidizing bad risks.

He added that while AIA does not agree with the legislation itself, concerns raised by Rep. DeLuca deserve to be considered.

Mr. Snyder said that while some insurers are using education and occupation as rating factors, others are moving in the opposite direction, by basing rates more on vehicle usage and miles driven. The variation in rating factors, he added, is what is to be expected from a very competitive marketplace.

The proper approach, he stated, is to allow for innovation in the marketplace, as long as the new approaches comply with applicable laws—including anti-discrimination laws.

Ms. Worters noted that “most auto insurers base price on multiple factors, including the type of vehicle a policyholder owns, how many miles they drive, a person’s driving record and the community in which a policyholder resides.”

She added, however, that occupation and education are also important predictors of loss. “No single factor determines eligibility for coverage or the premium charged. In fact, insurers use 20 or more risk factors when making determinations about price,” she said.

Tuesday, December 30, 2008

WSI Predicts Three Major Hurricanes For 2009

WSI Corporation is forecasting three Category 3 or higher hurricanes, and seven hurricanes in total for the 2009 Atlantic tropical season.

Andover, Mass.-based WSI—a provider of weather-driven business solutions for media markets, federal and state government agencies, and the energy and aviation industries—said it expects 13 named storms for the 2009 hurricane season, higher than the 1950-2008 average of 9.8 named storms.

WSI said warmer sea surface temperatures and favorable or neutral wind shear, due to the lack of an El Nino event, will be the primary reasons for the increased activity.

Todd Crawford, WSI seasonal forecaster, said in a statement: “Since 1995, most tropical seasons have been more active than the long-term averages, due to warmer Atlantic Ocean temperatures. We do not see any reason why this active regime will not continue in 2009. It should be noted that the Atlantic temperatures are cooler than last year, however, and we currently do not expect 2009 to be quite as active as 2008.”

WSI also noted it will update its forecast in April 2009.

Monday, December 29, 2008

Allstate IDs 10 Deadliest Cities For New Year’s Teen Drivers

Jacksonville, Fla., led the list of 10 cities that Allstate calls the deadliest hotspots for teen drivers on New Year’s Eve and New Year’s Day.

The survey, part of the Northbrook, Ill., insurer’s “Home for the Holidays public awareness and policy campaign,” listed 10 cities it calls the deadliest hotspots for teens during the two-day period among the nation’s 50 largest metro areas.

Allstate said that what each of these areas has in common is that over the past eight years they have had the highest fatal crash rates for teen drivers during the New Year’s holiday period.

The number does not reflect the number of teens killed, but the number of crashes involving a teenage driver and a fatality.

Among the nation’s 50 largest metropolitan areas (a central city and its surrounding counties), Allstate identified the deadliest hotspots:

• Jacksonville, Fla.
• Columbus, Ohio
• Richmond, Va.
• Birmingham, Ala.
• Orlando, Fla.
• Phoenix
• Las Vegas
• Philadelphia
• Sacramento, Calif.
• St. Louis

The ranking is based on Allstate’s teen driving score assessment.

According to the Insurance Institute for Highway Safety, from 1991 through 2006, more than 5,000 teens died on America’s roads each year. The year 2007 was the first in which the teen figures dropped below 5,000 since 1975. Motor vehicle accidents also were identified as the leading killer of American teens in 2005, the latest year for such data, the IIHS said.

The study examined recent federal crash statistics, Allstate’s claims data on teen collisions and U.S. Census Bureau statistics to score metro areas across the nation on rates of fatal crashes involving teen drivers during the holidays.

It was conducted by Allstate in conjunction with Sperling’s BestPlaces, a Portland, Ore., research firm specializing in demographic studies and analysis.

Friday, December 26, 2008

Agents, Inform Homeowners Of Holiday Liabilities

Many homeowners are unaware of the liability they expose themselves to if they host holiday parties and allow individuals to drive home drunk, according to a new national survey released by Trusted Choice and the Independent Insurance Agents & Brokers of America.

The survey asked homeowners if they believed they were legally liable if a guest caused an alcohol-related traffic accident after leaving a holiday party at their home.

The survey of 809 homeowners found that one-third did not think or did not know if they could be held responsible in the event of an alcohol-related accident. The telephone survey was conducted in November and has a margin of error of 3.5 percent.

Trusted Choice, the independent agent branding campaign of the Alexandria, Va.-based independent insurance agent group, said agents should advise their homeowner clients that in many states, individuals hosting holiday parties can be held liable.

“There are so many ‘what if’ scenarios that can face insurance buyers today, and not all of them are everyday occurrences,” said Madelyn Flannagan, IIABA vice president for education and research commented in an e-mail. “An independent agent can provide a tremendous value-added service to their clients by providing expert knowledge and coverage reassurance. The nation’s current economic crisis has everyone more vigilant about their financial matters. Agent’s need to reach out and help clients understand and mitigate their potential losses, not only during the holiday season, but during the entire year.”

Trusted Choice went on to say that many courts have found hosts liable for the damages their party guests cause as a result of consuming alcohol at their social gatherings and then driving motor vehicles.

Many states also have enacted statutes that can be interpreted as mandating non-commercial social host liability. In these situations, if a guest or third party is injured in an accident that is related to alcohol consumption and the drinking can be linked to the host, the host could be held responsible for the payment of medical bills, vehicle repair costs, lost time from work and—in the worst case—claims for wrongful death resulting in huge monetary settlements.

The survey found that:

• Almost 46 percent of homeowners thought they were not liable in the event that a guest became seriously ill from catered food consumed at the host’s home

• About 22 percent did not think they could be held responsible if a guest was injured on the sidewalk in front of their property.

• More than one-third of homeowners either did not think they could be held responsible or admitted they did not know, if they destroyed another home with a careless act.

The bottom line is that homeowners could, in fact, be held responsible in any of these scenarios or accidental incidents, Trusted Choice said. It recommended that consumers review the homeowners policy and understanding the coverage. Homeowners also should consider expanding coverage by purchasing a personal umbrella policy with greater limits, especially for anyone who is a frequent party host.

Other recommendations:

• Limit the guest list to those you know.

• Host a party at a place with a liquor license, rather in a home or office.

• Provide filling food for guests and alternative non-alcoholic beverages.

• Arrange transportation or overnight accommodations.

• Stop serving alcohol at least one hour before the party is scheduled to end.

• Do not serve guests who are visibly intoxicated.

Tuesday, December 23, 2008

Agents Eager To Invest In Future Generations, IIABA Finds

The majority of independent agents would like to see the insurance industry do more to encourage high schools and colleges to guide students toward an insurance industry career, and many said they would help with internship programs.

The findings were part of the bi-annual “Agency Universe Study” conducted by Future One, a collaboration of the Independent Insurance Agents & Brokers of America and leading independent agency companies. The study involved approximately 1,900 agencies answering questions by the Internet and a small sampling of participants by fax.

According to the survey, 56 percent of respondents stated that the insurance industry should encourage high schools and community colleges to help students plan for insurance careers. Forty-five percent of agencies said they would consider participating in an internship program to bring new people into the industry.

“Young people, women and minorities continue to be underrepresented in the independent agency system, particularly among agency principals,” Madelyn Flannagan, vice president for education and research with the Alexandria, Va.-based IIABA, said in a statement.

The study found that 11 percent of the agencies participating in the study are relatively new, founded in 2004 or later (including 4 percent founded in 2007 or 2008).

A positive finding was that new agencies were mostly headed by younger principals. The average age of respondents from all agencies is 52, compared to 47 from new agencies.

“The average age of a professional in the insurance industry is 54, and 60 percent of insurance industry professionals are older than 45,” noted Robert Rusbuldt, IIABA president and chief executive officer. “Many in the industry laud the “Big ‘I’ InVEST program as one of the most important projects to ensure the continuing success and growth of the independent insurance agency system.”

InVEST is the IIABA’s education initiative to raise awareness of insurance industry careers in high schools and college.

“As more baby boomers retire, the need for young talent is evident,” said Bill Pierson, IIABA assistant vice president of agent development and executive director of the InVEST Program. “To combat the generational transition, action needs to be taken now to train entry-level recruits and cultivate the growth of management-level employees so they can take over as boomers retire.”

Monday, December 22, 2008

W.Va. Named #1 “Legal Hellhole”—Again

A new list of judicial “hellholes” once again singles out the state of West Virginia as the worst area in the nation for business, citing the state for “its near perfect storm of anti-business rulings, massive lawsuits and cozy relationships between the personal injury bar, the state attorney general and some in the judiciary.”

The list is released annually by the American Tort Reform Foundation, funded in part by the U.S. Chamber of Commerce.

Besides what it calls “perennial” West Virginia, the list of the nation's "most unfair civil court jurisdictions” includes South Florida and Cook County, Ill.

Newcomers to the list are Clark County, Nev.; Atlantic County, N.J.; and Los Angeles County, Calif. Back on the list are Alabama's Macon and Montgomery counties, which officials say are returning to the unwanted spotlight “after respective absences.”

The Property Casualty Insurers Association of America said the list “sheds a spotlight on some of the worst judicial environments in the country and highlights the importance of fighting for a balanced civil justice system in 2009.”

David Golden, director of commercial lines for PCI, noted, “The cost of an unfair judicial system in today’s economy can be measured in lost jobs, lower tax revenues and higher costs for consumers.”

He added, “The last thing states need right now is an unfair judicial system that makes it even harder to generate new jobs, attract new companies to the state, keep doctors and make insurance affordable, as consumers ultimately foot the bill for runaway litigation.”

West Virginia tops the list, according to ATRF officials, because the state's highest court has a “history of plaintiff-biased decisions, paying damages to those who are not injured, allowing mass trials, permitting lawsuits outside the workers' compensation system, rejecting long-established legal principles, and welcoming plaintiffs' lawyers from other states to take advantage of its generous rulings.”

To make matters worse, the report said, “West Virginia is one of only two states that do not guarantee a right to appeal a civil verdict, even if a multimillion-dollar award is clearly excessive under the law or the trial court violated procedural fairness by allowing a jury to decide punitive damages before it found a defendant legally responsible for a claim.”

Moreover, the report said, “There also may be no state with a closer alliance between the state attorney general and politically connected personal injury lawyers—an alliance that “has wreaked havoc at the expense of civil justice,” the report concluded.

South Florida is next because it “maintains its reputation for legally excessive awards and plaintiff-biased rulings that make it a launching pad for class actions, dubious claims and novel legal theories creating new types of lawsuits,” the report said.

It noted that this year South Florida was home to a record-breaking award in an asbestos case. “And though medical malpractice claims may be coming down off their peak, the area is still home to some of the largest such awards,” it added.

Cook County, or Chicago, is on the list because it has a reputation for “hostility toward corporate defendants and has long been known as a receptive host for lawsuits.”

Cook County still hosts significantly more than its proportional share of lawsuits in the state, as its courts permit "forum shopping" whereby lawyers from other parts of the state or country can bring lawsuits with little or no connection to Cook County, the report added.

Beyond the Judicial Hellholes, the report also calls attention to several additional jurisdictions that bear watching for suspicious or negative developments in litigation, histories of abuse, or laudable efforts to improve themselves.

These include the Rio Grande Valley and Gulf Coast of Texas; Madison County, Ill.; Baltimore, Md.; and the city of St. Louis and St. Louis & Jackson counties, Mo.

Friday, December 19, 2008

All Primary Insurance Rating Outlooks Now Negative, S&P Says

New York-based Standard & Poor’s changed its rating outlook for personal lines insurers to negative late last week, indicating that ratings downgrades are expected to outpace upgrades over the next 12-to-18 months.

The rating agency also expects the industry overall to record an underwriting loss for 2008, with a property-casualty combined ratio in the 103-104 range for the year, a rating analyst said yesterday.

During a conference call, S&P Director John Iten, explaining the sector outlook revision, said there has been a dramatic change in the distribution of individual outlooks for personal lines insurers rated by S&P. As of mid-November, 26 percent of personal lines insurers now have a negative outlook attached to their ratings, compared to 2007, when no personal lines insurer ratings carried a negative outlook, he said.

Weak operating performance stemming from deteriorating underwriting results and poor investment performance partially explain the individual changes, he noted.

On the underwriting front, he said that while the entire property-casualty industry combined ratio is 105.6, according to a report released by the Insurance Services Office this week, the combined ratio for personal lines insurers is likely one or two points worse.

The negative outlook for personal lines now matches S&P’s outlook for commercial lines, Mr. Iten said during the conference call. He explained that the negative outlook for commercial lines has been in place since August.

While he listed a string of concerns that prompted the August outlook change, Mr. Iten noted some “good news” on the commercial lines side.

Public surveys have showed “a slight moderation in price declines in the third quarter and there is anecdotal evidence that this has continued in the fourth quarter,” he said.

“It’s still too early to call a turn in the commercial underwriting cycle,” he warned, however, explaining why S&P is maintaining the negative commercial outlook. Prior to the August revision, this outlook had been stable since June 2005.

Since November, S&P has downgraded seven commercial lines while upgrading four, with three of the downgrades coming in December. “So the ratings trend clearly has been negative,” Mr. Iten observed.

The distribution of ratings outlooks—“the best indicator of future ratings actions” has moved from 7 percent negative in 2007 to 30 percent negative in 2008.

While the sector outlook reflects ongoing concerns about pricing, as well as third-quarter catastrophe losses, lower investment income and a very substantial increase in unrealized capital losses, Mr. Iten said S&P’s primary concern has been the rapid deterioration in underwriting profitability.

“The pricing cycle has been unfavorable since 2004, and by August we believed that prices had fallen to the point that we really believed that the sector’s underwriting results, which had been favorable for three years, would turn into underwriting losses starting in 2009.”

In light of the recent ISO report, that timetable has been accelerated by this year’s hurricane losses, he said. He predicted the industry will report a combined ratio of 103-104 for the year.

Underwriting results for some companies could be reduced “to the point that operating performance no longer supports current ratings,” Mr. Iten said.

Other factors that could push down ratings for some commercial insurers include:

• Realized and unrealized losses on equities and fixed income investments, which have reduced capital, in some cases below levels contemplated in current ratings

• Capital market constraints making it difficult to raise capital through debt and equity issuance

On the other hand, positive factors include the capital adequacy for most commercial insurers, which was strong leading into 2008, as well as the strength of their reserve positions, which was adequate or somewhat redundant.

Echoing some of the negative comments he made about commercial lines during his discussion of the personal lines sector, Mr. Iten said weak operating performance and reduced financial flexibility prompted last week’s outlook change for auto and homeowners insurers.

Capital positions of personal insurers have been drained away by cat losses, mainly funded by primary insurers rather than reinsurers and by declines in asset value.

While S&P is seeing signs of a turnaround to higher pricing in personal auto, the economic downturn is having an adverse impact. “Fewer car sales [and] fewer houses being sold mean fewer policies being sold,” he said.

The only p-c segment for which S&P maintains a stable outlook is the global reinsurance sector, said Laline Carvalho, also a director. She explained that reinsurers have maintained better pricing discipline and have better enterprise risk management and limited asset exposure to the subprime crisis due to conservative investment postures.

Thursday, December 18, 2008

2008 Cats 2nd Costliest In Insured Losses

More than 238,000 people lost their lives to natural catastrophes and man-made disaster this year, the fourth largest number of deaths since 1970—and the second costliest in terms of insurance loss, according to a report from Swiss Re.

The Zurich, Switzerland-based insurance company released the estimates from a forthcoming Swiss Re report out of its Hong Kong office.

Swiss Re said the total property insurance loss would amount to $50 billion, with the total cost of losses, both insured and uninsured standing at $225 billion. China’s Sichuan earthquake was cited as the costliest overall loss at $85 billion.

Among other events the report noted as the most tragic were Tropical Cyclone Nargis that struck Myanmar in April taking 138,400 lives and China’s Sichuan earthquake in late May taking 87,400 lives and leaving more than 10 million homeless. Most of the losses from these two events were not insured, Swiss Re said.

In terms of insurance losses, of the $50 billion in 2008, natural disasters accounted for $43 billion, with storms costing insurers $39 billion.

Hurricane Ike, in September, was the costliest loss at $20 billion, followed by Hurricane Gustav at $4 billion in August. Both hit the United States and Caribbean.

Winter Storm Emma in February, which affected much of Central Europe, amounted to $1.39 billion in insured losses, followed by sever weather losses from tornadoes, rain and hail in May at $1.33 billion.

January snow storms and freezing rain in China amounted to $1.3 billion in losses and rounding out the top six, thunderstorms, winds and hail in the United States in May claimed $1.1 billion in insured losses.

Swiss Re said that in terms of man-made disasters, a ruptured pipeline on Varanus Island in Western Australia in June was the costliest, resulting in losses to insurers and the local economy of at least $1.8 billion.

Wednesday, December 17, 2008

Calif. Proposed Rate Rule Change Draws Fire

A proposed revision in the rules governing California’s insurance rate-setting process has drawn the fire of insurance trade groups, which argue the changes unfairly impact smaller insurers.

That was the thrust of a written argument submitted last week to the California Department of Insurance by the National Association of Mutual Insurance Companies (NAMIC) with its domestic insurer state advocacy partners, the Pacific Association of Domestic Insurance Companies.

Their complaint was voiced concerning amendments to the Prior Approval of Regulation proposed by the department.

“These amendments…are conceptually flawed and unfairly discriminate against small-to-midsize property-casualty insurers in California,” Christian J. Rataj, NAMIC’s Western state affairs manager, said in a statement.

Among the changes to the Prior Approval of Regulation that NAMIC says are “objectionable” is one relating to a proposed Efficiency Standard—a formula used in the rate-making process to determine whether an insurance carrier's rates are reasonable and appropriate.

Mr. Rataj said the department proposes use of a “formulaic insurance industry historic expense average” as a means by which to evaluate the reasonableness of an insurer's business expenses and operating costs.

“The idea that a simple industry average, with a proscribed standard deviation range, could fully and accurately measure the business realities for both national carriers and small-to-midsize insurers is suspect,” he said.

Mr. Rataj said, “National carriers, regional insurers and small-to-midsize domestic insurers all have different organizational structures, marketing approaches and business strategies” that influence an individual insurer’s operating expenses.

Proposed amendments affecting an insurer’s rate of return, NAMIC said, are of particular concern.

Mr. Rataj said those amendments “do not promote financial stability of insurers and/or the economic vitality of the insurance industry. The CDI proposed rate of return will adversely affect the industry’s ability to obtain necessary capital for growth and will ultimately reduce market competition in the state of California.”

NAMIC and PADIC said preventing insurers from making a reasonable rate of return could “devastate California’ economy.”

“California’s financial health is inextricably linked to the vitality of the insurance industry, especially in light of the fact that the insurance industry is one of the largest employers in the state, a leading sourcing of tax revenue [premium taxes] for the state’s budget, and a substantial funding source for state bond projects,” said Mr. Rataj.

According to NAMIC, if the department goes through with the changes, “California insurance consumers and the state’s economy could be severely harmed.”

NAMIC has 106 member insurance carriers writing business in California, which the organization said represents approximately 23 percent of the property-casualty insurance business in the state.

The proposed regulatory change is online at
http://www.insurance.ca.gov/0250-insurers/0800-rate-filings/0200-prior-approval-factors/upload/RegFile20080506EFPDatedMay1608.pdf.

Tuesday, December 16, 2008

Judge Denies State Farm Fla. Homeowners Increase

A Florida administrative law judge has recommended against State Farm Florida’s request for a statewide average homeonwers insurance rate increase of 47.1 percent.

Administrative Law Judge Daniel Manry, of the Division of Administrative Hearings, said, “State Farm Florida did not show by a preponderance of the evidence that either the indicated rate or requested rate in the rate filing is not excessive, inadequate, or unfairly discriminatory.”

The rate request was brought before Judge Manry after State Farm Florida appealed Florida Insurance Commissioner Kevin McCarty’s decision to reject the company’s requested increase in August.

State Farm Florida had argued that the increase was needed to “cover the expected costs of loss and operating expenses.” The company cited the cost of reinsurance as well as recent legislation mandating discounts for mitigation efforts to strengthen homes against storms as two of the reasons why a rate increase is needed.

The 47 percent average increase would affect homeowners across the state differently. For example, the increase would be as low as 19 percent for Pasco County beside the Gulf of Mexico, and as high as 88 percent in Flagler County on the Atlantic, which encompasses Daytona Beach.

The OIR responded with 23 reasons for rejecting the increase. Among those reasons, the OIR said, “The rate filing and requested rate fail to reflect a reduction in policyholder premiums consistent with the expansion of the Florida Hurricane Catastrophe Fund coverage…,” and “[the company] has not provided sufficient support that the reinsurance cost in the filing reflecting reinsurance premium amounts and expected recoveries does not result in excessive reinsurance cost related to services rendered….”

State Farm Florida then appealed the OIR’s decision to Judge Manry.

Mr. McCarty now has 30 days from Friday’s decision to issue a final order on State Farm’s request.

The OIR said in a statement it would not comment further on the matter because Mr. McCarty is the final hearing officer.

In a statement, State Farm Florida said, “We believe the facts we presented to the administrative law judge should have led to a different recommendation and that our rate request should be granted.”

The company also urged the OIR to “take into account State Farm Florida’s rapidly deteriorating financial condition” when making its final decision.

Monday, December 15, 2008

Hurricane Models Wrong For Past Three Years, Report Says

Model forecasts for 2006 through 2008 hurricane seasons significantly overestimated U.S. insured losses, according to a catastrophe risk management firm study announced today.

The report, “Near Term Hurricane Models—How Have They Performed?,” was issued by Boston-based Karen Clark & Company and is available at www.karenclarkandco.com.

The firm said it looked at models designed to predict insured losses in the United States from Atlantic storms for the five-year period ending in 2010.

Ms. Clark developed the first hurricane catastrophe model, and in 1987 founded the first catastrophe modeling company, Applied Insurance Research (AIR) in Boston, which she left last year. AIR was among the companies critiqued in the report.

Besides AIR the study looked at near-term models produced by Oakland, Calif.-based Eqecat and Risk Management Solutions (RMS) in Newark, Calif.

It said AIR had initially predicted an overall annualized increase in hurricane losses of 40 percent above the long-term average but later lowered that figure to 16 percent in 2007.

Eqecat said the report had predicted increases of between 35- and 37 percent, and RMS consistently predicted an overall increase of 40 percent above the long-term average.

Assuming long-term average annual hurricane losses of $10 billion for each year, these figures translate into cumulative insured losses for 2006 through 2008 of $37.2 billion, $40.8 billion and $42 billion, respectively, for the AIR, Eqecat and RMS models.

But Karen Clark & Company said the actual cumulative losses were $13.3 billion, far lower than the model predictions, and more than 50 percent below the long-term cumulative average of $30 billion.

“With the close of the 2008 hurricane season, and three years into the application of near-term hurricane models, it is a good time to evaluate the models’ performance,” said Ms. Clark, the president and chief executive officer of her firm.

“While it is still too early to make definitive conclusions about the near-term models, with insured losses significantly below average for the cumulative 2006 through 2008 seasons, initial indications are there is too much uncertainty around year-to-year hurricane activity and insured losses to make credible short-term predictions,” she advised.

Catastrophe models were introduced to the insurance industry in the late 1980s. By utilizing many decades of historical data, the models gave insurance companies better estimates of what could happen and, more specifically, the probabilities of losses of different sizes on specific portfolios of insured properties, Karen Clark & Company said.

According to the firm, the destructive 2004 and 2005 hurricane seasons were catalysts for introducing the near-term models, which are based on short-term assessments of the frequencies of hurricanes. Use of these models by insurance and reinsurance companies was a radical departure from the way in which catastrophe average annual losses (AALs) and probable maximum losses (PMLs) are typically derived.

The report said in order for insured losses to reach 40 percent above average for the five-year period, in line with the highest model predictions, the next two years will have to be similar to 2004, or there will have to be another Hurricane Katrina.

The report noted that hurricane activity is influenced by climate factors, many of which are known, but some unknown, by scientists.

The study said there are complicated feedback mechanisms in the atmosphere that cannot be quantified precisely even by the most sophisticated and powerful climate models, and it recommended that insurers, reinsurers and regulators evaluate the efficacy of the near-term hurricane models in light of this uncertainty.

“Standard, long-term catastrophe models are characterized by a high degree of uncertainty, and short-term assumptions on frequency and severity only magnify this uncertainty and the volatility in the loss estimates,” said Ms. Clark.

“While computer models are valuable decision-making tools, they can lead to bad business decisions when not used correctly. Model users frequently forget that all models are based on simplifying assumptions, and therefore all models are wrong. Models attempt to replicate reality, but they are not reality,” she warned.

Karen Clark & Company is an independent provider of catastrophe risk management products and services. The company works with senior executives and boards of directors to help ensure their companies have in place effective risk management processes that conform to best practices.

The company also provides executive briefings to inform senior management and company boards on specific information they need to know on catastrophe risk, catastrophe models and using model results to manage risk.

Thursday, December 11, 2008

14 Insurers Ready To Offer Miles Driven Auto Insurance

Fourteen auto insurers by the end of 2009 say they will be offering pay-only-as-you-drive policies, which base rates primarily on miles driven, according to a San Francisco-based technology firm’s survey.

The poll by Exigen Insurance Solutions found the Pay As You Drive coverage is drawing increasing interest from some drivers and public policy advocates who see it as a green product because it creates an incentive to drive less.

Interest among motorists has come from low-mileage drivers who see it as a way to save money, the firm said.

As a result, Exigen reported, some U.S. insurers are moving fast to introduce PAYD products. But others, the technology firm noted, are still taking a cautious approach.

Exigen’s survey, based on a series of polls of 163 insurance company representatives from 91 companies who attended a Nov, 5 webinar on PAYD insurance, showed 59 percent of the representatives said their companies have investigated or considered offering a PAYD product.

Two insurers said they would be offering a product by mid-2009, and 12 insurers have plans to do so before the end of 2009, according to the survey.

Those looking into offering PAYD products cited protecting their book of business from competitors as the top reason.

Exigen said “entering a new market to grow revenue” ranked as the second most popular reason, followed by “entering the market to gain market perception as exercising corporate responsibility with a ‘green’ product.”

The cost of implementing core systems was the largest barrier for insurers offering PAYD products, with 46 percent of respondents citing this concern, according to the survey. Additionally, 20 percent of respondents cited consumer privacy concerns, 18 percent pointed to the cost of telemetry devices, 14 percent mentioned state insurance regulations, and 4 percent said existing PAYD patent infringement was a concern.

Fazi Zand, vice president, marketing and business development for Exigen Insurance Solutions, said, "The results indicate that U.S. insurers are adopting a follow-the-leader approach to PAYD that is defensive rather than aggressive. They are clearly monitoring PAYD market developments closely, concerned that if competitors begin to offer a PAYD product they will have to act swiftly to protect their book of business.”

He said the survey results also reflect Exigen Insurance Solutions' belief “that implementation of agile technology is essential if insurers plan rapid new product introductions, such as PAYD programs. PAYD challenges existing systems to incorporate new rating factors and business processes."

Exigen announced in September that it had partnered with Real Insurance to offer Australian motorists a usage-based insurance product that allows them to pay only for the kilometers they plan to travel.

The Australian offering does not involve telemetry devices used to communicate odometer readings for PAYD products, which Exigen said were seen as costly for insurers and potentially invasive for consumers.

California Insurance Commissioner Steve Poizner recently promulgated rules to allow mileage-based policies as long as only mileage is monitored by any telemetry devices, citing privacy concerns.

Wednesday, December 10, 2008

Comp Loss Medical Share Up 13% Points Since ‘87, NCCI Finds

The medical share of total workers’ compensation insurance losses has jumped by 13 percentage points since 1987, according to new research by the National Council on Compensation Insurance.

NCCI said in a brief that such losses have gone up “dramatically” to a projected 59 percent for medical against 41 percent for wage replacement indemnity costs in 2007, based on actuarial estimates of ultimate accident-year losses.

Among other findings in the report, which NCCI labeled as key:

• The rising importance of medical losses is pervasive, whether looking at estimated ultimate losses, reported data, or incremental payments by accident year and report period.

• The medical share has been increasing over time for most report periods.

• For a given accident year, the medical share starts out high, falls until the fourth or fifth report, and rises slowly again.

• Slightly more than half of the increased medical share was the result of differences in medical and wage inflation rates, while the balance was attributed to differences in the growth in medical and indemnity utilization.

• Although there are differences in the medical share by state, the change in the relative mix of states has had very little impact on the estimated countrywide share of medical and indemnity benefits.

Regarding inflation, NCCI noted that growth in the medical Consumer Price Index has exceeded growth in wages from 1986 to 2006, with medical CPI growing 175 percent versus 103 percent for wages.

The Council said that the rising share of medical losses since 2001 reflects not only the growth of medical severity but also a moderation in the growth of lost income payments for an injury.

It also noted its prior research found that in the case of medical utilization, a key driver in recent years has been increases in the number of billed treatments per claim.

NCCI defines the medical share of total benefits as medical losses divided by the sum of medical and indemnity losses.

Tuesday, December 9, 2008

Coalition Formed For Secondary Payer Issue

A coalition that includes insurance companies has been formed to negotiate with the Medicare program as well as Congress on overhauling reimbursement and recovery procedures for secondary payers.

The coalition, being called the Medicare Advocacy Recovery Coalition, is being created as Medicare is launching a “new, and potentially massive, program involving liability claims,” according to co-chairman Roy Franco, who also serves as director of risk management strategies for Safeway.

“We look forward to working with the Center for Medicare and Medicaid services as they” initiate this program, he said.

The other chairperson is Katie Fox, who also serves as the manager of the Medicare Secondary Payer Compliance and Resolution Unit for MedInsights, Inc. a GAB Robins company.

"Our goal is to make it easier for Medicare beneficiaries to settle claims and ensure that they receive uninterrupted Medicare payments for claims,” Mr. Franco said.

Problems with the system have arisen for injured workers receiving workers’ compensation payments who become Medicare eligible. Difficulties arise because of Medicare system blocks to ensure Medicare does not begin paying for care until the comp settlement runs out, which is usually done through a set-aside trust.

The coalition includes major employers, insurance companies, third party administrators and lawyers.

"We as an industry need to ensure beneficiaries receive seamless coverage," Ms. Fox said. "We already have a base of support and look forward to working with the Congress and CMS in partnership."

The objectives of the coalition include ensuring that Medicare beneficiaries receive coordinated and uninterrupted coverage for claims involving secondary payer issues; and to provide coordination, collaboration and communication among the member organizations regarding Medicare reimbursement and recovery policy.

They will also work to develop and implement a legislative and regulatory strategy designed to enhance Medicare reimbursement and ensure that the secondary payer program “works effectively, efficiently and economically,” Mr. Franco and Ms. Fox said.

Its insurance members include Colorado Self Insurers; Crowe Paradis Services Corp.; Gallagher Bassett Services Inc.; and Liberty Mutual Group.

Monday, December 8, 2008

NAIC Approves ‘Framework’ To Revise Reinsurance Collateral

Final details remain to be put in place, but the nation’s insurance regulators, after nearly a decade of study, have adopted a “conceptual framework” to modify the 100 percent collateral requirements for foreign reinsurers.

After the action by the National Association of Insurance Commissioners, at its winter meeting here, one insurers’ trade group vowed to fight against implementation at state and federal levels.

“This proposal sets forth a conceptual framework only,” said a statement from New Jersey Banking and Insurance Commissioner Steven M. Goldman, chair of the NAIC Reinsurance Task Force, which drafted the proposal.

“Now, we must focus on developing the specifics of this new regulatory regime and taking the appropriate legislative steps to make the proposal a reality,” he said.

The proposal creates two new classes of reinsurers in the United States: U.S.-domiciled national reinsurers and non-U.S.-based port of entry (POE) reinsurers, and introduces modified collateral requirements for eligible reinsurers.

A companion proposal that was approved establishes a new framework for state-based reinsurance regulation based on the concepts of supervisory recognition, single-state licensure for U.S. reinsurers and single-state certification for non-U.S. reinsurers from approved jurisdictions.

The proposal creates the NAIC Reinsurance Supervision Review Department (RSRD), which will evaluate the reinsurance supervisory regimes of other countries and establish standards for a state to be certified to regulate reinsurance on a cross-border basis.

In order to be certified as a POE federal enabling legislation would be required to give a state the authority to be the domicile state for a port of entry reinsurer.

A POE reinsurer must also be licensed by a non-U.S. jurisdiction recommended as eligible for recognition by the RSRD.

The companion proposal, developed by Vermont, includes the following principles:

• The RSRD should be created as a transparent, publicly accountable entity (contemplated to be part of the NAIC), with a governing board composed of state or district insurance regulators, and with director eligibility open to all state or district insurance commissioners, directors and superintendents.

• RSRD criteria relating to ceded premium volume will not unfairly discriminate against otherwise qualified small jurisdictions regarding approval as a home state or POE state supervisor.

Kentucky Commissioner Sharon Clark said that although she voted against the proposal, the principles in the companion proposal made her feel more comfortable with the proposal. Four other states voted against the proposal: Indiana, Ohio, Utah and Wisconsin.

Throughout its development, the proposal generated concern among trade groups including the American Insurance Association, Washington; the National Association of Mutual Insurance Companies, Indianapolis; and the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill.

“We’re disappointed but not surprised,” said Steve Broadie, vice president of financial legislation and regulation with the PCI. But he says that there are points in the proposal that still need to be fleshed out, such as federal preemption.

Dave Snyder, AIA’s vice president and assistant general counsel, said, “Against a backdrop of financial stresses in the economic system, it is impossible to justify shipping billions of dollars of security out of the U.S. without obtaining at least equal concessions that would benefit U.S. companies overseas.”

“We will fight this in the states and certainly at the federal level because we believe that this is not in the interests of the U.S,” he promised.

The American Council of Life Insurers, Washington, has favored more “comprehensive” reinsurance reform, it said in a May 31 letter, while the Reinsurance Association of America, Washington, has “commended” the NAIC for acknowledging the need for a different framework and recommended embracing federal legislation to accomplish this goal, according to an RAA statement quoting RAA President Frank Nutter.

And the National Conference of Insurance Legislators, Troy, N.Y., through its president, New York State Sen. James Seward, R-Oneonta, expressed concern over the NAIC proposal in a Dec. 3 letter.

The letter agreed with Vermont and other states that support more corporate governance on the RSRD, including Maine, Nebraska, District of Columbia and Ohio. Sen. Seward expressed concern that seeking a “federal hand in reinsurance” for the POE “could lead states down the path to an undesirable federal regulator or to a national overseer in the form of the NAIC.”

The current NAIC Credit for Reinsurance Model Act remains in place for reinsurers that do not choose to become either national or POE reinsurers. For more information, visit www.naic.org/committees_e_reinsurance.htm.

Friday, December 5, 2008

Auto Insurer Rating Errors, Fraud Cost $16.1 Billion Last Year

Fraud and insurers’ inability to track insureds resulted in premium rating errors that cost carriers $16.1 billion in revenues last year, according to San Francisco-based Quality Planning.

The company, a subsidiary of Insurance Services Office in Jersey City, N.J., validates policyholder information for auto insurers.

According to the Quality Planning annual premium rating error report, the latest figure is slightly down from the 2006 figure of $16.6 billion—but still almost 10 percent of the total $162 billion in personal auto premium written.

The firm identifies two primary reasons for rating error: consumer fraud and the inability of insurers to keep track of key lifestyle and driving habits of their customers.

Titled "Auto Insurance Industry Continues to Hemorrhage Cash," the report is online at http://tinyurl.com/6mtf3c.

Raj Bhat, president of Quality Planning, said, "The year 2007 saw the first decrease in auto premium leakage since Quality Planning began issuing this industry report five years ago. We believe this is likely the cumulative effect of several large insurers eliminating the mileage component from their rating plans."

"Seldom is there debate over whether or not people who drive more miles should pay higher premiums, yet over the past several years some companies have elected to forgo the use of annual mileage as a critical rating factor—simply because it was difficult to validate," said Mr. Bhat adding, "Their decision may prove costly."

The report aggregates and summarizes audit results of more than 4 million policies from 16 major carriers. The sample includes substandard to preferred books of business, all distribution channels, and national and regional carriers. Sample results were weighted to reflect the total national private passenger auto line.

In this year's report, Quality Planning noted a small upward trend in the misreporting of garaging addresses and of youthful drivers.

The trend was found to be most striking in large urban areas where vehicle garaging location can dramatically affect premium. Nationwide, 1 to 2 percent of all policies written include an unrated operator, who is most often a high-premium younger driver. Policies that contain such rating errors account for more than $2 billion of annual premium leakage.

"The insurance industry can combat premium leakage by applying appropriate analytic tools," said Mr. Bhat. "Some policyholders misrepresent facts, and others don't report lifestyle changes. Others boldly commit fraud. Underwriting doesn't have to accept those trends as a cost of doing business or, worse, as justification to counterbalance leakage by inflating premiums for all policyholders."

The 2007 report includes a detailed analysis that shows how different categories of rating error contribute to overall premium rating error and distinguishes between vehicle rating errors (mileage, usage, type of vehicle, and location) and driver rating errors (driving experience and driving record).

Quality Planning said it recommends auto insurers better analyze policyholder rating data to identify and correct flawed information—steps which could have a positive effect on profitability.

The firm puts auto insurance companies' books of policyholders through a battery of more than 150 proprietary tests, cross-reference checking, and pattern-matching algorithms to identify errors and discrepancies that might suggest customer fraud.

Quality Planning also provides insurers with additional services, such as policyholder phone interviews to discover missing drivers, verify garaging addresses, determining annual mileage, and other key rating information.

Thursday, December 4, 2008

Mumbai Attacks Expected To Impact Terrorism Insurance

The terrorist attacks in Mumbai, India, may raise rates for terrorism risk coverage, but should not impact the overall insurance market, one expert suggested.

“In terms of losses, the attacks in Mumbai are not a market-turning event for the insurance industry generally,” said Alex Clayton, executive director at Willis Global Markets International in London.

“However, the losses may significantly impact the terrorism insurance market,” he added. “It now seems that the hotels are insured against the peril of terrorism through the Indian terrorism pool, which in turn is reinsured in London.”

“The potential reinsurance losses to the London market will certainly lead terrorism underwriters to have another look at their terrorism rates for India--which have, up until now, been very competitive,” Mr. Clayton said, responding to questions in an e-mail.

“The terrorism losses come at a time when most of the markets are renewing their reinsurance programs--including their terrorism reinsurance programs,” he noted.

“If the markets are faced with increased reinsurance costs along with potential losses from the Mumbai attacks, the result may be a hardening of the terrorism insurance market,” he added. “However, at the moment it is very much ‘wait and see.’”

Specific to India, he said the events will force underwriters to look at their rates for terrorism insurance there--especially because rates have been mired in a soft cycle for the past few years.

Another element the attacks in Mumbai underscored, he mentioned, is the need for combined insurance products covering physical damage, business interruption, kidnap and ransom, and accident and health exposures subsequent to an act of terrorism. Currently all coverage, though available, must be purchased separately, he noted.

While it is currently unclear who insures the Mumbai exposures--especially the two luxury hotels that were damaged--there is expected to be “significant business interruption losses” as they remain closed “for the foreseeable future,” according to Mr. Clayton.

In addition to the direct loss from the attack, he believes there will also be contingent losses.

For example, he noted cancellation of the one-day cricket series and other tours, “notwithstanding the intangible losses to the economy of a reduction of tourism, etc.”

Another industry source--who requested his name not be used because information remains sketchy at this point--said it does appear most of the losses will be assumed by India’s insurance pool, which is reinsured through Lloyd’s, but the property losses are not anticipated to be large.

Currently, the markets remain unaffected by the event, and renewal placements are still being made with no apparent contraction in the marketplace, the source noted.

According to one estimate reported yesterday, insured losses from the terror attack are expected to run between $300 million-to-$600 million. More than 170 people were killed in the four-day attack and close to an additional 300 were injured.

Wednesday, December 3, 2008

Federal Regulation Unlikely To Pass In 2009, FDIC’s Chair Tells AIA Directors

Congressional approval of federal regulation for insurance appears unlikely for 2009, and prospects for an optional federal charter in the long term are dim—particularly for property-casualty firms, the head of the Federal Deposit Insurance Corp. indicated in a private briefing to p-c industry executives.

In addition, if insurance is addressed at all next year, the focus of the incoming Obama administration and federal banking regulators will be on the life insurance side of the business, not property-casualty, FDIC Chair Sheila Bair said in an off-the-record briefing to directors of the American Insurance Association on Nov. 14.

A copy of a summary of her remarks was obtained by National Underwriter and confirmed through other sources.

Ms. Bair said that plans to create an optional federal charter may fall by the wayside in Congress, suggesting that insurers seeking federal regulation might be better off finding a regulatory home within existing federal banking agencies.

Those in the p-c industry who want federal oversight in general, and a federal charter in particular, face an uphill climb because their sector “is not in any financial trouble, and it is state-regulated, so it is not in the sights of those will be involved in federal financial services regulatory reform,” Ms. Bair explained.

Regarding an OFC, she said that “re-regulation will favor fewer regulators at the federal level, rather than more, and it will be done in phases. All current federal regulators have their hands full with the various bailout and stimulus packages that Congress has passed.”

The reason creation of a separate federal agency to regulate insurance is unlikely, she added, is that “the last thing the federal regulators need is to be distracted by turf fights among the four current federal regulators.”

Ms. Bair told AIA that the p-c industry “may have to fight to get in the process and the legislation, and differentiate itself from the banks, if that’s what the AIA companies want.”

Property-casualty insurance also has the complications of rate regulation and protection for policyholders versus stockholders as issues to be worked out, she noted. However, “in the long term, there seems to be consensus that it would be beneficial to Congress and the Treasury/Administration if there were insurance expertise at the federal level,” Ms. Bair said, according to the AIA summary.

Looking at the broader regulatory reform picture, Ms. Bair told AIA officials that dealing with an overhaul of financial services regulation will be delayed by the incoming Obama administration and Congress until 2010 in favor of tackling more urgent priorities. Moreover, it will be done in “phases,” she said.

She also told AIA members that the Obama administration will take the lead in drafting legislation overhauling regulation of financial services. During the question-and-answer session that followed, an industry lobbyist said that Sen. Chris Dodd, D-Conn., chair of the Senate Banking Committee, and Rep. Barney Frank, D-Mass., who heads the House Financial Services Committee, will serve to “balance things out.”

Asked to elaborate on her remarks to the AIA, Ms. Bair, responding through FDIC representative David Barr, said that “since this was not a public event, we will not comment on the discussion.”

Blain Rethmeier, an AIA representative, would only say that “as with all our meetings, they are closed to the press, so I can’t give you any guidance on what she said.”

One industry lobbyist working on the future shape of insurance regulation cautioned that “nothing is set in stone, and this is just one idea.”

However, several life insurance lobbyists confirmed that as a result of recent direction as to how insurance might be regulated by the federal government, their companies are going back to the drawing board to determine what form of federal regulation would be acceptable, and which banking agency they believe would be their most appropriate federal regulator.

Jack Dolan, a representative for the American Council of Life Insurers, confirmed that Kim Dorgan, its chief lobbyist, recently told an industry strategy group that “Congress will be quite busy at the start of 2009,” and that an “OFC is likely not a top item on their agenda.”

However, Mr. Dolan added, “that does not mean it is a non-issue.” Moreover, he said, the “ACLI is still pursing an OFC.”

In her comments to AIA, Ms. Bair said the Obama administration’s priorities in 2009 will be:

• Regulation of mortgage-backed securities and credit default swaps.

• Standards for the mortgage lending industry and for all mortgage brokers/originators.

• Stronger disclosure rules for executive compensation and balance sheets.

Regarding the possibility of “systemic regulation” across industries, she said that would be “hard to conceptualize.” In theory, she said, “such a regulator would look at the systemic/liquidity risk of the enterprise and work with its functional regulators to address its financial problems.”

However, the current thinking is that such a regulator would be a backstop for financial services entities that cannot be allowed to fail, she added.

“It is anticipated that there would be a recovery/fee/assessment mechanism for any funds provided by backstop to such an entity,” she said.

On Nov. 24, President-Elect Obama said he will nominate Timothy Geithner, current president of the Federal Reserve Bank of New York—which oversees the government’s bailout of American International Group—as Treasury secretary.

Ms. Bair told the AIA directors that AIG represents the first non-bank entity that is “too big to fail” as seen through a federal lens.

Tuesday, December 2, 2008

Another Piracy Policy Introduced

Responding to the risk from increased ship piracy in the Gulf of Aden, another insurance brokerage announced it is offering an insurance policy tailored to deal with some of the losses from an attack.

Chicago-based Aon said it is new offering a policy for those who charter boats, ship-owners and cargo owners, designed to cover loss of earnings from a ship being detained by pirates.

Aon’s move follows the Nov. 20 announcement of the Benfield Corporate Risk brokerage, after the capture of a Saudi Arabian oil tanker by Somali pirates, that it had produced a dedicated and exclusive Marine Ransom and Extortion policy.

Aon’s new policy offering comes after Sunday’s failed pirate attack on a cruise ship sailing in the Gulf of Aden.

Aon noted that there have been over 50 reported attacks off the coast of Somalia, with 32 vessels hijacked, in the first eight months of 2008.

According to the firm, the average duration of vessel seizure is 60 days. Aon said this means that those arranging charters have been incurring the cost of paying a charter hire for these additional days without receiving any extra income, and the delay means cargo owners are facing the risk of cancellation of contracts.

Aon said policies that have been in use cover physical loss or damage arising from piracy under hull protection and war clauses, with ransom dealt with by specific coverage.

Owners have also sought to recover as a sue-and-labor expense, according to the brokerage, but it explained that there has been a potential void in coverage for the financial impact of business interruption or loss of earnings.

Aon said its new policy is designed to cover:

• Charterers, who are paying for hiring the vessel even though the vessel is detained.

• Ship owners, who in the event of “contract frustration,” may lose out on charter revenues.

• Cargo owners, particularly of seasonal goods, who face cancelled contracts if the goods are held up.

• All other interested parties to a venture with an insurable interest.

Aon said the policy calls for the cover to be triggered from day one of the attack (with no deductible), and is a stand-alone policy to complement existing hull, war, cargo and protection and indemnity coverage.

"The recent spate of pirate attacks in the Gulf of Aden/Horn of Africa has highlighted how ship owners and charterers are incurring significant uninsured costs with no recourse,” said Aon’s head of marine hull risks, Peter Townsend.

The brokerage, he said, decided to do something by introducing new coverage available across the marine industry “so all parties affected by an attack could recover their loss of earnings."

"This year has seen our marine clients facing a raft of risks as ship-owners face tighter margins in the credit crunch and hull rates begin to increase,” added Aon’s U.K. marine team chief executive officer, Peter Dobbs. “Against this backdrop, Aon has stepped up its innovation to provide our clients with solutions that respond to the real challenges facing their businesses--such as piracy attacks."

Monday, December 1, 2008

Reinsurance Demand, Prices On The Rise

Reinsurers are entering a hardening market, leaders in the sector predicted here, with one admonishing industry peers to seize the opportunity to rethink standard operating procedures to sustain whatever level of profits comes as a result of the shift.

“We talk about the soft market as if someone came in and put it there. But the fact of the matter is, the markets are us,” said Anthony Kuczinski, chief executive officer of Munich Reinsurance America, based in Princeton, N.J.

“Markets get soft because of our actions, and they get hard because of our actions,” he said after presenting historical data demonstrating that catastrophic events don’t drive cycles.

Mr. Kuczinski delivered his take on the market here during the 20th Annual Executive Conference for the Property-Casualty Industry, presented by The National Underwriter Company, and sponsored by Ernst & Young and Dewey & LeBoeuf.

During a session entitled, “The Reinsurance Sector: Achieving Profitability,” he noted that in 2006, the reinsurance industry made its first underwriting profit in over 25 years—posting a combined ratio less than 100, then achieved an underwriting profit again the following year.

“We should be looking at ways to continue that process, and absent the events of 2008, I’m not convinced we would have gone there,” he said.

As a result of the financial crisis and catastrophe losses that will exceed $35 billion for the year, “we believe there’s a market turn [coming],” he said. “Why don’t we use the market turn as a way of changing how this business gets done going forward.”

Mr. Kuczinski said that at this point reinsurers have enough information in their extensive data bases to price business at technically-correct levels.

“Sometimes the technical gets persuaded by the emotional. We have to figure out a way of saying, no, the technical really does drive the outcome,” he advised.

“At the end of the day, we are in a cyclical business, but we determine the market,” said Mr. Kuczinski.

During the first half of his talk, Mr. Kuczinski presented slide after slide of historical data setting the stage for his call for reinsurers to stop a history of unprofitable results from being repeated.

Referring to the two isolated years of profit—2006 and 2007—he said, “the only reason we had those results, or at least the primary reason, was because of Mother Nature,” referring to the lack of catastrophe losses in those years.

At one point, he displayed a graph of dollars of underwriting profit and loss from 1991-to-2007 for the U.S. reinsurance industry. Profits of $1.3 billion in 2006 and $1.7 billion in 2007—only $3 billion together—were not even enough to cover the underwriting losses in the earliest years on the graph, 1991 and 1992, he noted, referring to numbers that ranged from an $800 million loss in 1991 to a $3.6 billion loss in 2000.

Despite the fact that Munich Re and other reinsurers have been trying to maintain discipline, downward pricing trends for the past three years have moved the industry overall “dangerously close” to inadequate pricing, he said.

Illustrating the industry’s failure to get pricing right during another part of his presentation, Mr. Kuczinski displayed a history of accident-year loss ratios (including loss adjustment expenses) evaluated at the end of each accident year, assuming that these loss ratio picks serve as a basis for pricing.

He then superimposed revised loss ratios for each accident-year evaluated 24 months later and 36 months later on the same graph, revealing that in each subsequent evaluation—12, 24 and 36 months after the start of each accident-year—the ratios remained strikingly similar.

“Three years after we made our decision on what the pricing was, there’s not much change” in the loss ratios, he said.

But ultimately—beyond 36 months—the ratios moved very far off the initial estimates, he showed. “In hard markets and soft markets, there is a big dispersion between the ultimate loss ratios and the original loss ratios,” and periods of underestimation far outweigh the overestimated periods, according to Mr. Kuczinski.

In an attempt to put to rest the idea that the discrepancy is driven by catastrophic events, he noted that for accident-year 2001, which encompasses losses from the 9/11 terrorist attacks, the gap between the original loss ratio and ultimate loss ratio is about the same as it was for corresponding gaps for several accident years preceding 9/11. “It’s not because of the event that we were that far apart. It’s because we got it wrong to begin with,” he said.

“Cycles are not impacted by the catastrophes. They may be an impetus for changing conditions, but they are not what get us there in the first place. What gets us there in the first place is getting the loss ratios wrong to begin with,” he said, adding that reinsurers don’t find out the magnitude of their errors until many years after they make their initial estimates.

COUNTERPOINT

Meanwhile, reinsurance market optimists may need to pen up their bullish forecasts for premium growth a little longer, suggested one global reinsurance brokerage leader speaking at the NUCO conference.

Bryon Ehrhart, president and chief executive officer of Aon Re Global Services in Chicago, offered a cautious outlook even as he agreed with some of the factors that reinsurance company executives have mentioned in third quarter earnings reports as pointing to increased demand for reinsurance in 2009.

Unlike more positive forecasters however, Mr. Ehrhart, looked at one key factor—the disappearance of insurer cushions of capital—and a very long list of additional demand drivers, and weighed them against a shorter, but formidable list of impediments. This led him to conclude that insurers may continue to increase their retentions going forward.

Referring to the optimistic commentary from reinsurers, he said “there has been speculation that there will be a bull reinsurance market,” which caused reinsurance company stocks to react favorably recently. This “premature rally,” however, has already “come in some,” he noted—attributing the short life of the rally to the realization of “a disconnect” between buyers and sellers.

Going on to describe what he meant by the term “disconnect,” Mr. Ehrhart said reinsurers are also suffering reasonably significant capital declines. “If you buy more reinsurance, who are you going to buy it from?” he asked.

“Intuitively, the right risk management move when capital is down from the supplier of risk-taking capacity is that you buy less … from them. That’s general fundamentals,” he said.

Earlier in his presentation, Mr. Ehrhart displayed numbers showing that insurer capital declines have been steeper than reinsurer declines.

Overall, a group of insurers he tracked, which had $366 billion at the end of fourth-quarter 2007, lost 19.4 percent of their capital by the end of third-quarter 2008.

On the reinsurance side, capital fell only 8.2 percent in the same period for a group of reinsurers that had $360 billion in capital as of fourth-quarter 2007. But while some large companies, like Berkshire-Hathaway, had no capital change, others have suffered “reasonable declines” that will get the attention of ceding companies, he noted.

Three of the larger reinsurers have capital drops ranging between 15- and 20 percent through the third quarter, he said—without identifying them. “While that’s better than we’re going to see for a lot of insurers, it is material enough that it’s not going to go unnoticed,” he added.

There are significant reinsurers that “are possibly even facing control changes or other uncertainties,” he said.

In addition, reinsurers that “qualified on the margin last year” for the reinsurance programs—in other words, who just hit cedents’ credit quality thresholds with ratings of “A-minus” from A.M. Best and “BBB-something” from Standard & Poor’s—now have lower capital cushions than they had last year. That means “clients are going to be more cautious about buying from people with those ratings,” he said.

“And then there’s the price,” he continued, noting that while there’s been a lot of talk about insurance prices stabilizing, there hasn’t necessarily been any indication that “new money is flowing in the door” from insurance rate hikes.

Speaking from the perspective of an insurer, he asked: “How am I going to spend more going out the door” to buy the higher levels of reinsurance protection, “without more coming in the door?”

That will cause insurers to wait—“if they’re going to buy more, to do it after they see the money flowing in.”

In efforts to increase the inflow of dollars, insurers may try to grow their business in 2009, but “there’s real growth risk when there is real competition on the street for business,” Mr. Ehrhart noted.

“While there is some $30-to-$40 billion worth of premiums in companies that have difficult economic circumstances in their own books, there’s still competition for moving that business,” he said.

On the reinsurance side, after two years of reinsurance price declines, insurers know that the cost of reinsurance is going up. Therefore, he concluded, “you are going to see [cedents] defeating some of that price increase with raised retentions.”

This is counterintuitive, since lower insurer capital levels should coincide with lower risk tolerance, he conceded. “I think it’s probably something that will occur even though it feels unnatural,” he said.

On the demand side, in addition to the disappearance of insurer cushions of capital, Mr. Ehrhart said a greater respect for model uncertainty, and a $12.0-to-14.5 billion shortfall in the Florida Hurricane Catastrophe Fund are factors working in the opposite direction—potentially fueling more reinsurance demand in line with more bullish predictions.

Wednesday, November 26, 2008

Happy Thanksgiving!

Sabal Insurance Group will be closing early on Wednesday, November 26th, at 3:00p.m., and will be closed Thursday and Friday to celebrate the Thanksgiving Holiday. We will resume our normal operating hours on Monday, December 1st.

As we are every year at this time, we're particularly thankful for our clients, carriers, and friends. Enjoy your holiday and have a wonderful Thanksgiving!

Insurance Groups Urge Fix For Fla. Catastrophe Fund

Florida may have dodged a bullet avoiding a major storm in the 2008 hurricane season, but insurance industry groups have warned lawmakers about the need to address the state’s underfunded Hurricane Catastrophe Fund.

“We are extremely thankful to have weathered the 2008 season with no major hurricanes,” said Bob Lotane, a spokesman for the National Association of Insurance and Financial Advisors in Florida. “However, we hope that this does not mask the very deep-seeded problems in our hurricane insurance matrix.”

Florida was not hit by any major hurricanes, but Florida Insurance Council executive vice president of the Sam Miller noted that there were more storms overall in the area.

"Just because Florida was spared does not mean that hurricane activity is down,” he said. “The fact is we remain in the middle of a 20-year cycle for increased hurricane activity,"

Lynn Knauf, director of personal lines for the Property Casualty Insurers Association of America, offered an even longer estimate for the cycle at as many as 50 years. Florida was one of several coastal states that the PCI noted faces significant problems, and the group called on lawmakers to respond accordingly.

“To help protect homeowners, state governments should stabilize the financial condition of these coastal insurance markets as property exposure continues to grow,” said PCI Southeast Regional manager William Stander.

The hurricane season is officially over Nov. 30, but Mr. Miller noted that next year’s hurricane season is not far away and the Catastrophe Fund faces a shortfall of $10 billion to $15 billion. In addition, the turmoil in the economic markets would make raising additional funding through bond issues more difficult.

The most likely solution, Mr. Miller said, would be to reduce the Fund’s total obligations from its current limit of $28 billion to the $16.5 billion ceiling that was in place prior to a 2007 law expanding the fund.

That law, he noted, only expanded the fund for the 2007, 2008 and 2009 seasons. “It’s going away anyway,” he said, which in addition to the acknowledged shortfall should make it easier for lawmakers to accept eliminating it early. “It isn’t real anyway,” Mr. Miller said.

By rolling back the Cat Fund, the state would effectively push insurers to purchase more reinsurance from the private market, Mr. Miller noted, and the Council called on state lawmakers to allow insurers to include these increased costs as they calculate rates.

This is especially the case for the state run insurer, Citizens Property Insurance Corp., said Mr. Miller. Lawmakers froze Citizens rates in 2007, and there is already concern that Citizens must raise its rates to avoid assessments on taxpayers in the aftermath of a major storm.

“We urge policymakers and regulators to address the serious underfunding of our catastrophe fund in addition to inadequate rates being applied in the state-run insurance company and also with the private insurers taking policies from it,” said Mr. Lotane. “The solvency of not only these entities is at risk but, in fact, the solvency of the state as well should our good luck regarding catastrophic storms turn around.”

Tuesday, November 25, 2008

Economic Troubles To Spur Consolidation

The insurance industry can expect some consolidation going forward, as big companies get bigger and weaker companies struggle to survive the current economic challenges, an expert said today.

Speaking during an Ernst & Young teleconference, “Financial Crisis And The Insurance Industry,” Robert W. Stein, global director of Actuarial Services, Ernst & Young LLP, said weaker companies will likely not survive going forward, and that will lead to increased consolidation in the industry.

Mr. Stein warned, “There are issues on the banking side as to whether the rise of mega institutions is always a good thing, but it’s quite clear that we will see the big getting bigger, and I think with that will come a little bit of increase in complexity and risk profile—perhaps undesired, but nonetheless part of the ‘getting bigger’ situation.”

He predicted that many insurance companies will restructure and sell non-core businesses to raise capital, which will lead to a change in business profile throughout the industry.

David Schieldrop, managing director, Barclays Capital, commented, “Out of difficult times comes opportunity for some.”

He said a lot of properties are coming to market while valuations are under “severe stress”. He said the current mergers and acquisitions environment is a “once in a generation opportunity” for people to acquire some of the largest franchises in the industry, and he mentioned the expected sale of several American International Group properties as an example.

He noted that with valuations as stressed as they are, though, there is less incentive to sell. The activity over the next year will likely be AIG and other distressed situations, Mr. Schieldrop said.

Monday, November 24, 2008

AIG To Pay $500 Million In First Quarter To Prevent Deferred Comp Departures

American International Group Inc. said it is terminating voluntary deferred compensation programs to eliminate an incentive for employees to leave the company in order to get back pay, and as a result will distribute approximately $500 million to such individuals in the first quarter of 2009.

AIG said 14 voluntary deferred compensation programs involving 5,600 employees and independent agents and representatives are affected by the decision.

The company explained that these individuals earned but volunteered to defer receiving these funds until a later date.

In each case, an employee could leave AIG for any reason and be entitled to this deferred pay. The cash-strapped company—which has been forced to accept government ownership in return for a federal bailout loan—has been fighting to keep staff in place as it struggles to stay afloat.

“AIG has decided to terminate and pay out the deferred pay plans to remove the incentive for employees to leave in order to obtain their deferred pay,” said Andrew Kaslow, senior vice president of human resources.

“Many AIG employees have seen their life savings wiped out in the financial crisis,” Mr. Kaslow said. “Employees are now concerned about obtaining the pay they have earned but deferred so they can pay for retirement, college tuition or other expenses.”

Under the majority of AIG’s deferred pay plans, participants can only access deferred pay when they retire or leave the company. AIG said it is concerned that employees will leave AIG so they can obtain their deferred pay.

“This is a concern at a time when AIG is working to maintain the value of its businesses, whether those businesses are to be sold to repay AIG’s Federal Reserve loan or to be continued as part of a restructured AIG,” said Mr. Kaslow.

AIG said it plans to distribute close to $6 million to seven executives under the terms of the deferred compensation program. In a filing with the Securities and Exchange Commission, the company said that under its Senior Partners Plan there was an aggregate of $5.96 million in deferred pay, with six executives receiving $3.04 million of that pot.

At the top of the list is Jay S. Wintrob, executive vice president of retirement services, who will receive $1.9 million. Win J. Neuger, chief investment officer, will receive $607,953. David L. Herzog, the chief financial officer, will receive $371,422. The remaining four will receive a total of $161,860--ranging from more than $100,000 to $8,564.

Friday, November 21, 2008

Is Warren Buffet Losing His Touch?

Investors are wondering if Warren Buffett has lost his touch.

They are bailing out of Berkshire Hathaway Inc stock and have lost some confidence that the insurance and investment company, run by one of the world's most admired investors since 1965, can pay its debts.

Berkshire stock has lost close...

To read the entire article, please visit Insurance Journal.com at:
http://www.insurancejournal.com/news/national/2008/11/21/95715.htm

Thursday, November 20, 2008

AIG Exec Defends Company Amid Soft Market Discussion

An executive with an American International Group subsidiary denied suggestions today that the company is holding onto business by engaging in aggressive price cutting that is prolonging the property-casualty soft market

John Q. Doyle, president and CEO, AIG Commercial Insurance, made his remarks during a panel discussion at the 20th Annual Executive Conference for the Property-Casualty Industry presented by National Underwriter Company and sponsored by Ernst & Young and Dewey & LeBoef.

Mr. Doyle said he was curious that AIG is being singled out when his company’s top line was down seven percent during the third quarter. Some companies criticizing AIG, he said, had increased their top line during the quarter.

Panel moderator Sam Friedman, editor-in-chief of National Underwriter, said the industry has sent mixed signals regarding the soft market.

Some participants, he said, indicate that pricing is beginning to harden, while others have singled out AIG for driving prices down as it attempts to hold on to business and combat damage to its reputation by pricing aggressively.

Mr. Friedman noted that it is odd to hear some in the industry single out one competitor, rather than speaking broadly about the market.

Mr. Doyle remarked that there seems to be “no shortage of experts” in the industry regarding what is going on at AIG. He added that while challenges at the parent company have inflicted some brand damage, the strengths of AIG Commercial remains the same.

Regarding the state of the market, the experts on the panel did not share a consensus on whether the soft market has come to an end.

Mr. Doyle said pricing is still down, but there has been modest improvement since early July. He explained that there is still no shortage of capacity in many lines, adding that as capacity leaves, or as consolidation occurs, prices will move.

George Fay, executive vice president, Worldwide Property-Casualty for CNA, said he has met with producers, and they indicated that prices are already stabilizing, and cited some lines where prices are rising. He said producers are already telling customers to expect increases, and they also said the market will likely harden over the next six months.

Stanley A. Galanski, president and chief executive officer, The Navigators Group, Inc., said he was not as optimistic that the end of the soft market is here, but he added the industry is getting closer.

The executives mentioned access to capital as one area of potential concern going forward. Mr. Friedman noted that AIG, The Hartford and CNA are among insurers that have gotten a capital infusion of some sort, and he questioned where the industry will get capital from in the future.

Mr. Doyle noted that AIG’s p-c outlets have not needed to access the capital that the parent company received, but he said inability to raise capital could change the market very quickly if a catastrophe event were to take place.

Determining how much capital insurers have is difficult, Mr. Galanski noted, given the state of the debt markets.

Mr. Galanski also shared some lessons learned during the recent financial struggles. He said companies should:

• Understand that underwriting matters.

• Not underwrite what they do not understand.

• Understand the downside of risks.

• Understand that a handful of people can destroy a major company that took years to build.

• Understand that size does not necessarily equal strength.

At a separate discussion at the conference, Pierre L. Ozendo, member of the executive board, chairman, and chief executive officer of Swiss Re American Corporation said the industry will emerge from the current financial problems, but it may be at the cost of some companies failing.

He stressed that companies need to manage capital for preservation, that solvency and security matter, and that risk management and risk modeling need to become competencies for all financial firms. He added that the economics of the industry remain sound, but challenged, and said the underlying strength of the industry would prevail.

All panelists agreed that sound underwriting is a must for the industry to weather the current environment.

Wednesday, November 19, 2008

U.S. Insurance Regulation Seems Certain, Insurance Execs Say

Insurance executives said today that the current mood in Congress, given the U.S. financial troubles, indicates some form of federal insurance regulation has become a matter of “when,” rather than “if.”

Their comments came during a panel discussion at the 20th Annual Executive Conference for the Property-Casualty Industry produced by National Underwriter Company with sponsors Ernst & Young and Dewey & LeBoeuf

Panel member Stanley A. Galanski, president and chief executive officer, The Navigators Group, Inc. said the pace towards federal regulation is fast.

The feeling among some legislators, he said, is that insurance is part of financial services, and Congress is determined to fix it. Mr. Galanski compared the current environment in Congress to the mood just before Sarbanes-Oxley was passed.

Future federal regulation may not even be “optional,” according to George Fay, executive vice president, Worldwide Property-Casualty for CNA. He said he believes there will be federal regulation of insurance that all companies will have to comply with to some degree, possibly in addition to state regulations.

Mr. Fay suggested larger companies will likely be able to adapt to this environment more easily than smaller companies.

John Q. Doyle, president and CEO, AIG Commercial Insurance, wondered what a federal regulation system in the U.S. would look like. He noted that, around the world, regulators are primarily interested in solvency, whereas in the U.S., there is more concern over consumer issues. He said he would be interested to see if the U.S. regulatory system would change its focus under federal regulation.

At a separate session during the conference, Pierre L. Ozendo, member of the executive board, chairman, and chief executive officer of Swiss Re American Corporation, said the United States should look to an Optional Federal Charter as a way to effectively prepare for regulatory systems around the world that will become more global with respect to coordination and cooperation.

Answering a question regarding whether the current U.S. insurance regulatory system is ready to coordinate on a global scale, Mr. Ozendo said an OFC would allow the U.S. to have a regulator that would be able to hold discussions with regulators in Europe and elsewhere.

Sam Friedman, editor-in-chief of National Underwriter, questioned whether federal regulation would be more effective than the states given the problems that have occurred in the federally-regulated banking sector during the current financial troubles.

Mr. Ozendo responded that there is no way to determine exactly how effective the government would be at regulating insurance, but he maintained that federal officials are the only ones with the “sheer power” to get a system that is stuck moving again.

Mr. Galanski furthered Mr. Ozendo’s point regarding international cooperation, stating he believes the debate in Washington has moved from state versus federal regulation to federal versus international cooperation.

Mr. Doyle did not say whether he would prefer a state or federal regulation system, but stressed there needs to be more effective regulation with respect to insurance.

Mr. Fay said he is not a fan of more government involvement in insurance. A future problem, he said, could be fixing problems ahead created by the very government that is trying to solve current issues.

Speaking beyond regulation, to solutions to the financial troubles in general, Mr. Fay said he would like to see some time pass by before major changes to the financial services landscape are made. He said it would be beneficial to wait until the true problems are identified, and the country can effectively analyze how it got to this point, before effecting solutions on the insurance industry.

Tuesday, November 18, 2008

Costs From Lawsuits Shooting Upward, Says Report

U.S. lawsuit costs rose 2.1 percent in 2007, will jump 4 percent this year and the sour economy will push the upward trend through 2010, according to a study by Towers Perrin consulting firm.

Last year’s increase was attributed to a rise in personal injury cases mostly from automobile accidents—the first increase since 1999. The auto property damage frequency index, based on insurance industry figures, was 0.897 last year compared with 0.891 for 2006.

The “2008 Update on U.S. Tort Cost Trends” from Towers Perrin reported that a $5.1 billion climb from tort costs in 2006 marks the first escalation since 2005 and follows a 5.6 percent decline in 2006.

Further, Towers Perrin said it estimates that U.S. tort costs will increase 4 percent in 2008 and an additional 5 percent in both 2009 and 2010.

It said this is due to the continuing fallout of the 2007 subprime mortgage debacle and the current global financial crisis—as well as such factors as the impact of ever changing fuel prices on personal auto liability costs and the potential for increased activity in the area of employment practices liability, the company said.

“The current global economic climate could very well lead to a surge in tort activity here in the U.S,” Russ Sutter, a Towers Perrin principal and author of the report said in a statement.

“For 2008 and beyond, we see the list of potential defendants growing to groups such as mortgage brokers, appraisers and investment banks, as well as peripheral defendants, such as auditing firms and attorneys advising the targeted firms,” said Mr. Sutter

He continued that the implosion and “resulting government involvement in firms such as Bear Stearns, Lehman Brothers, Fannie Mae and AIG will undoubtedly lead to further litigation in 2008 and 2009,” noting that, “What remains unclear is how many dollars will change hands as a consequence of this litigation.”

From a statistical standpoint, the U.S. tort system cost $252 billion in 2007, or $835 per person—$9 per person more than in 2006. The 2008 report analyzes U.S. tort costs from 1950 through 2007, with projections through 2010.

The methodology used in the study incorporates three cost components: benefits paid or expected to be paid to third parties (losses), defense costs and administrative expenses, Towers Perrin said.

Administrative expenses are identified separately in the report.

Key findings:

• Overall economic growth in 2007 was 4.8 percent. As such, the ratio of tort costs to gross domestic product (GDP) shrank in 2007, marking four consecutive years of a decline in the ratio. Since 1950, growth in tort costs has exceeded growth in GDP by an average of approximately two percentage points.

• The total tort costs from commercial lines in 2007 increased 1 percent over 2006. The 2007 costs, however, were below levels seen each year in 2003 through 2005. The reduction from those prior years appears to be attributable to a reduction in the number of claims, according to the report.

• The smaller increase in commercial tort costs can be attributed in part to asbestos. Insured asbestos losses increased approximately $1.2 billion in 2007. This was lower than the comparable increases in 2004, 2005 and 2006 ($7.3 billion, $7 billion and $1.8 billion, respectively).

Towers Perrin said it is forecasting growth in U.S. tort costs of 4 percent in 2008, with higher growth (5 percent) in 2009 and 2010.

According to the report, several issues will determine the future trends in U.S. tort costs, including:

•Gasoline prices — Increases in the price of gasoline have resulted in a decrease in miles driven in 2008. Whether the price of gas increases further, and whether the public’s reaction to the price is a temporary or permanent shift in driving habits will impact future personal auto liability costs.

• Credit crunch — Springing from the subprime mortgage crisis in 2007 and continuing through 2008, the survey found the credit crisis has led to significant litigation activity, particularly on a class action level. As of year-end 2007, most of this activity was in the directors and officers area.

For 2008 and beyond, the firm said it sees the list of potential defendants growing to groups such as mortgage brokers, appraisers and investment banks, as well as peripheral defendants such as auditing firms and attorneys advising the targeted firms.

Medical malpractice legal claims costs, according to the report, have decreased in inflation-adjusted dollars since 2004. Tort reforms in several states have contributed to this result. It was noted that some of those reforms, however, such as in Illinois and Georgia, have been overturned or are currently being challenged in the courts.

In addition, the growing emphasis on “never events” (serious and costly errors in the provision of health care that should never happen, such as surgery on the wrong body part or a mismatched blood transfusion), and the potential strict liability that hospitals face from such claims, could change the recent trends, according to the report.

Monday, November 17, 2008

New Study: State Tort Reforms, Arbitration, Focus on Care Quality Improvement Boosts Stability of Long Term Care Sector

For the first time in Aon Risk Consultant Inc.'s ongoing nine year actuarial study of general liability and professional liability (GL/PL) claims against America's long term care providers, the countrywide frequency of claims and their severity are stable. The American Health Care Association (AHCA) stated that a combination of effective state tort reform laws, a trend towards settlements based on arbitration, and increased facility-based quality improvement efforts are indisputably working on behalf of elderly Medicaid beneficiaries and the taxpayers who finance the nation's Medicaid program. Aon's The Long Term Care 2008 General Liability and Professional Liability Actuarial Analysis is supported by AHCA.

"The facts and statistics in the new Aon analysis are powerful and profound, and excellent news for U.S. seniors and taxpayers," stated Bruce Yarwood, President and CEO of AHCA. "The long term care profession is enormously pleased that state tort reform laws and other initiatives designed to help ensure the nation's Medicaid resources are working as intended - to protect our most vulnerable seniors."

The Aon 2008 analysis states the following:

"Across the United States, the climate of long term care liability is constantly changing. In the mid to late 1990's, soaring liability costs prompted providers to devise a number of strategic initiatives. Early efforts focused on tort reform legislation, withdrawal from expensive markets, , and operational improvements. These efforts have continued and expanded to include an increased focus on quality of care, and alternative dispute resolution strategies, including arbitration.

After years of quickly rising costs, these initiatives have resulted in stability in most areas as evidenced by the following key findings from this year's study:

* For the first time in Aon's nine years of reporting on long term care liability costs, countrywide frequency and severity are stable; * Tort reform driven reductions in liability costs have been lasting. Several years past the last major tort reform actions, frequency and severity are stable at their post reform levels;
* Despite stability in the national trends, turbulence remains in higher cost jurisdictions like Arkansas, Tennessee, and California, where the loss costs per occupied bed are multiples of the countrywide average; * Arbitration appears to reduce the time to settlement, with lower defense costs and smaller indemnity payments; * Survey respondents who had received an AHCA Quality Award had 34% lower liability costs per bed; * Defense costs continue to increase as indemnity amounts stabilize.

Other key findings are as follows:

Liability Costs Plummet in States with Tort Reform Laws

Liability costs have dropped significantly in states that have passed tort reform in the past several years. As a group, the average loss cost of Florida, Georgia, Louisiana, Mississippi, Ohio, Texas, and West Virginia dropped from $7,190 in 1998 to an estimated loss cost of $1,230 in 2005. The loss cost for these states has increased slightly through 2007 to $1,270.

Arbitration

Providers are increasingly seeking alternatives to tort litigation, and arbitration reduces the time to settlement by more than two months on average; the average indemnity amount for claims subject to arbitration is 31% lower than for claims that are not subject to arbitration; and the average expense amount for claims subject to arbitration is 20% lower than for claims that are not subject to arbitration.

Yarwood concluded, "We are encouraged by the correlation between those facilities that have earned AHCA's quality award and lower per bed liability costs. While there remain several areas of concern, the positive overall trend lines are unmistakable."