Research Can't Yet Explain Link of Chinese Drywall to Home, Health Woes

Federal investigators have been unable to prove a definite link between imported Chinese drywall and home damage and health issues. But they aren't done investigating.

The Consumer Product Safety Commission said that the problems with the Chinese manufactured home product require further study. It plans to release more information next month.

This week, the federal agency released preliminary results of three studies. The researchers said they could not definitively explain the cause of certain health problems or corrosion of pipes and wire damage that many homeowners, especially in the Southeast, have been blaming on the drywall.

"While the studies have discovered certain differences between Chinese and non-Chinese drywall, further studies must be completed to determine the nexus between the drywall and the reported health and corrosion issues. The conclusions of each study are preliminary and may be subject to change with the results of later studies," the CPSC report said.

To date, CPSC itself has received nearly 1,900 reports from 30 states, the District of Columbia and Puerto Rico about problem drywall in homes.

Complaints from homeowners, many of whom have had to abandon their places, are that the fumes from the drywall are corroding, or blackening, indoor metals, such as electrical components and central air conditioning system evaporator coils, as well producing various health symptoms, including persistent cough, bloody and runny noses, headaches, difficulty in breathing and irritated and itchy eyes and skin.

The government studies thus far have found that Chinese drywall contains higher concentrations of strontium and elemental sulfur than non-Chinese drywall and that it emits "volatile sulfur gases" at a higher rate than non-Chinese drywall.

Indoor air studies conducted on 10 homes did not detect any or found only very limited indications of certain sulfur compounds. Some concentrations of two irritants, acetaldehyde and formaldehyde, which could exacerbate conditions such as asthma in sensitive populations, were detected in homes with and without Chinese drywall.

Various state agencies along with the CPSC, the Centers for Disease Control and the Environmental Protection Agency acknowledge the problems and health symptoms have been working in the issue.

A 50-home indoor air study scheduled for release next month will provide a more comprehensive picture, according to the CPSC. It also plans to release a preliminary engineering analysis of electrical and fire safety associated with corrosion. A study of long-term corrosion issues will not be completed until June of 2010.

U.S. officials said that the Chinese government is assisting with the drywall investigations.

There have been some reports of homeowners losing their insurance because of potential issues associated with the drywall. Homeowners policies do not cover damage from defective products but some underwriters fear the damage could eventually lead to a fire, water leak or other claim that might be covered.

In one case, Florida's state-backed property insurer initially rejected a renewal on a policy on a home with Chinese drywall but reconsidered after it said it found the damage was not as bad as first thought and would not likely to result in a covered claim.

An Associated Press analysis found that more than 500 million pounds of Chinese gypsum board was imported between 2004 and 2008 - enough to have built tens of thousands of homes.

House Healthcare Bill Has Public Option, Individual Mandate, Surtax

Democrats in the House finished work Wednesday on a healthcare bill that includes a government-run insurance plan, requires individuals to buy health coverage and imposes a surtax on the wealthy to help pay for it.

The measure, the product of weeks of closed-door talks to merge three pending health bills, will be unveiled by party leaders Thursday and submitted to the full House for debate as early as next week.

The bill includes a government-run "public'' insurance option that uses reimbursement rates negotiated with healthcare providers, Democrats said, a setback for House liberals led by Speaker Nancy Pelosi who favored a more "robust'' version to compete with private insurers.

Pelosi failed to gain the 218 votes needed to pass a version of the government-run plan using lower rates pegged to Medicare, the health plan for the elderly.

The healthcare measure being prepared for debate in the Senate also includes a public insurance option based on negotiated reimbursement rates but, unlike the House bill, it would allow states to decline to participate.

The House's version of a sweeping healthcare overhaul, President Barack Obama's top domestic priority, would require individuals to buy insurance and all but the smallest employers to offer health coverage to workers, Democrats said.

It would offer subsidies to help the uninsured buy insurance through newly created exchanges and would expand eligibility for the Medicaid program to those with incomes up to 150 percent of the poverty level.

The House bill includes a 5.4 percent surtax on individuals making more than $500,000 and couples earning more than $1 million, which an aide said would bring in about $460 billion over 10 years to help pay for covering the uninsured.

NO CADILLAC TAX

The House bill does not include a tax on high-cost ''Cadillac'' insurance plans that is included in the Senate bill. House Democrats have strongly opposed that approach, which has drawn criticism from labor unions that fear it will hurt too many middle-income workers.

Obama has sought a health bill that reins in costs, regulates insurers and expands coverage to millions of the uninsured. The House bill includes restrictions to keep insurers from declining to cover those with pre-existing conditions or dropping the sick.

Democrats who attended a meeting with Pelosi said they were told congressional budget analysts had estimated the bill would cost less than Obama's target of $900 billion.

The House bill includes about $20 billion in fees over 10 years for medical device manufacturers, an aide said.

It will phase in penalties for businesses that fail to provide insurance, starting at 2 percent for firms with a payroll of $500,000 and ending at 8 percent for businesses with a payroll of $750,000 or more, the aide said.

The battle over a government-run insurance plan has become a flashpoint in the debate over the healthcare overhaul. Obama and liberals believe the option would create more choice for consumers.

Critics say the public option, which would compete with private plans on state-based exchanges where individuals could shop for insurance, would lead to a government takeover of the sector.

The House bill still faces a potential uprising by liberals who had pushed hard for a public option tied to Medicare rates. Rural Democrats had opposed that approach, fearing it would hurt small hospitals.

"We think we'll have the votes,'' for the negotiated rates, said George Miller, chairman of the House Education and Labor Committee.

Democratic leaders also face possible opposition from a group of about 40 House Democrats who want to strengthen the bill's language to ensure no federal funds would be used for abortions.

Democratic Representative Marion Berry of Arkansas said he was undecided if he would support the measure because he was concerned about how it would be paid for and he wanted to see more money taken from the drugmakers and insurance industry.

"If they aren't squealing to the high heavens, we haven't hit them hard enough,'' he told reporters.

W.R. Berkley Reports Q3 Profit; CEO Sees Turn in Cycle 'Inevitable'

Insurance holding company W. R. Berkley Corp. reported net income for the third quarter of 2009 of $98 million, compared to a net loss of $28 million for the third quarter of 2008.

Operating income for the third quarter of 2009 was $112 million compared to $103 million for the corresponding quarter of 2008.

Investment income rose 15 percent and the combined ratio for the quarter came in at 95.

William R. Berkley, chairman and chief executive officer, said pricing on his company's renewal business, while still down, is down less than one half percent and premium volume is down less than three percent. New business from our start-ups is, in part, offsetting premium declines from established companies.

Berkley said he sees the economy improving and insurance pricing firming over the next six to eight months.

"At current pricing levels with existing low interest rates, we believe the industry is operating at a net loss on an accident year basis; and a turn in the cycle is inevitable," he said. "We anticipate modest improvement in the economy and a turn in the insurance pricing environment in the first half of next year," Berkley said.

W. R. Berkley Corp. operates in five segments of the property/casualty commercial insurance business: specialty insurance, regional property casualty insurance, alternative markets, reinsurance and international.

U.S. Senate Healthcare Bill to Include Public Option with State Opt-Out

Democratic leader Harry Reid said Monday the U.S. Senate's healthcare overhaul will include a government-run insurance plan that lets states opt out, handing liberals an early victory on the bill's most contentious issue.

After days of closed-door talks, Reid said he would include the "public'' insurance option in a healthcare reform bill headed to the Senate floor for debate because it was the best way to lower costs and create competition.

"I believe there's a strong consensus to move forward in this direction,'' he told reporters, declining to say if he had commitments for the 60 Senate votes needed to pass a healthcare bill including the public option.

Reid's compromise decision was praised by many fellow Democrats but condemned by Republicans and the health insurance industry, whose stock prices fell out of apparent concern about the prospect of competition from the government-run plan.

The White House said President Barack Obama was "pleased'' that a public option was included in the bill.

The option has become a flashpoint in the raging debate over Obama's top domestic priority -- a bill that reins in healthcare costs, expands coverage to millions of uninsured people and bars insurers from denying coverage for pre-existing conditions or dropping coverage for the sick.

Reid said he would send the bill to congressional budget analysts for a cost estimate and begin Senate debate on it as soon as they report their findings, perhaps next week.

Democratic leaders in the House are nearing the end of a similar process to meld three pending bills into one. Each House bill includes a public insurance plan but members are negotiating which version to use.

Obama and liberals support the government-run plan as a way to boost competition in the insurance market but critics call it a government takeover that would hurt private companies.

About a dozen moderate Democrats in the Senate -- more than enough to sink the bill -- have voiced concerns about a public option.

But several said they are open to letting states "opt out'' of the plan because it would allow local decision-making and Reid hoped to win them over with the compromise.

'COME BACK, OLYMPIA'

Reid said he talked to Senator Olympia Snowe, the only Republican to support any of the pending healthcare measures in a committee vote and a target of heavy Democratic lobbying, but so far she did not support the public insurance option.

"We hope that Olympia will come back,'' he told reporters. ''I'm disappointed that the one issue, the public option, has been something that's frightened her.''

Snowe, who has supported a proposal to "trigger'' a public option in areas where insurance competition did not rise to certain benchmarks, said she was "deeply disappointed'' by Reid's decision.

"I still believe that a fallback, safety net plan ... could have been the road toward achieving a broader bipartisan consensus,'' she said.

The Senate healthcare bill is the result of more than a week of negotiations between Reid, other top Senate Democrats and White House officials, who merged two bills passed by Senate panels into one piece of legislation.

Reid's decision amounts to a comeback for the public option, labeled dead by some pundits and senators after the Senate Finance Committee rejected it earlier this month. But the idea has gained momentum as some polls show it making slight gains among the public.

The lobbying group for the insurance industry, America's Health Insurance Plans, said the public option would not drive down costs as advertised.

"The American people want healthcare reform that will reduce costs and this plan doesn't do that,'' said the group's president, Karen Ignani. "The divisive debate about a government-run plan is a roadblock to reform.''

Health insurance stocks were weak Monday, with the S&P Managed Healthcare index of large insurers closing down 2.5 percent versus a 1.2 percent drop in the S&P 500 index.

The healthcare reform measures have bogged down in Congress. Republicans criticize the costs at a time of expanding federal deficits and Democrats have had trouble winning over party moderates concerned by the price tag and the cost for lower- and middle-income consumers.

"The core of the proposal is a bill that the American public clearly does not like and doesn't support,'' Republican Senate leader Mitch McConnell said after Reid's announcement.

But a top White House adviser said reforming the health insurance market could cut the federal budget deficit.

"Done correctly, healthcare reform can genuinely slow the growth rate of healthcare costs and thus put us on a path to greatly reduced budget deficits in the long run,'' said Christina Romer, chairwoman of the White House Council of Economic Advisers.

A Thomson Reuters report found the U.S. healthcare system wastes $505 billion to $850 billion a year and that proposed reforms could be paid for by fixing some of the most obvious inefficiencies, preventing mistakes and fighting fraud.

Miami Insurance Agent Accused of $14 Million in Premium Finance Fraud

A Miami insurance agent was arrested for the second time in less than a month for stealing more than $14 million by submitting thousands of fraudulent premium finance contracts for fictitious policyholders, according to state officials.

Florida CFO Alex Sink said that her Division of Insurance Fraud (DIF) arrested Jose V. Peris, 52, of Miami, the owner and president of Insurance Force Corp., d/b/a FED USA Insurance Agency.

Officials allege that Peris submitted more thn 3,800 bogus premium finance contracts to numerous premium finance companies. Currently, they said, more than $7 million remains unrecovered and Peris is facing multiple counts of first degree organized scheme to defraud.

Peris was initially arrested on Sept. 18, 2009 by DIF investigators for charges involving theft from a premium finance company. Then on Oct. 8, officials said Peris was arrested for an additional charge of organized fraud in the first degree for actions involving three other premium finance companies. If convicted on all charges, Peris faces up to 60 years in prison.

Sink's office also ordered a suspension of the insurance licenses held by Peris.

The investigations into Peris and his insurance agency were based on allegations that Peris lied about premium financing contracts for fictitious Citizens Property Insurance Corp. policies. ABCO Premium Finance provided information to investigators that Peris was creating bogus contracts, and in the course of the investigation it was found that other premium finance companies were also defrauded.

2010 Looks to Be Painful Year for P/C Insurers, Brokers: Advisen

Economists have declared the Great Recession over, but its lingering effects will continue to chip away at commercial property/ casualty premiums through 2010, according to insurance experts.

A new Advisen Ltd. briefing says that the damaged economy will keep rates from rising while at the same time sales, payroll and other measures of exposure used to calculate premiums may fall further. The cumulative effect will be another year of lower written premiums �€" a boon for insurance buyers, but a painful and potentially damaging situation for some insurers and, especially, brokers.

"The recession may have ended, but recovery has not yet begun in any meaningful way," said Dave Bradford, an Advisen executive vice president and the author of the briefing. "Because of the economic slowdown, there is less to insure, and written premiums are taking a beating as a result. Factor in soft market pricing and 2010 looks like it will be another tough year for carriers and brokers."

Average premiums have been falling steadily since 2004 in some lines of insurance, a result of a global insurance capacity glut. Rate levels in lines such as general liability and commercial directors and officers liability (D&O) are expected to erode further before reaching the bottom of the pricing cycle.

The average general liability premium has surrendered all the gains of the 2001-2003 hard market, and is now at 2000 level, according to Advisen. The average workers' compensation premium is close behind.

"We had expected to see rate levels begin to creep up in 2010, but the continuing impact of the recession means that meaningful rate increases are now unlikely until at least 2011," said Bradford.

"Certain narrow market segments such as financial institution D&O have seen premiums rise, but most of the commercial insurance marketplace is mired in the soft market, and is likely to remain there through 2010."

Lower rates in tandem with a shrinking economy have resulted in a drop in written premium reported by U.S. insurers through the first half of 2009, and further decreases are expected.

Workers' compensation insurance has been especially hard hit because of skyrocketing unemployment. Unemployment is forecast to rise further in 2010.

Advisen's briefing, Planning for 2010: The Recession Will Keep Commercial Insurance Premiums Under Pressure, examines the forces driving the commercial insurance pricing cycle and the impact of the recession on premiums. It outlines the most likely economic scenario for 2010, which leads to slowly rising premiums in 2011, but also explores circumstances that could trigger a new round of cutthroat price competition.

3 States Accuse FedEx of Misclassifying Drivers as Independent Contractors

Three states said Tuesday they plan to sue FedEx Corp., accusing the second-largest U.S. package delivery company of violating labor laws by illegally classifying drivers as independent contractors rather than employees to save money.

The attorneys general of New York, New Jersey and Montana intend to begin litigation against FedEx Ground Package System Inc after Oct. 27, saying the unit of Memphis, Tennessee-based FedEx has caused a "serious injustice'' to more than 1,000 drivers in the three states.

According to a letter to FedEx Ground released by New York Attorney General Andrew Cuomo, the misclassification causes the drivers to be deprived of workers' compensation coverage and the protection of state anti-discrimination and labor laws.

The states said this occurs though FedEx subjects the drivers to strict work rules, down to the colors of their socks, and to thousands of dollars of expenses to buy or lease trucks and use company uniforms and scanners.

In addition, the states said FedEx's actions deprive them of tax payments and result in unfair competition.

"By blatantly misclassifying its drivers, FedEx Ground has denied these individuals the employment rights they are guaranteed by law,'' Cuomo said in a statement.

Anne Milgram and Steve Bullock, the attorneys general of New Jersey and Montana, joined Cuomo in the litigation threat.

FedEx did not immediately return requests for comment.

The company has long battled critics including the Teamsters labor union and has faced some lawsuits over its worker classification practices. It has said FedEx Ground drivers can operate their own businesses as they wish.

FedEx Ground is based in Moon Township, Pennsylvania, near Pittsburgh.

The states said they intend to seek restitution, damages and civil penalties. They gave FedEx until Oct. 27 to show why a lawsuit should not be filed.

FedEx shares rose $1.45, or 1.8 percent, to $81.44 in afternoon trading on the New York Stock Exchange, and on Tuesday hit their highest level since September 2008.

Chimp Owner Claims Connecticut Woman was Mauled on the Job

An attorney representing the owner of a chimpanzee that mauled and blinded a woman is calling the attack a work-related incident and said her family's case should be treated like a workers' compensation claim.

The strategy, if successful, would severely limit potential damages in the case and insulate the chimp owner from personal liability.

The 200-pound chimpanzee named Travis went berserk in February when his owner, Sandra Herold, asked her friend and employee Charla Nash to help lure him back into her house in Stamford. The animal ripped off Nash's hands, nose, lips and eyelids, and she remains in stable condition at the Cleveland Clinic.

Nash's family filed a $50 million lawsuit against Herold, saying she was negligent and reckless for lacking the ability to control "a wild animal with violent propensities.''

But Herold's attorney, Robert Golger, says in recent court papers that Nash was working as an employee of Herold's tow truck company, Desire Me Motors, at the time of the attack. He argues that Travis was an integral part of the business, saying his picture was on the wrecker, he appeared at the garage daily and he attended numerous promotional events.

The house where the attack occurred is a business office of the company, Golger said. Nash fed Travis, cleaned his play area and purchased his supplies as an employee, Golger contends.

"It's an unfortunate and tragic accident that happened in the workplace and should be subject to the provisions of the Connecticut workers' compensation statutes,'' Golger said Wednesday.

Matt Newman, attorney for Nash's family, said he disagrees with the argument but declined further comment.

Under workers' compensation, Nash would have her medical bills paid for by the employer's insurance and would receive partial wage replacement, but would not get any money for pain and suffering that makes up a large part of jury awards in civil cases. Workers typically receive 65 to 75 percent of their wages.

"It's a steady smaller income that would be enormously dwarfed by a successful civil suit,'' John Mastropietro, chairman of the Connecticut Workers Compensation Commission, said Wednesday.

Paul Slager, an attorney in Stamford not involved in the case, says Golger is making "a pretty creative argument.''

To win the argument, Herold will need to prove there was an employer-employee relationship and that Nash's injuries were work-related.

Nathan Shafner, a workers' compensation attorney in Connecticut, called the tactic "a very sellable argument'' and thinks it could prevail.

The strategy leaves Nash's side in a quandary because they only have one year to file a workers' compensation claim, Shafner said. If they fail to file that claim and lose the civil case, they could be left with no remedy, he said.

The 14-year-old chimp was shot and killed by police when he tried to attack a police officer responding to the assault on Nash. Test results showed that Travis had the anti-anxiety drug Xanax in his system at the time of the attack, but investigators don't know whether the drug played a role.

Florida to Hear Citizens Property Insurance Rate Hikes of 5% to 10%

Florida regulatory officials will hold a public hearing Nov. 10 on proposed hikes of between 5 and 10 percent in the premiums charged by Citizens Property Insurance Corp., the state-backed property insurer.

If approved, the increases for the state's biggest property insurer would go into effect starting in January.

The rate proposals are in keeping with a law enacted this past legislative session allowing Citizens to gradually increase premiums by up to 10 percent a year until its rates are actuarially sound.

The personal lines rate increases that Citizens has proposed are:

Homeowners: 5.4%

Dwelling Fire: 8.8%

Mobile Homeowners: 1.8%

For commercial property accounts and mobile homes, the proposals are:

Mobile Home Physical Damage: 2.1%

Commercial Property Residential-Condo Association. 10.1%

Commercial Property Residential-Ex-wind-Condo Association: 10.1%

These are statewide averages.

The amounts are less than some in the insurance industry believe are needed to shore up the state fund financially and encourage more competition from private carriers.

After having had its rates suppressed for three years, Citizens' own actuaries have acknowledged rates would have to go up about 40 percent on average on residences, more than 10 percent on commercial residential properties and as much as 140 percent on wind-only commercial property policies to reach proper funding for its exposure, which is about $405 billion for its 1,040,000 policies.

The Office of Insurance Regulation's public hearing will start at 9 a.m. in Tallahassee.

Originally, a hearing had been scheduled for Aug. 25 but it had to be postponed due to a glitch in the electronic transfer of data accompanying the rate filings, according to OIR.

Florida's American Keystone Insurance to Be Liquidated

Leon County Circuit Court Judge John C. Cooper has granted a request by state insurance officials to place American Keystone Insurance Co. in Ponte Vedra Beach into state receivership to be liquidated.

American Keystone (AKIC), a Florida insurer licensed in 2007, primarily wrote homeowners, condominium unit owners, personal inland marine, and residential condominium association policies in the state. The company has approximately 7,800 policies in force, including homeowners, commercial, residential and wind policies. It sold through independent agents.

In August, the company had only about $3.7 million in surplus-- which is below the minimum of $4 million required under Florida law, according to the Office of Insurance Regulation (OIR).

In addition, the company was found to lack sufficient cash flow to meet $8.8 million in obligations to the state hurricane fund and private reinsurers.

The insurer's management consented to the liquidation.

The insolvency will trigger the state's guaranty association to pay claims the company can't.

OIR said it has been monitoring the company for a year. It even explored transferring the firm's book of business to another insurer but came up empty.

"We worked with the company to resolve the outstanding issues," said Insurance Commissioner Kevin McCarty. "However, when it became evident the issues could not be remedied, I had to take action to protect their policyholders."

The Florida Department of Financial Services has been appointed receiver.

Floridians who have homeowners insurance with American Keystone should immediately contact their insurance agent to secure coverage with a new company. All policies will be cancelled effective 11:59 p.m. on Nov. 8, 2009, unless otherwise terminated prior to that date.

"Given that this liquidation order comes during hurricane season, it is imperative that homeowners who have coverage with American Keystone immediately contact their agents to secure new coverage," said Florida CFO Alex Sink. "We will continue working diligently to help make the transition as smooth as possible for policyholders."

Consumers with questions relating to American Keystone policy and coverage issues should call the company's customer service department at 1-877-350-9777 until Nov. 8. Questions relating to claims should be directed to the Florida Insurance Guaranty Association (FIGA) at 1-866-928-4310 or the policyholder's agent.

AKIC was one of the two dozen property insurers started in the state since 2006. The company was capitalized with $9 million and received its license in February, 2007. It wrote an estimated $2 million in premium in 2007; $30 million in 2008; and $20 million as of June, 2009.

In June 2008, American Keystone got a boost to its business when it received approval from the OIR and Citizens Property Insurance Corp. to assume as many as 718 commercial residential policies from state-backed Citizens. The premium on these policies averaged $20,000 each, the company said at the time.

AKIC President Bruce K. Howson hailed the 2008 Citizens agreement as a "major step in the full development of our company as a private sector solution to the growth and recovery of the property insurance market in Florida."

According to its Web site, AKIC's targeted homes with up to $2 million of dwelling coverage including personal liability coverage up to $500,000.

Its condominium program wrote buildings up to $10 million per building.

The liquidation of AKIC is the second in as many months in Florida. In August, Miami-based First Commercial Insurance Co. and its subsidiary were declared insolvent and ordered liquidated about six weeks after being placed under state control.

All policies written by FCIC and its subsidiary, First Commercial Transportation and Property Insurance Co., have been cancelled.

FCIC wrote workers' compensation, commercial auto, general liability and commercial multi-peril insurance policies in Florida and Georgia. FCTPIC wrote commercial auto insurance coverage in Florida. Together, the companies had approximately 18,000 in-force policies.

Insurers Backing Away from Homes with Chinese Drywall

James and Maria Ivory's dreams of a relaxing retirement on Florida's Gulf Coast were put on hold when they discovered their new home had been built with Chinese drywall that emits sulfuric fumes and corrodes pipes. It got worse when they asked their insurer for help -- and not only was their claim denied, but they've been told their entire policy won't be renewed.

Thousands of homeowners nationwide who bought new houses constructed from the defective building materials are finding their hopes dashed, their lives in limbo. Experts warn that cases like the Ivorys', in which insurers drop policies or send notices of non-renewal based on the presence of the Chinese drywall, will become rampant as insurance companies process the hundreds of claims currently in the pipeline.

At least three insurers have already canceled or refused to renew policies after homeowners sought their help replacing the bad wallboard. Because mortgage companies require homeowners to insure their properties, they are then at risk of foreclosure, yet no law prevents the cancellations.

"This is like the small wave that's out on the horizon that's going to continue to grow and grow until it becomes a tsunami,'' said Florida attorney David Durkee, who represents hundreds of homeowners who are suing builders, suppliers and manufacturers over the drywall. "This is going to become critical mass very shortly.''

During the height of the U.S. housing boom, with building materials in short supply, American construction companies imported millions of pounds of Chinese-made drywall because it was abundant and cheap. An Associated Press analysis of shipping records found that more than 500 million pounds of Chinese gypsum board was imported between 2004 and 2008-- enough to have built tens of thousands of homes. They are heavily concentrated in the Southeast, especially Florida.

The defective materials have since been found by state and federal agencies to emit "volatile sulfur compounds,'' and contain traces of strontium sulfide, which can produce a rotten-egg odor, along with organic compounds not found in American-made drywall. Homeowners complain the fumes are corroding copper pipes, destroying TVs and air conditioners, and blackening jewelry and silverware. Some believe the wallboard is also making them ill.
,p>The federal government is studying the problem and considering some sort of relief for homeowners.

Meanwhile, the AP interviewed several homeowners who, like the Ivorys, were unlucky enough to purchase properties built with Chinese drywall, and are now being hit with a second and third wave of bad news: Their insurers are declining to fill their claims, then canceling the policy or issuing notices that policies won't be renewed until the problem is fixed. The homeowners have little recourse since neither the Chinese manufacturers nor the Chinese government are likely to respond to any lawsuits or reimburse them for the defective drywall.

In each instance, the insurer learned of the drywall through a claim filed by the homeowner seeking financial help with its removal.

The Ivorys have sued, but it could take months for their case and hundreds like it to work their way through the courts. In the meantime, they have moved back to Colorado because their three-bedroom ranch home two miles from the Gulf of Mexico is unlivable and soon will be uninsured.

"It's been an emotional roller-coaster,'' said James Ivory, who is still making mortgage payments on the house. "It was all in our heads, nice weather down there, calm life, beaches. Now I don't know what to do.''

John Kuczwanski, a spokesman for the Ivorys' insurer, Citizens Property Insurance Corp., said their claim was denied because the drywall is considered a builder defect, which is not covered under the policy. It also considers the drywall a pre-existing condition that could lead to future damage, which is why the company won't renew the policy unless the problem is fixed.

"If someone were to have bought a new car and there was a defective part, would that person go to their auto insurance to get that fixed or would they go back to the manufacturer?'' Kuczwanski said. "We provide insurance, not warranty service.''
Citizens, a last-resort insurer backed by the state of Florida for people who can't find affordable coverage elsewhere, has received 23 claims about Chinese drywall, and has so far denied five.

Citizens could not immediately say how many policies had been canceled or not renewed because of the drywall.

Robert Hartwig, president of the Insurance Information Institute, agreed that homeowners policies were never meant to cover "faulty, inadequate or defective'' workmanship, construction or materials.

Tom Zutell, spokesman for the Florida Office of Insurance Regulation, said the cancellations are troubling, but legal. No law prevents insurance companies from canceling policies because of Chinese drywall.

"We are staying out of the fray at the moment,'' he said.

Even if a homeowner does not file a claim over the drywall and remains covered, they could later be denied a claim for a fire or another calamity if insurance investigators determine the home contained undisclosed Chinese drywall.

"If you think that by not telling your insurance company about the drywall that you're protected, you're sadly mistaken,'' Durkee said.

A newly married couple in Hallandale Beach, Fla., saved up for five years to buy their first home only to later discover it had Chinese drywall. They filed a claim with their insurer, Universal Insurance Co. of North America, and were denied.

Universal then sent the couple a letter, stating their policy was being dropped because "the dwelling was built with Chinese drywall.''

The couple then signed on with Citizens, but didn't divulge the drywall issue, and hasn't filed another claim. The 31-year-old man requested anonymity because he's afraid of losing his insurance policy, and thus his home.

"I honestly don't know what I'd do if that happened,'' he said. "All this has basically taken us back five years. We saved money to buy this home.''

Universal did not respond to requests for comment.

Louisiana lawyer Daniel Becnel Jr., who represents more than 200 owners of homes containing Chinese drywall, is advising his clients to avoid filing claims with their insurers or they could lose their houses.

"I really believe everybody should have an insurance claim with this,'' Becnel said. "But it's hard to tell somebody to go make a claim, then they lose their policy ... This is a nightmare for people.''

"I tell people flat out if you file, you may lose your insurance,'' agreed Mississippi attorney Steve Mullins, who has about 100 clients with Chinese drywall in their homes.

One of Mullins' clients, Chris Whitfield, a 29-year-old tire repairman in Picayune, Miss., says he moved out of his house because the drywall was making his family sick. His claim was then denied by his insurer, Nationwide, which followed up with notice that he would be dropped because his policy didn't cover unoccupied dwellings.

Nationwide spokeswoman Liz Christopher declined to comment on Whitfield's case and could not say how many drywall claims had been submitted or how many policies had been canceled or not renewed.

Whitfield offered to move back into the house, but he said he was told he'd first have to replace the drywall.

"I don't know what I'm going to do,'' he said.

Studies on Possible Link Between Mobile Phones and Cancer Vary Widely

Studies on whether mobile phones can cause cancer, especially brain tumors, vary widely in quality and there may be some bias in those showing the least risk, researchers reported this week.

So far it is difficult to demonstrate any link, although the best studies do suggest some association between mobile phone use and cancer, the team led by Dr. Seung-Kwon Myung of South Korea's National Cancer Center found.

Myung and colleagues at Ewha Womans University and Seoul National University Hospital in Seoul and the University of California, Berkeley, examined 23 published studies of more than 37,000 people in what is called a meta-analysis.

They found results often depended on who conducted the study and how well they controlled for bias and other errors.

"We found a large discrepancy in the association between mobile phone use and tumor risk by research group, which is confounded with the methodological quality of the research,'' they wrote in the Journal of Clinical Oncology.

The use of mobile and cordless phones has exploded in the past 10 years to an estimated 4.6 billion subscribers worldwide, according to the U.N. International Telecommunication Union.

Research has failed to establish any clear link between use of the devices and several kinds of cancer.

The latest study, supported in part by the U.S. Centers for Disease Control and Prevention, examined cases involving brain tumors and others including tumors of the facial nerves, salivary glands and testicles as well as non-Hodgkin's lymphomas.

It found no significant association between the risk of tumors and overall use of mobile phones, including cellular and cordless phones.

MILD RISK

Myung's team said eight studies that employed "high quality'' methods to blind participants against bias found a mild increased risk of tumors among people who used mobile phones compared with those who never or rarely did.

An increased risk of benign, not malignant, tumors was also found among people who used the phones for a decade or longer.

The "high quality'' studies were funded by the Swedish Work Environment Fund, the Orebro Cancer Fund and the Orebro University Hospital Cancer Fund, Myung's team said.

By contrast, studies that used "low quality'' methods to weed out bias found mobile users were at lower risk for tumors than people who rarely used the devices.

Myung's team suggested those results could be marred by random errors and bias because of the quality of the methods.

Funding for some of the lower-quality studies included two industry groups, the Mobile Manufacturers Forum and the Global System for Mobile Communication Association, the researchers said.

Overall, the studies examined were not broad enough to shed light on whether mobile phone use could cause tumors. Myung's team said larger studies of a type called cohort studies are needed to answer that question.

Such studies follow a group of people who share a characteristic, in this case cellphone use, and compare them with other groups over time.

The only cohort study published to date showed no association between mobile phone use and tumors. But the study, conducted in Denmark, relied on telephone subscriptions and did not evaluate actual exposure to mobile phones.

Insurers Relieved That El Nino Tamed Atlantic Hurricane Season

Thanks to El Nino, the 2009 Atlantic hurricane season has been the quietest in more than a decade, offering a reprieve for residents in the danger zone and a chance for insurance firms to refill depleted coffers.

With the peak of the season -- late August to mid-October -- now behind, the Atlantic-Caribbean basin has seen just two hurricanes and a total of eight tropical storms.

El Nino, the Pacific warm-water phenomenon that can produce destructive weather in other parts of the world, played a big role in suppressing Atlantic cyclones this year, experts said.

If the full season, which runs from June through November, ended today, it would be the lowest number of storms since 1997. The last time an Atlantic season produced only two hurricanes was 1982.

After a 2008 season that produced Hurricane Ike, one of the most destructive in U.S. history, the cyclones of 2009 have had virtually no impact on the populous U.S. coasts, the vulnerable islands of the Caribbean or the Gulf of Mexico oil patch.

"There was for all intents and purposes no hurricane damage in the United States this year,'' Robert Hartwig, president of the Insurance Information Institute, told Reuters.

"It's something that will help the insurance industry create very favorable earnings comparisons in the third quarter compared to the third quarter of last year,'' he said.

Forecasters saw nothing on the horizon on Wednesday.

"El Nino produced an increase in wind shear,'' said meteorologist Todd Crawford of private forecaster WSI Corp.

"If you have an increase in the speed of the winds aloft over the Atlantic it acts to basically chop the heads off any kinds of storms,'' he said. Wind shear is a technical term for different wind speeds at different altitudes.

Crawford also said sea temperatures in the tropical Atlantic are cooler, by about 2 degrees Fahrenheit on average, than the blistering seasons of 2004, when four hurricanes hit Florida, and 2005, which produced 28 storms, the highest single-season total in recorded history.

Hurricanes draw energy from warm water, so cooler sea temperatures can mean fewer and less intense storms.

INSURERS HAPPY

So far this year, only named storms Bill and Fred reached 74 miles per hour, the threshold for hurricanes. Fred fizzled in the mid-Atlantic without causing damage while Bill raced through Canada's Atlantic provinces as a Category 1 hurricane, the weakest type, causing few problems.

Ana hit the Caribbean's Leeward Islands as a depression. Erika plowed into the same area as a tropical storm. Danny, Grace and Henri stayed out at sea.Only Claudette, a tropical storm that sprouted suddenly in the eastern Gulf of Mexico, made a U.S. landfall, hitting the Florida panhandle.

So far, insured losses don't appear to have climbed to the $25 million needed to mark it as a catastrophe, according to the Insurance Information Institute.The quiet season will allow insurers to replenish from Ike, whose $12.5 billion in insured losses put it third on the list of costliest U.S. storms for the industry.

Only Katrina, which caused $43 billion in insured losses when it struck New Orleans in 2005, and Andrew's $23 billion rampage through south Florida in 1992, cost more.

Hartwig said the industry's net first-quarter loss of $1.2 billion turned to a profit of $5.7 billion in the second quarter. "In the third quarter that number will have increased, potentially substantially, because of the continued recovery of the markets but also very favorable comparisons with regard to catastrophic losses,'' he said.

Over the past 20 years, hurricanes have accounted for 50 percent of all insured U.S. catastrophe losses and tornadoes another 25 percent, he said.

The Florida Hurricane Catastrophe Fund has also had a chance to refill. Cash on hand climbed from $3 billion to $4.5 billion over the past year, according to data compiled by the State Board of Administration, which oversees the fund.

Although the peak has passed, the six-month season still has nearly seven weeks to run. It officially ends on Nov. 30.

"It's not over,'' said meteorologist Jill Hasling, president of Houston's Weather Research Center, which monitors weather for the offshore oil industry.

"There's pretty warm water in the Gulf still,'' she said. ''If we get enough cold fronts in here and cool the water off, we'll be clear for this season. But it hasn't happened yet.''

Florida's American Keystone Insurance to Be Liquidated

Leon County Circuit Court Judge John C. Cooper has granted a request by state insurance officials to place American Keystone Insurance Co. in Ponte Vedra Beach into state receivership to be liquidated.

American Keystone (AKIC), a Florida insurer licensed in 2007, primarily wrote homeowners, condominium unit owners, personal inland marine, and residential condominium association policies in the state. The company has approximately 7,800 policies in force, including homeowners, commercial, residential and wind policies. It sold through independent agents.

In August, the company had only about $3.7 million in surplus-- which is below the minimum of $4 million required under Florida law, according to the Office of Insurance Regulation (OIR).

In addition, the company was found to lack sufficient cash flow to meet $8.8 million in obligations to the state hurricane fund and private reinsurers.

The insurer's management consented to the liquidation.

The insolvency will trigger the state's guaranty association to pay claims the company can't.

OIR said it has been monitoring the company for a year. It even explored transferring the firm's book of business to another insurer but came up empty.

"We worked with the company to resolve the outstanding issues," said Insurance Commissioner Kevin McCarty. "However, when it became evident the issues could not be remedied, I had to take action to protect their policyholders."

The Florida Department of Financial Services has been appointed receiver.

Floridians who have homeowners insurance with American Keystone should immediately contact their insurance agent to secure coverage with a new company. All policies will be cancelled effective 11:59 p.m. on Nov. 8, 2009, unless otherwise terminated prior to that date.

"Given that this liquidation order comes during hurricane season, it is imperative that homeowners who have coverage with American Keystone immediately contact their agents to secure new coverage," said Florida CFO Alex Sink. "We will continue working diligently to help make the transition as smooth as possible for policyholders."

Consumers with questions relating to American Keystone policy and coverage issues should call the company's customer service department at 1-877-350-9777 until Nov. 8. Questions relating to claims should be directed to the Florida Insurance Guaranty Association (FIGA) at 1-866-928-4310 or the policyholder's agent.

AKIC was one of the two dozen property insurers started in the state since 2006. The company was capitalized with $9 million and received its license in February, 2007. It wrote an estimated $2 million in premium in 2007; $30 million in 2008; and $20 million as of June, 2009.

In June 2008, American Keystone got a boost to its business when it received approval from the OIR and Citizens Property Insurance Corp. to assume as many as 718 commercial residential policies from state-backed Citizens. The premium on these policies averaged $20,000 each, the company said at the time.

AKIC President Bruce K. Howson hailed the 2008 Citizens agreement as a "major step in the full development of our company as a private sector solution to the growth and recovery of the property insurance market in Florida."

According to its Web site, AKIC's targeted homes with up to $2 million of dwelling coverage including personal liability coverage up to $500,000.

Its condominium program wrote buildings up to $10 million per building.

The liquidation of AKIC is the second in as many months in Florida. In August, Miami-based First Commercial Insurance Co. and its subsidiary were declared insolvent and ordered liquidated about six weeks after being placed under state control.

All policies written by FCIC and its subsidiary, First Commercial Transportation and Property Insurance Co., have been cancelled.

FCIC wrote workers' compensation, commercial auto, general liability and commercial multi-peril insurance policies in Florida and Georgia. FCTPIC wrote commercial auto insurance coverage in Florida. Together, the companies had approximately 18,000 in-force policies.

Medical Lawsuit Curbs Would Save Billions, Congressional Study Finds

Limits on medical malpractice lawsuits would lead doctors to order up fewer unneeded tests and save taxpayers billions more than previously thought, budget umpires for Congress said in a reversal that puts the issue back in the middle of the health care debate.

The latest analysis from the nonpartisan Congressional Budget Office estimates that government health care programs could save $41 billion over ten years if nationwide limits on jury awards for pain and suffering and other similar curbs were enacted. Those savings are nearly ten times greater than CBO estimated just last year.

"Recent research has provided additional evidence that lowering the cost of medical malpractice tends to reduce the use of health care services,'' CBO Director Douglas Elmendorf wrote lawmakers, explaining the agency's shift. Previously, CBO had ruled that any savings would be limited to lower malpractice insurance premiums for doctors, saying there wasn't clear evidence physicians would also change their approach to treatment.

Elmendorf essentially acknowledged what doctors have been arguing for years: fear of being sued leads them to practice defensive medicine. Some doctors will order a $1,500 MRI for a patient with back pain instead of a simple, $250 X-ray, just to cover themselves against the unlikely chance they'll be accused later of having missed a cancerous tumor.

Republicans immediately called for liability limits to be incorporated in the health care overhaul legislation advancing in Congress. The Senate Finance Committee bill now gives a nod of recognition to doctors' concerns, but little more. Heeding a call from President Barack Obama, the legislation calls for promoting state experiments with programs to resolve cases before they go to court.

"The more federal health care programs spend on unnecessary tests, the less money is available for necessary patient care,'' said Sen. Charles Grassley of Iowa, the ranking Republican on the Finance Committee. "Cutting medical liability costs would help preserve patients' access to care. "

Tens of billions of dollars in savings is "not chump change,'' added Grassley. "It's a no-brainer to include tort reform in any health care legislation.''

However, Republicans were unable to pass malpractice limits when they controlled Congress and the White House, and it's unlikely that Democrats would do so now.

For one thing, trial lawyers who file malpractice lawsuits have traditionally been heavy contributors to Democratic politicians.

But also, patient advocates argue that fixed limits on jury awards as in California and some states are unfair to those who have suffered the most harm because of a doctor's negligence. A patient who was given the wrong drug and had to spend several days in the hospital recovering from a bad reaction would likely be able to collect adequate compensation. But a family whose youngster was left brain damaged by an anesthesiologist's mistake probably would not be able to offset all the costs of lifelong care.

Obama has tried to straddle the argument, siding with the doctors on defensive medicine and agreeing with the lawyers who say limits on jury awards are the wrong remedy. He wants to promote alternatives to litigation; studies have shown anger over cover-ups by doctors is a principal reason that families sue.

Trial lawyers said the projected malpractice savings have to be viewed in the context of the $2.5 trillion a year the U.S. spends on health care.

"Medical malpractice claims have almost no effect on overall health care spending,'' said Anthony Tarricone, president of American Association for Justice, which lobbies for lawyers. "The vast majority of empirical evidence suggests that there are only minuscule savings to be found in reforming our nations civil justice system.''

But the CBO report means the malpractice issue will stay alive as the health care debate in Congress builds to a climax this year. The budget scorekeepers estimated the total effect of malpractice curbs could reduce the federal deficit by $54 billion over 10 years, once $13 billion in new tax revenues from economic ripple effects are taken into account.

Even in the health care debate, that's real money.

Employers Plan Big Changes for Employee Medical Plans for Next Year

As employees flip through their open enrollment packets, they may notice substantial changes to their medical plan for 2010, from increases in employee contributions to a new wellness program.

According to the 2009 Benefits & Talent Survey by Aon Consulting, 41 percent of employers are expecting to make more substantial changes to their 2010 medical program than they did this year.

Aon Consulting, which surveyed 1,313 employers nationwide, found that 70 percent are planning to increase employee contributions and 67 percent are expecting to raise deductibles, co-pays, coinsurance or out-of-pocket maximums.

In addition, more than half of employers are expecting to introduce or expand a wellness program next year, and 34 percent are planning to introduce or increase financial incentives for wellness programs in 2010.

"As in year's past, many employers are expecting to shift additional health care costs to employees in 2010 to share the burden of double-digit rate increases," said John Zern, U.S. Health & Benefits Practice Director with Aon Consulting. "However, it may be more dramatic next year, as many organizations try to avoid taking other drastic measures such as layoffs or salary freezes."

Conversely, Zern said, the good news is that more than half of employers are planning to either introduce or expand wellness programs.

Short-term Solutions

Employers have been implementing various types of audits as a short-term savings solution and the survey says more will follow suit. The survey found that 46 percent of organizations conducted a dependent eligibility verification audit in 2009 or earlier, and 20 percent are planning to do so in 2010 or later. These audits are designed to save on health care costs by ensuring only eligible dependents are covered.

"Employers who conduct dependent eligibility audits can see immediate savings ranging from 3 percent to 10 percent in dependent health care costs," said Tom Lerche, U.S. Health Care Practice Leader with Aon Consulting.

Other audits employers are planning to implement in 2010 or later include electronic prescription drug (16 percent of employers); medical claims (13 percent of employers); and prescription rebate (12 percent of employers).

Long-Term Solutions

Employers taking are also offering wellness and disease management initiatives to help improve the health care cost trend in the long-term. The survey found 67 percent of employers have promoted exercise/physical activity in 2009 or earlier, and another 12 percent are planning to implement this initiative in 2010 or later.

Additionally, 63 percent of respondents offer disease management programs and 10 percent plan to do so in 2010 or later.

A successful wellness and disease management program depends on participation, and one way to motivate employees to sign-up is by offering incentives, according to Paul Berger, chief medical officer with Aon Consulting. The survey found 41 percent of employers offer a gift card or merchandise as an incentive, and of those organizations that offer at least one incentive, 39 percent offer between $50 and $249 as the maximum value an employee can earn in one year.

Mutual Insurers Positioned for Growth But Some May Need Partners

The world's mutual insurance companies are well placed to continue to grow market share in the wake of the credit crisis, but they also face a vast range of challenges, according to new research.

A report by credit ratings agency A.M. Best Co. shows that mutuals currently make up 26.5 percent of the world's insurance premiums, compared to 25.2 percent a year earlier. They could increase their presence further, the study suggests, because they are perceived to be relatively safe, can offer more competitive prices to well-defined affinity groups, and do not face the same pressures in terms of returns to shareholders that stock companies face.

The research report, "Mutuals under the microscope as market share grows," was launched by A.M. Best at the International Cooperative and Mutual Insurance Federation (ICMIF) Biennial Conference in Toronto.

Speaking at the conference, Nick Charteris-Black, director of Global Financial Services at A.M. Best, placed the future for mutuals in context.

"Mutuals are being presented with opportunities to exploit their values and build on customer loyalty during the continued economic uncertainty," he said. "However, they do also face a host of challenges and lack the financial flexibility of stock companies. For some mutuals, the future is uncertain."

The report also predicts that some mutuals will be forced to merge and create partnerships in order to survive aggressive competition and regulatory pressures.

Yvette Essen, report author and Head of Market Analysis, Global Financial Services at A.M. Best, said, "These challenges are expected to drive consolidation and partnerships around the world, particularly among smaller mutuals looking to share central resources. While the bigger mutuals may have the budgets and time to promote their values, the smaller, regional players may simply not be able to survive."

The report is based on data from ICMIF and analysis of mutuals within the Group of Seven (G7) countries and in a number of other key countries.

The report cites the introduction of the Solvency II directive as one of the factors likely to drive consolidation among mutuals.

"Smaller mutuals will struggle to cope with the increased workload and capital requirements," Esen said. "The challenge associated with complying with Solvency II in some cases represents an even greater hurdle than the current recession."

P/C Industry Net Income Falls Nearly 60% in First-Half 2009

Private U.S. property/casualty insurers' net income after taxes fell 59.3 percent to $5.8 billion in first-half 2009 from $14.1 billion in first-half 2008. Insurers' overall profitability as measured by their annualized rate of return on average policyholders' surplus (or statutory net worth) dropped to 2.5 percent in first-half 2009 from 5.5 percent in first-half 2008.

Driving the declines in insurers' net income and rate of return, their net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 50.2 percent to $12.4 billion in first-half 2009 from $24.9 billion in first-half 2008, according to ISO and the Property Casualty Insurers Association of America (PCI).

Partially offsetting the deterioration in insurers' investment results, net losses on underwriting fell $3.4 billion to $2.2 billion in first-half 2009 from $5.6 billion in first-half 2008. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 100.9 percent in the first half of this year from 102 percent in the first half of 2008.

Policyholders' surplus — insurers' net worth measured according to Statutory Accounting Principles — rose 1.2 percent to $463 billion at June 30, 2009, from $457.3 billion at year-end 2008.

The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.

"Insurers' 2.5 percent annualized rate of return for the first half of 2009 is their second-lowest first-half rate of return since the start of ISO's quarterly data in 1986 and 7 percentage points less than the 9.5 percent average first-half rate of return for the past 24 years," said Michael R. Murray, ISO's assistant vice president for financial analysis.

Results for mortgage and financial guaranty insurers were particularly poor, with ISO estimating that mortgage and financial guaranty insurers' annualized rate of return fell to negative 76.5 percent in first-half 2009 from negative 67.4 percent in first-half 2008, Murray said. "Excluding mortgage and financial guaranty insurers, the insurance industry's annualized rate of return declined to 4.5 percent in first-half 2009 from 7.7 percent in first-half 2008."

"While insurers' profits and profitability tumbled in first-half 2009, the insurance industry remained profitable and policyholders' surplus increased. Property/casualty insurers continue to be healthy and competitive despite an extraordinarily difficult operating environment complicated by the worst recession in decades and the lingering effects of an unprecedented financial crisis that brought down many once iconic banks and Wall Street institutions," said David Sampson, PCI president and chief executive officer. "Moreover, combining insurers' $463 billion in policyholders' surplus at June 30 with their $553.4 billion in loss and loss adjustment expense reserves and their $202.5 billion in unearned premium reserves, insurers had just over $1.2 trillion in funds available to cover losses and other contingencies. This stability is important to the industry's ability to fulfill its promise to consumers."

Underwriting Results

Underwriting results improved in first-half 2009 even though premiums continued declining. Net written premiums dropped $9.4 billion, or 4.2 percent, to $212.8 billion in first-half 2009 from $222.2 billion in first-half 2008. Net earned premiums declined $6.3 billion, or 2.9 percent, to $211.4 billion in first-half 2009 from $217.8 billion in first-half 2008.

At negative 4.2 percent in first-half 2009, net written premium growth was the weakest for any first half since the start of ISO's quarterly financial data for the property/casualty industry. The previous record lows for first-half premium growth were negative 0.5 percent in 2008 and positive 0.1 percent in 2007, with first-half premium growth ranging as high as 13 percent in 1987.

"The decline in written premiums reflects economic conditions. The nation's gross domestic product [GDP], which takes into account both inflation and real growth, fell 1.9 percent in first-half 2009 compared with its level a year earlier. Moreover, total private-sector employment fell 4.3 percent, private-sector wages and salaries fell 5.6 percent, and sales by retailers, including restaurants and other food services, dropped 9.4 percent, with all of this reducing the demand for insurance," said Murray.

Driving the improvement in underwriting results in first-half 2009, insurers' overall net loss and loss adjustment expenses (after reinsurance recoveries) fell $8 billion, or 4.9 percent, to $154.1 billion in the first half of 2009 from $162.1 billion in the first half of 2008. ISO estimates that the net catastrophe losses included in private insurers' financial results declined to $8.1 billon in first-half 2009 from $10.7 billion in first-half 2008, even though first-half 2009 net catastrophe losses include some late-emerging losses from Hurricane Ike in 2008. Excluding catastrophe losses, net loss and loss adjustment expenses fell $5.5 billion, or 3.6 percent, to $145.9 billion in first-half 2009 from $151.4 billion in first-half 2008.

According to ISO's Property Claim Services (PCS) unit, catastrophes striking the United States in the first half of 2009 caused $7.5 billion in direct insured losses to property (before reinsurance recoveries) for all insurers (including residual market insurers and foreign insurers and reinsurers) — down $3.1 billion from the direct insured losses to property due to the catastrophes striking the United States in the first half of 2008 but $2 billion more than the $5.5 billion average for first-half direct catastrophe losses during the past 10 years.

Also contributing to the improvement in underwriting results in first-half 2009, other underwriting expenses — primarily acquisition expenses, expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes — dropped $1.7 billion, or 2.8 percent, to $58.9 billion in first-half 2009 from $60.6 billion in first-half 2008.

Dividends to policyholders were essentially unchanged at $0.7 billion in both the first half of 2009 and the first half of 2008.

The $2.2 billion net loss on underwriting in first-half 2009 amounts to 1 percent of the $211.4 billion in net premiums earned during the period, whereas the $5.6 billion net loss on underwriting in first-half 2008 amounted to 2.6 percent of the $217.8 billion in net premiums earned during that period.

"While the 100.9 percent combined ratio for first-half 2009 compares favorably with the 103.8 percent average combined ratio for all first halves since 1986, today's low interest rates and investment yields mean insurers must now post significantly better underwriting results just to be as profitable as they once were," said Sampson. "For example, in first-half 1987, insurers achieved a 15 percent annualized overall rate of return with a combined ratio of 104.1 percent. In first-half 2009, insurers' annualized rate of return was just 2.5 percent, even though the combined ratio was 3.3 percentage points better."

Second-Quarter Results

The industry's consolidated net income after taxes for second-quarter 2009 amounted to $7.1 billion, up 28.1 percent from the $5.5 billion in net income for second-quarter 2008. Reflecting the increase in net income, property/casualty insurers' annualized rate of return on average surplus rose to 6.3 percent in second-quarter 2009 from 4.3 percent a year earlier.

Mortgage and financial guaranty insurers' annualized rate of return rose to negative 22.1 percent in second-quarter 2009 from negative 45.6 percent in second-quarter 2008, as their net income after taxes increased to negative $0.6 billion from negative $1.7 billion.

Excluding mortgage and financial guaranty insurers, the insurance industry's annualized rate of return rose to 7 percent in second-quarter 2009 from 5.8 percent a year earlier, as its net income rose 6.9 percent.

Second-quarter 2009 net income for the entire insurance industry consisted of $12.7 billion in pretax operating income, less $3.2 billion in realized capital losses on investments and $2.5 billion in federal and foreign income taxes.

The industry's second-quarter pretax operating income of $12.7 billion is up 59.5 percent from $8 billion in second-quarter 2008. Second-quarter 2009 operating income consisted of $0.4 billion in net gains on underwriting, $11.9 billion in net investment income, and $0.5 billion in miscellaneous other income. Excluding mortgage and financial guaranty insurers, operating income rose 9.4 percent to $11 billion in second-quarter 2009 from $10.1 billion in second-quarter 2008.

The $0.4 billion in net gains on underwriting in second-quarter 2009 constitutes a $5.4 billion positive swing from the $5.1 billion in net losses on underwriting in second-quarter 2008. Contributing to the improvement in underwriting results, ISO estimates that the net catastrophe losses (after reinsurance recoveries) included in private insurers' financial results declined to $4.8 billion in second-quarter 2009 from $7.1 billion a year earlier.

For all insurers (including residual market insurers and foreign insurers and reinsurers), direct insured losses from catastrophes striking the United States in second-quarter 2009 totaled $4.3 billion, down $2.8 billion from the direct insured losses caused by catastrophes that struck in second-quarter 2008, according to ISO's PCS unit.

Second-quarter 2009 net gains on underwriting amount to 0.4 percent of the $105.8 billion in premiums earned during the period, in contrast to second-quarter 2008 net losses on underwriting amounting to 4.6 percent of the $109.8 billion in premiums earned during the period.

The industry's combined ratio improved to 99.5 percent in second-quarter 2009 from 104.1 percent in second-quarter 2008. At 99.5 percent, the industry's quarterly combined ratio had improved to its best level since the 95.9 percent combined ratio for third-quarter 2007.

The $0.4 billion in net gains on underwriting is after deducting $0.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders essentially unchanged from their level in second-quarter 2008.

Written premiums fell $5.4 billion, or 4.8 percent, to $106.3 billion in second-quarter 2009 from $111.7 billion in second-quarter 2008. At negative 4.8 percent in second-quarter 2009, quarterly written premium growth had fallen to a record low not seen since third-quarter 2005.

Excluding mortgage and financial guaranty insurers, net written premiums fell 4.4 percent in second-quarter 2009, loss and loss adjustment expenses dropped 5.8 percent, and the combined ratio improved to 100.5 percent from 101.6 percent in second-quarter 2008.

"Written premiums have now declined versus year-ago levels for nine successive quarters," said Sampson. "Prior to second-quarter 2007, written premiums declined in just two quarters — fourth-quarter 1991 and third-quarter 2005. The decline in third-quarter 2005 resulted from a special transaction in which one insurer ceded $6 billion in premiums to its foreign parent, but the declines since second-quarter 2007 were a result of increasingly intense competition in many insurance markets and the recession that began in December 2007."

The $11.9 billion in net investment income in second-quarter 2009 is down $1.2 billion, or 9.2 percent, compared with investment income in second-quarter 2008.

Miscellaneous other income rose to $0.5 billion in second-quarter 2009 from near zero in second-quarter 2008.

The $3.2 billion in realized capital losses on investments in the second quarter of 2009 contrasts with the $0.7 billion in realized capital losses in the second quarter of 2008.

Combining net investment income and realized capital losses, the industry posted $8.7 billion in net investment gains in second-quarter 2009, down 30.1 percent from $12.4 billion a year earlier.

Unrealized capital gains on investments in second-quarter 2009 totaled $15.9 billion, whereas insurers posted $8.3 billion in unrealized capital losses on investments in second-quarter 2008. Combining realized losses and unrealized capital gains, the insurance industry posted $12.7 billion in overall capital gains in second-quarter 2009 — a $21.6 billion positive swing from the $8.9 billion in overall capital losses in second-quarter 2008.

The $12.7 billion in overall capital gains for second-quarter 2009 includes $5 billion in realized write-downs on impaired securities, with realized write-downs on impaired securities having risen from $2.6 billion in second-quarter 2008.

Bernanke Tells House Panel Mega Insurers Need U.S. Oversight

WASHINGTON—Federal Reserve Board Chairman Ben Bernanke told Congress today that the financial crisis has demonstrated the need for “systemically important” insurance companies to be subjected to federal controls.

In testimony today before the House Financial Services Committee he said such large insurers should be under the same consolidated supervision that currently applies only to bank holding companies.

While he did not mention the company by name, his comments about insurance companies clearly pointed to American International Group, which was rescued with a government bailout last September.

He added that while the Federal Reserve Board is “well suited” to the task of being the consolidated supervisor for systemically important non-banks, a system for resolving large, troubled non-banks such as insurers “analogous to the regime currently used by the Federal Deposit Insurance Corporation” is also needed.

In his testimony, he also called for creation of an oversight council made up of all the agencies involved in financial supervision which would have the authority to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps and to coordinate the agencies’ responses to potential systemic risks.

Moreover, he said, all federal financial supervisors and regulators—not just the Federal Reserve—should be directed and empowered to take account of risks to the broader financial system as part of their normal oversight responsibilities.

Mr. Bernanke’s proposals are consistent with the legislative concepts advanced by the Obama administration to increase oversight of the financial system.

However, he barely touched on an administration proposal currently being debated in the House that would reduce the Federal Reserve’s power by creating an independent Consumer Finance Protection Agency.

That drew a rebuke from Rep. Melvin Watt, D-N.C. “Five sentences on consumer protection when everything else gets substantially more space,” Rep. Watt said. “It is just not a good message to send.”

Republicans on the panel were critical. Rep. Spencer Bachus, R-Ala., ranking minority member of the panel, said, “Chairman Bernanke, in the run-up to the worst financial and economic crisis since the Great Depression, the Federal Reserve offered few warnings of the forces undermining the foundations of our markets and the industrial and commercial structures on which we depend.”

“And yet, we are now asked to designate the Federal Reserve as the agency in which we place our trust as the systemic risk regulator to protect against the forces that will endanger the economy in the future. In my questioning, I will ask what has changed that should make us believe the Fed will be up to the task in the future that it so manifestly could not handle in the past,” Rep. Bachus added.

Republicans are proposing to strip the Fed of its regulatory and supervisory powers and leave it only with the authority to conduct monetary policy.

Instead, they propose creating a council “with members from a broad spectrum of agencies” to oversee financial institutions.

“It also seems unfair to ask one agency to handle a responsibility as complex and difficult as monetary policy and the other responsibilities proposed in the administration’s plan,” said Rep. Bachus.

Under the scheme suggested by Chairman Bernanke, he said, “all systemically important financial institutions would be subjected to the same framework for consolidated prudential supervision that currently applies to bank holding companies.”

Mr. Bernanke said such action would prevent financial firms that do not own a bank, but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities, from avoiding comprehensive supervisory oversight.

“Besides being supervised on a consolidated basis, systemically important financial institutions should also be subject to enhanced regulation and supervision, including capital, liquidity and risk-management requirements that reflect those institutions’ important roles in the financial sector,” said Mr. Bernanke.

“Enhanced requirements are needed not only to protect the stability of individual institutions and the financial system as a whole, but also to reduce the incentives for financial firms to become very large in order to be perceived as too big to fail,” Mr. Bernanke explained.

The resolution authority, Mr. Bernanke said, would provide the government the tools to restructure or wind down a failing, systemically important firm in a way that mitigates the risks to financial stability and the economy and thus protects the public interest.

He said such an authority would also provide the government a mechanism for imposing losses on the shareholders and creditors of the firm.

“Establishing credible processes for imposing such losses is essential to restoring a meaningful degree of market discipline and addressing the too-big-to-fail problem,” the Fed chairman advised.

“The availability of a workable resolution regime also would replace the need for the Federal Reserve to use its emergency lending authority under section 13(3) of the Federal Reserve Act to prevent the failure of specific institutions,” Mr. Bernanke added.

This was the catch-all provision the agency used to provide more than $180 billion in cash in return for 79.9 percent of the company’s stock in order to prevent its insolvency. The arrangement has been adjusted several times since the original AIG bailout.