14.1% Drop In Fla. Comp Rates Proposed

Workers’ compensation insurance rates in Florida would see an overall average decrease of 14.1 percent statewide under the latest proposed rate filing, it was announced.

Florida Insurance Commissioner Kevin McCarty said in a statement that he has received the latest rate filing from the National Council on Compensation Insurance for rates that would become effective next year if approved.

He said the recommended drop in rates would produce a savings of more than $465 million for Florida employers.

Boca Raton, Fla.-based NCCI, which produces and files rates for insurers, said the rate decline was primarily due to a significant drop in claims frequency and a reduction in the costs of claims.

The rate decrease, if approved, would be the sixth consecutive drop since the Florida Legislature passed extensive reforms to the state's workers' comp system in 2003. The cumulative overall statewide average rate decrease since 2003 would total 58.3 percent.

Commissioner McCarty said, "These lower workers' compensation rates will have a positive impact on every segment of our marketplace. It is great news for business owners and their employees, because Florida employers are paying lower rates and benefits are being delivered fairly and effectively. The reduction of fraud and abuse in the system is certainly paying off."

According to the OIR, prior to the legislative reforms, the state of Florida consistently ranked No. 1 or No. 2 in the country for the highest workers’ comp rates; however, post-reform, Florida has dropped out of the top 10 rankings.

The OIR said a hearing on the filing will be scheduled in October, and the rate change would be effective for new and renewal business as of Jan. 1, 2009.

The revised Florida comp insurance law passed in 2003 instituted provisions for enhanced fraud compliance and revised permanent and temporary disability definitions. It also set new parameters for attorney and physician compensation and improved dispute resolution procedures, in addition to making many other improvements to the system.

AIG Hit By Credit Suisse, Fitch

American International Group’s stock price sank today after Credit Suisse upped its loss estimates for the firm by billions. On Friday a rating firm took negative action against the giant insurer.

AIG shares, which sold for close to $70 12 months ago, were at $18.99 in late afternoon trading on the New York Stock Exchange.

Fitch Ratings late Friday said it had updated its assessment of American International Group and placed its ratings of the insurer and its subsidiaries on Rating Watch Negative.

Credit Suisse cited AIG’s credit default swap portfolio as a problem and said it estimated that AIG Financial Products is “sitting on a $6.5 billion loss vs. our previous estimate of a loss of $2.6 billion.”

The firm said it was lowering the company’s third-quarter earnings per share estimate to a loss of 86 cents from a gain of 13 cents.

Based on our mark-to-market analysis of AIG’s investment portfolio, Credit Suisse said it expects AIG’s book value to decline by 6 percent.

The estimate for AIG is being lowered largely due to elevated losses from its derivatives business. If AIG continues to hold its exposures, a de-risking strategy may result in losses remaining elevated given the very poor liquidity conditions for securities with residential housing exposures, the firm said.

Credit Suisse said in the event of a one notch ratings downgrade from both Moody’s and S&P, AIG would be required to post up to $13.3 billion of additional collateral.

Fitch, before Friday, had previously put a long-term Negative Rating Outlook on AIG and the majority of its insurance-related subsidiaries rated by Fitch, and a Stable Rating Outlook on AIG's financial services subsidiaries.

Fitch Rating Watches are generally event-driven actions that are expected to be resolved over a relatively short period.

Financial subsidiaries rated included AIG Capital Corporation (AIGCC), International Lease Finance Corp. (ILFC) and American General Finance Inc. (AGF).

Fitch noted that it does not rate AIG Financial Products (AIGFP), which have been a significant source of recent quarterly losses reported by AIG.

The rating service said moving all rated AIG entities to Rating Watch Negative reflects its uncertainty regarding potential outcomes of AIG's previously announced business unit review, which is expected to be completed in late September.

Also reflected in the change, Fitch said, is ongoing uncertainty associated with the company's potential for additional realized and unrealized losses on its various residential mortgage backed securities-related exposures, including its portfolio of credit default swaps collateralized by structured finance collateralized debt obligations (CDOs) and resultant collateral posting and capital needs.

Fitch said it believes that completion of AIG's review of its various business units will likely provide clarity around some of its rating concerns over the next four to six weeks.

However, the company noted that concerns related to both AIGFP's and AIG's insurance operations' exposure to credit-market volatility is more likely to emerge over a longer period of time that may extend over the next two quarterly reporting periods.

Although Fitch noted that AIG has publicly acknowledged that ILFC will remain a core holding of AIG, Fitch said its decision to place ILFC on Rating Watch Negative reflects a heightened overall level of uncertainty surrounding the AIG organization and the indirect impact this can have on ILFC.

Experts See Computers, Obesity, Adding To Comp Risk

Obesity, an aging workforce and injuries caused by new technologies are among emerging risks faced by workers’ compensation insurers and businesses, said experts at an industry conference here.

Their comments were made during the Florida Workers’ Compensation Institute’s Workers’ Compensation Educational Conference (WCEC).

In a National Trends program session, organized by National Underwriter, a presentation prepared by Insurance Information Institute (I.I.I.) President Robert Hartwig showed trends such as obesity and an aging workforce leading to more frequent and more expensive claims going forward.

Most obese workers, according to the presentation, miss 13 times more work days than healthy weight workers, and indemnity costs for time away from the job are 11 times higher for the most obese workers than for healthy weight workers.

For older workers, who are make up an increasing part of the workforce, the presentation cited a fatality rate for workers 65 and older that is triple that of workers age 35-44. Median lost time is also 50 percent greater for 65 and older workers compared to 35-44 workers.

While employers may be under the impression that older workers will have claims handled by Medicare, the presentation explained that if workers’ comp coverage is available to an individual, then Medicare does not cover an injury. Additionally, if Medicare does cover the injury, it will seek subrogation.

Mr. Hartwig’s presentation also cited rising medical severity costs for returning injured war veterans and non-English speaking workers as emerging and continuing risks.

With respect to non-English speaking workers, and in particular for Latino workers, the presentation noted that as their workforce percentage increases, they will eventually shift to lower-risk jobs, and that will cut the injury rate. In the meantime, though, making sure that workers who do not speak English understand safety manuals and procedures remains a challenge.

Jennifer Tomilin, senior vice president, Zurich North America, also gave a presentation on emerging risks, and noted risks associated with technology as a growing problem. For example, workers who are always using laptops face the challenge of proper positioning while typing. Because these workers are often forced to work on planes or other cramped conditions, she said injuries are occurring in greater numbers.

Other risks Ms. Tomilin cited include high incidents of stress-related problems, due in part to technology that keeps people working well beyond normal business hours, and injuries such as “Travelers Thrombosis,” which are clots that form due to long periods of sitting, in particular on long plane flights.

P-C Trends Look Positive Says Keefe, Bruyette & Woods

Second-quarter results for the property-casualty insurance sector were mixed, but overall profits were excellent and the trend should continue, according to an investment bank analysis.

Analysts at Keefe, Bruyette & Woods said in a report they foresee declines in premium levels for insurers and brokers’ revenues, reduced investment income and an active merger and acquisition environment, among other trends.

The report also mentioned further capital management and “modest” deterioration of profit margins.

The firm said underlying earnings results remained strong and because it expects positive trends continuing it favors smaller regional and specialty insurers.

Referring to 50 insurers followed by KBW, the report said, “The group on the whole posted a 12.2 percent annualized ROE [return on equity] in the quarter, down from 15.5 percent in a year ago, but still impressive profitability in our view.”

Among firms that KBW tracks, it said 58 percent beat expectations in the quarter, 38 percent missed and 4 percent were in line—a modest improvement from the first quarter when only 45 percent exceeded expectations and 48 missed.

The company noted particular strength in personal lines and Bermuda-based insurers and reinsurers, which were offset by commercial/specialty lines and brokers.

Merger and acquisition activity included four major deals among insurers (Safeco/Liberty Mutual, Darwin/Allied World, Philadelphia Consolidated/Tokio Marine and CastlePoint/Tower Group) and KBW said it expects “robust” deal making to continue.

With a continuing fall in insurance prices, KBW foresees continued downward pressure on premium volume in coming quarters. In the second quarter, its report said total net written premiums were only up 0.3 percent.

Total brokerage revenue growth for the five companies KBW tracks was 7.8 percent for the second quarter compared with 5.8 percent for the period last year.

KBW said it expects in coming quarters other brokers will join Aon and Gallagher in share buyback activity.

A portion of the report said that frequency of weather-related losses appears to be growing, with tornadoes and other weather causing nearly 60 percent of U.S. catastrophe losses since 1953.

It noted that the United States, averaging about 1,000 tornadoes a year has the highest number of tornadoes “on the planet” and that the first half of 2008 had nearly double the average level of tornado activity.

Fay Drowns Florida

Tropical storm Fay continued to dump rain over Florida and is expected to do so for the rest of the week before moving out along the Gulf Coast.

An insurance association executive said it is still too soon to tell what the insurance damage may be from the storm that has dumped as much as 30 inches of rain on isolated parts of the state according to the National Weather Service.

By mid-afternoon Fay was reported to be stalled just north of Cape Canaveral, Fla., the National Hurricane Center reported, with a tropical storm watch extending from Fort Pierce, Fla., north to Altamaha Sound, Ga.

The storm, with maximum sustained winds of 50 mph, was expected to begin moving again into the Atlantic, then move northwest over the Florida Panhandle. The Hurricane Center said an unofficial report puts total rainfall so far just northwest of Melbourne, Fla., at 22 inches.

William Stander, assistant vice president and regional manager for the Property Casualty Insurers Association of America, said in an e-mail, “It is too soon to determine the full scope of insurance losses at this point. Floridians are just now starting to file claims.”

He added, “Insurers stand ready to assist Floridians recover from flash floods, high winds, tornado activity and power outages that have been reported across the state.”

Steve E. Smith, president of Property Solutions Carvill ReAdvisory, said Fay is expected to spend the 12-24 hours over the Atlantic where it is expected to intensify but not reach hurricane status.

According to Progress Energy’s Web site, 437 customers are without power. Florida Power and Light Company said about 93,000 customers were without power, but the figure was expected to fluctuate and his crews are working to restore power as quickly as possible.

In a statement, the company said that Miami-Dade, Broward and Palm Beach counties were “essentially restored.” Other areas of the state were still being worked on.

Reports say the storm has spawned nine tornadoes, injuring two and damaging more than 50 homes.

S&P Outlook For P-C Industry Turns Negative

Standard & Poor's Ratings Services has revised its outlook on the U.S. commercial lines property-casualty insurance sector to negative from stable as rates are expected to continue to decrease for another year.

In a statement, S&P’s credit analyst John Iten explained that “our decision to revise the sector outlook reflects our concern over two issues—the ongoing decline in pricing for commercial lines and decreases in investment income.”

Price competition persists across virtually all commercial lines, with prices continuing to decline, albeit at a somewhat moderated pace in the second quarter, S&P said. Based on industry pricing surveys and information that companies provided in their second-quarter earnings releases, the New York-based rating firm said it believes pricing in the second quarter for renewal business declined at a mid-single-digit rate in most lines and at a low-double-digit rate for new business.

“Although some companies and outside observers have suggested that the rate of deterioration might have bottomed out in the second quarter, rates are still declining steadily,” Mr. Iten said. “Absent an extraordinary event, we do not see anything reversing the general downward direction of rates over the next six-to-12 months.”

Over the next 12-to-18 months, this decline in rates will adversely affect underwriting results, S&P continued. The rating service said it expects that full-year 2008 underwriting results for most commercial lines writers will remain relatively strong, with the U.S. p-c industry’s combined ratio still less than 100.

However, S&P cautioned that it still believes underwriting performance will deteriorate through the remainder of 2008 and through much of 2009.

Other factors contributing to the outlook revision are the worse-than-anticipated deterioration in net investment income through the first half of 2008 and the significant increase in net unrealized investment losses, reflecting continued developments in credit markets.

S&P said it last revised its outlook on the U.S. commercial lines p-c sector in June 2005. The revision then was from negative to stable.

In 2008 through mid-August, the number of upgrades in the U.S. commercial lines sector exceeded the number of downgrades by a margin of four to two, said S&P. However, Mr. Iten warned that the rating service sees few upgrades, if any, for this year and the number of commercial lines companies with negative outlooks is expected to increase by year’s end.

The decline in operating performance could worsen if there is no recovery in the credit markets and unrealized capital losses lead to higher impairment charges on insurers’ fixed-income portfolios, S&P said.

Zurich Says Half-Year Profits Up

Zurich Financial Services Group bucked the trend of most insurers and reported a profit for the first half of the year, reporting a slight drop in its combined ratio despite the falling prices affecting the industry.

The Zurich, Switzerland-based company reported net income increased $5 million to $2.68 billion for the first six months of the year. This translated into an earnings per share increase of 68 cents a share to $18.99 a share.

The company did not report quarterly results.

Despite the performance, the results were not immune from the effects of the soft market, noted Zurich Chief Executive Officer James J. Schiro during a conference with investment analysts.

Mr. Schiro said Zurich would take whatever actions necessary to protect the company and continue with its strategy for profitable growth.

Dieter Wemmer, chief financial officer, said the company has responded to soft market realities and losses in investment income with headcount reductions in the United States, United Kingdom and elsewhere.

He said U.S. operations headcount has been reduced by 6 percent resulting in a $63 million charge, and U.K. operations will see headcount reductions of 10 percent resulting in an estimated charge of 10 percent.

For the six months compared to last year, general insurance operating profit rose 22 percent, or $398 million, to $2.2 billion. Gross written premiums rose 8 percent, or $1.6 billion, to $20.6 billion. The combined ratio improved 0.3 points, dropping to 96.2.

Reporting on its Los Angeles-based Farmers Insurance Group, which the company manages but does not own, catastrophe losses in the Midwest contributed to deterioration of that company’s combined ratio.

Zurich received fee income from Farmers of $1.2 billion, an increase of 9 percent, or $103 million.

However, Farmers reported net income dropped 8 percent, or $55 million, to $617 million. Gross written premiums increased 12 percent, or $930 million, to $8.7 billion. The combined ratio deteriorated 6.5 points to 104.2.

Mr. Schiro said the company has examined Farmer’s losses and determined that the deterioration was not a result of “weakening of underwriting.”

He said the company is satisfied that the issue is not systemic but the result of the catastrophe losses. He noted that those losses occurred with many long-time customers who have been very profitable in the past.

Mr. Wemmer noted that despite the losses at Farmers, the company still has capital in place to continue with a growth strategy while maintaining underwriting discipline.

In its other business, global life, net income increased 6 percent, or $45 million, to $766 million.

On the investment side, Mr. Wemmer said Zurich took a $10 million write-down related to the subprime mortgage market and is leaving some municipal bond investments.

Employers’ Health Insurance Cost Increases May Be Easing

Employers may be seeing some small relief on their health care premiums as rates have not increased as substantially as they have in the past, according to a survey from Aon Consulting.

Aon Consulting, a subsidiary of Chicago-based insurance broker Aon Corp., said from a survey of 70 major health care insurers representing more than 100 million insured individuals, it projects that health care costs over the next 12 months will increase an average of 10.6 percent. This is slightly less than the 11 percent increase projected last year.

By medical plans, Health Management Organizations are expected to rise 10.6 percent this year, compared to a 10.9 percent increase in the spring of last year. Point of Service plans are expected to rise 10.5 percent compared to 10.8 percent last year. Preferred Provider Organizations are expected to see a 10.7 percent increase, a 0.5 point decrease over year’s 11.2 percent. Consumer-driven health care plans dropped from 10.7 percent last year to 10.5 percent.

Bill Sharon, senior vice president with Aon Consulting and director of the study, observed that the decreases in medical trend rates could be attributed to more employers and employees taking advantage of wellness, health promotion and consumer-driven programs.

“But more must be done to truly stem the tide of rising health care costs. This includes greater senior management support for these programs, better employee communications and more consistent cooperation from the medical community,” he said in a statement.
Aon Consulting's U.S. health and benefits practice director, John Zern, said of the results: “While the medical trend rate is still more than twice the consumer price index, it is encouraging to see that health care cost rate increases are continuing to slow down. This is a step in the right direction for companies nationwide that continue to feel significant health care price pressures.”

Berkshire Hathaway Says Soft Market Affecting Earnings

Omaha, Neb.-based holding company Berkshire Hathaway Inc. said second-quarter net income dropped 8 percent, or $238 million, to $2.88 billion.

The company said declining insurance prices will translate into substantially less profits and warned that investors cannot expect the benefits of low catastrophe losses to continue.

In the company’s Friday filing with the Securities and Exchange Commission, the company reported revenues rose in the quarter by 10 percent, $2.75 billion, to $30.1 billion.

For the first six months of the year, net income is off 33 percent, or $1.89 billion, to $3.82 billion. Revenues are off 8 percent, or $5 billion, to $55.3 billion.

The company reported the economy was affecting a number of its segments, for instance housing and retail, which showed deterioration due to the economic slowdown.

The company’s four insurance segments (GEICO, General Re, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group, plus investment income) saw net profit decline 8 percent, or $238 million, to $2.88 billion in the second quarter. Revenues increased 4 percent, or $255 million, to 7.45 billion.

Net profit for the six months declined 33 percent, or $1.89 billion, to $3.82 billion. Revenues during the first half decreased $7 billion, or 32 percent, to $14.76 billion.

The company said underwriting gains this year “will be substantially lower than in 2007 as price competition” has increased substantially over the past two years in most property-casualty markets.

The company’s reinsurance operations have benefited from “relatively low levels of catastrophe losses” that it warned investors may not continue through 2008 with the onset of the hurricane season.

Of its operating segments, GEICO, the writer of auto coverage, reported its combined ratio in the quarter rose 1.5 points to 90.4 percent, while for the six months, it rose 2.8 points to 92.1. The loss ratio is expected to be higher for 2008 compared to 2007.

Losses from catastrophe events for the first six months rose from $40 million in 2007 to $60 million this year.

The company’s reinsurance business General Re saw its premium earned on p-c business drop $6 million to $1.86 billion.

“The reduced premium volume reflects continued underwriting discipline by declining to accept business where pricing is considered inadequate,” the company said in its filing.

Bermuda Enhances Insurance Solvency Regulations

The Bermuda Monetary Authority announced today what it called significant changes for Bermuda’s solvency and disclosure regulations for insurers.

It said the revisions will help ensure Bermuda achieves recognition as having regulatory standards equivalent to those in Europe’s Solvency II Directive.

The Authority also announced new measures to facilitate special purpose vehicles (SPVs).

“I’m pleased to say that the developments announced today mean we’re well on track to achieving our objective of achieving equivalence, or mutual recognition status, in Europe and elsewhere,” said Matthew Elderfield, chief executive officer of the Authority.

“Bermuda is now one of the countries at the front of the pack in terms of preparing for Solvency II,” he commented.

With the recent passage of the Insurance Amendment Act 2008, the Authority said it will now introduce, among other new and expanded regulatory initiatives, the Bermuda Solvency Capital Requirement (BSCR), an enhanced solvency regime that will apply to Bermuda’s Class 4 (re)insurers, its largest insurance companies.

“The BSCR will assist us to build on Bermuda’s existing solvency regime by establishing risk-based capital adequacy standards for high impact insurers,” Mr. Elderfield said.

“This will allow for a more risk-sensitive approach to setting solvency requirements for Bermuda’s insurers, in line with international developments regarding capital adequacy such as Solvency II,” he added.

“Implementing the BSCR will also help with the Authority’s transition to recognizing companies’ internal economic capital models,” said Mr. Elderfield.

“Permitting the use of internal models for our (re)insurance companies to determine appropriate capital levels for their business, subject to review and approval of each model by the Authority, is again consistent with developments in international insurance regulation,” he noted.

Other initiatives facilitated by the new provisions in the amended legislation include the publication of financial statements submitted to the Authority by Class 4 companies, under new reporting requirements for these high impact insurers, using Generally Accepted Accounting Principles (GAAP).

“These new provisions enable us to publish GAAP financial statements, which will result in enhanced standards for disclosure for Bermuda’s Class 4 insurers, in line with international standards relating to transparency in the industry,” Mr. Elderfield said.

The legislation also facilitates the re-classification of Bermuda’s Class 3 insurance sector, which includes a large number of firms with a wide range of characteristics—from captive insurers writing a limited amount of third-party business to large, purely commercial (re)insurers.

“This means we’re establishing further subcategories within the Class 3 group, based on their respective risk profiles,” Mr. Elderfield explained.

He said, “We will be able to refine our application of risk-based supervision to these firms further, to ensure they receive the level of oversight that is appropriate to the nature of their business.”

The reclassification, Mr. Elderfield noted, also introduces a new category of ‘Special Purpose Insurer,” focused on fully collateralized SPVs that are established to conduct specific insurance transactions (most typically asset-backed securitization transactions).

The new classification, it was explained, will make it less costly for SPVs to be established in Bermuda.

“The changes agreed for SPVs will help maintain Bermuda’s position as a leading insurance market,” Mr. Elderfield said.

350,000 Fla. Citizens Policyholders Must Re-Apply for Coverage

Florida residents who have wind-only policies from Citizens Property Insurance Corp. will have to re-apply for coverage as of February 1, 2009, representatives from the state-created carrier said in a press briefing yesterday.

Citizens, the state’s insurer of last resort, said it is updating its computer system for wind-only policies and 350,000 policyholders will need to re-apply for coverage as their current policies will not be renewed.

The changes do not affect policyholders who have coverages other than wind-only.

John Kuczwanski, public information manager for Citizens, explained that Citizens was created by joining the Florida Windstorm Underwriting Association with the Residential Joint Underwriting Association. The Windstorm Underwriting Association, he said, ran on an old computer system with “long, difficult to read policy forms.”

Mr. Kuczwanski said, “We are updating those policy forms to industry standards, and in doing so, we have to nonrenew the existing policies and have [customers] submit these new applications, because there are choices that the consumer needs to make, and [the choices] will be written on a new computer system which is Internet-based instead of the old manual process on the old AS400 system.”

The choices include the option to reduce coverage on detached structures, Mr. Kuczwanski said.

In letters that will be sent to policyholders, Citizens notes that almost all who currently have wind-only policies will qualify for coverage. Additionally, rates will not be increased.

However, Citizens added that policyholders who have a shingle roof that is over 25 years old, or any roof that is over 50 years old, will need to “update his/her roof in order to be eligible for coverage.” Mr. Kuczwanski said this new underwriting guideline is “pretty much standard in the industry.”

Citizens also said that if a policyholder does not have enough coverage to cover the replacement cost for a home, then additional coverage will be required, which will increase the overall premium.

Mr. Kuczwanski said the new computer system provides a replacement cost estimate that the policy will be written for.

If customers disagree with the estimate, he noted, “they can provide us the declaration page from their fire and theft policy in the private industry, or have an appraisal done. Basically, that’s being done to protect our interest and, more so, protect our customers’ interests if there is a total loss.”

RIMS Survey: Premium Price Drop Continuing

Average premiums for all major commercial lines of insurance continued to fall in the second quarter, according to the RIMS Benchmark Survey released today.

And, “it is still very much a buyer’s market, and should remain so, at least through 2008,” according to officials at Advisen, which produces the survey for the Risk and Insurance Management Society.

The 6.1 percent decrease in premiums for property insurance essentially repeated first-quarter price decreases for renewals, even though forecasters now predict a severe hurricane, Advisen officials said.

In general, “insurers’ net profit plunged in the first quarter, due largely to falling rate levels,” said David Bradford, editor-in-chief of Advisen.

“But the property and casualty industry is still overcapitalized, which continues to put downward pressure on premiums,” he said.

The decrease in average general liability premium was nearly 5 percent, up from 2 percent in the first quarter. After an unexpected 11 percent drop in the first quarter, the average workers’ compensation premium fell just 1.7 percent in the second quarter, Mr. Bradford said.

He said this was not evidence of a trend; the rates just fluctuate from quarter to quarter.

Even the average directors and officers liability insurance premium fell a comparatively moderate 6.4 percent in the second quarter after dropping sharply in the first quarter, according to the study.

That occurred even though losses from the subprime debacle are expected to cost directors and officers liability insurers an estimated $3.6 billion loss claims over three years, Mr. Bradford said.

The survey is produced by Advisen, Ltd., which collects and analyzes the data and provides the technology infrastructure for the survey’s online services.

Mr. Bradford said that only financial and real estate firms with subprime exposure have experienced price increases, and these on a risk-by-risk basis.

D&O coverage costs have been falling “vigorously since the beginning of 2004” due to the huge money flow into the market because of its relatively low risk, he said.

Moreover, he added, despite the losses, the industry will break even because the cost will be spread between 2007 and into 2009. And that does not take into account the time value of money.

The reason prices are falling, he said, is because the industry has not suffered major losses since the problems of Enron and Worldcom in the early part of the century.

NCCI Finds Comp Injury Declines With Economy

The frequency of workers’ compensation injury claims declined by about 2.5 percent in 2007, a decrease helped in part by the economic downturn, National Council on Compensation Insurance, reported yesterday.

One of the drivers of the injury rate, NCCI said, is the business cycle, which during economic expansions can result in hiring of more injury prone less-experienced workers.

The Boca Raton, Fla.-based rate and data service organization said, however, that the reduction in injury claims last year was much smaller than in the previous two years, when the claim frequency was reduced by 6.7 percent in 2006 and 6.8 percent in 2005.

NCCI said that while accident year 2007 saw overall declines in claim frequency, there were overall increases in indemnity and medical severities.

The increase in indemnity lost-time wage claims is projected to have been 4 percent last year, NCCI reported, outpacing wage inflation, which rose 3.3 percent according to the U.S. Bureau of Labor.

Medical claims costs in 2007 were found to have increased by 6 percent, growing faster than the Consumer Price Index for medical care, which was 4.4 percent.

NCCI said the continuing frequency decline spanned all industry groups.

In addition to a lack of new untrained workers being added to payrolls, NCCI said other factors that influence frequency are global competition, increased use of robotics, increased use of modular design and construction techniques, increased use of power-assisted processes, advances in ergonomic design and proliferation of cordless tools.

The company also mentioned the impact of more and better job training, continued emphasis on workplace safety, improved fraud deterrents and older workers who tend to have fewer workplace injuries.

By region, the NCCI report said, the frequency decline was greatest in the Midwest--23 percent over the past five years.

NCCI said permanent total disability claims have increased significantly over the last three years and are highest for contracting and other industries that fall in the “miscellaneous” category.

By region, permanent total claims grew the most in the Southeast.

From 2004 to 2006, the increase in permanent total claims may have increased lost-time indemnity severities by approximately 1.5 percent per year and lost-time medical severities by approximately 2.5 percent to 3 percent per year, NCCI said.

A key issue facing employers and workers compensation insurers, NCCI said, “is whether the large declines in claim frequency that began in the 1990s are likely to continue. Virtually every major employment category examined has experienced marked declines.”

Storm Edouard Seen As Small Threat

Tropical Storm Edouard, which is headed through the Gulf of Mexico toward Texas, is expected to produce less than $100 million in insured losses, a catastrophe modeling firm said.

The estimate was produced by Oakland, Calif.-based Eqecat Inc. The firm currently estimates there will be no real damage to energy drilling platforms in the Gulf, a spokesman for Eqecat Inc. said.

Aon Re Global offered the same view. In total damages, insured loss potential is low, said a company spokesman. Intensity is expected to range between a weak tropical storm and a Category 1 hurricane with winds up to 95 mph.

Estimates are based on the storm’s current track and forecast. As of early this afternoon, Edouard was currently about 265 miles east-southeast of Galveston, Texas.

The storm was moving at 8 miles per hour, an increase from the previously recorded 6 mph with winds at about 45 mph, according to an Aon Re Cat Alert.

The storm is expected to strengthen to 70 mph and hit the upper Texas coast by morning.

Edouard became the fifth named tropical storm of the 2008 hurricane season late yesterday.

Steve Smith, an atmospheric physicist and president of Property Solutions at ReAdvisory, Carvill Reinsurance Intermediary’s analytical arm, said in a report that impact from Edouard is likely to be limited in scope, and even if the storm were to come ashore near Galveston as a strong Category 1, damage would likely be minimal from a reinsurance perspective.

Mr. Smith noted that with Edouard sitting right in the middle of the Gulf oil field, with expectations it will transit through the oil field almost until landfall, oil prices have shown little reaction.

Varieties of crude oil were trading slightly lower for most of the early morning. “Clearly, energy traders do not see Edouard as a significant threat to oil production at this time,” Mr. Smith said.

PCI And NAMIC Square Off On OIR Question

Two of the largest property-casualty insurance trade groups have offered different approaches to the question of federal involvement in insurance regulation.

The comments of the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America (PCI) were submitted Tuesday to the Senate Banking Committee as part of the panel’s hearing on the status of insurance regulation.

In its testimony, NAMIC said it opposed creation of an optional federal charter system for insurers but supported more limited reforms, for example, passage of legislation creating an Office of Insurance Information within the Treasury Department.

In its statement, NAMIC also said it would support legislation already passed by the House reforming the surplus lines and reinsurance industries, as well as a bill which would establish licensing reciprocity for insurance producers that operate in multiple states.

But, in its submission, PCI declined to support any specific federal legislation and called for market-based reforms of a continued state regulatory system.

David Sampson, PCI president and chief executive officer, said in the organization’s statement that PCI’s members supported a “state-based insurance regulatory system based on sound principles of regulation and preserving the prerogatives of the states.”

However, Mr. Sampson did caution that PCI “also recognized that many states have not made sufficient reforms and that much work is needed to modernize and streamline the existing regulatory system.”

Chuck Chamness, NAMIC’s president and CEO, said that among the federal legislation dealing with insurance it supports the measure to create an Office of Insurance Information.

The bill is HR. 5840 and is awaiting House floor action. It was sponsored by Rep. Paul Kanjorski, D-Pa., and passed by the Capital Markets Subcommittee of the House Financial Services Committee that Rep. Kanjorski heads.

“Rep. Kanjorski’s bill addresses two key points raised by proponents of an OFC: assuring that information on the insurance industry is available to the federal government—especially in times of crisis—and providing a process for agreements on international trade,” Mr. Chamness said. “Therefore, we believe the establishment of an OII diminishes the argument for an OFC.”

However, Mr. Chamness said NAMIC would support creation of an OII as long as it contained the principles included in Mr. Kanjorski’s bill. This would mean an OII that has “the strongest confidentiality and privilege protections, is limited in scope, has a well-balanced advisory panel with limited preemptive authority, and is subject to congressional oversight,” Mr. Chamness said.

Hearing Underscores Insurance Industry Rift

The Senate hearing Tuesday on insurance regulation has once again spotlighted the divide within the insurance industry between supporters of continued state regulation and proponents of optional federal chartering of insurers.

In defending state regulation, Steven Goldman, commissioner of banking and insurance in New Jersey, said, “The current U.S. insurance regulatory scheme is strong, and our track record is regarded internationally as the benchmark by which other supervisory systems are measured.”

Also speaking for state regulation was Tom Minkler, an independent agent from New Hampshire testifying on behalf of the Independent Insurance Agents and Brokers of America. Mr. Minkler said it is important to maintain the consumer protection strengths of the state-based insurance regulatory system while making needed improvements, specifically in the area of agent licensing.

But Alessandro Iuppa, senior vice president, government and industry affairs at Zurich North America, representing the American Insurance Association, said that today’s marketplace demands “far more dramatic action [for change] than the states alone are able to provide.”

Mr. Minkler reiterated the IIABA’s opposition to OFC proposals. He said that even though it is commonly known as “optional,” current federal legislative proposals to allow for such a federal insurance charter would not be at all optional for agents.

Independent agents represent multiple companies and, under this proposal, presumably some insurers would choose state regulation and others would choose federal regulation, he said.

“In order to field questions and properly represent consumers, independent agents would have to know how to navigate both state and federal systems, therefore making them subject to the federal regulation of insurance—meaning OFC would not in any way be optional for insurance producers,” Mr. Minkler said.

“Even more importantly, ‘optional’ federal charter would not be optional for insurance consumers,” he said. “The insurance company, not the insurance consumer, would make that determination.”

In his comments, Mr. Goldman said “the insurance industry in the U.S. has “grown exponentially in recent decades in terms of the amount and variety of insurance products and the number of insurers.”

The industry now has combined annual premiums exceeding $1.4 trillion, and its share of the U.S. economy has grown from 7.4 percent of gross domestic product in 1960 to 11.9 percent in 2000, he noted.

“Clearly, this is not an industry that has suffered under state insurance supervision,” Mr. Goldman argued. He added that in 2005, while insurance companies were absorbing record losses, they were making record profits, and profits and surplus have continued to increase each year since.

Mr. Iuppa, however, argued that “although some risks and insurance markets remain local or state-based, in general, insurance has become a national and international marketplace in which risks and losses are widely spread throughout the world.”

“Rather than encouraging increased availability and addressing the cost of insurance to cover such multijurisdictional risks,” he said, “the state regulatory system does just the opposite.”

“By artificially making each state an isolated individual marketplace with its own rules and standards, the state-based system constrains the ability of carriers to innovate and has a negative effect on the availability and cost of coverage,” he added.