On my mind…
Been a hot summer so far for this “bachelor” whose family is in Italy for July. From my occasional porch-perch overlooking the Hudson and from my more likely post, looking over your e-mails, press releases, letters and receiving VM messages and even the occasional anonymous letter, I have kept a number of news and opinion items that you might enjoy reading, together with the eye opening articles on BYOD, hacking, and the rest in this mid summer number of the Insurance Advocate, our 123rd July serving as your business’s advocate. We take particular pleasure in the thoughtful letters to the editor that praise Jamie Deapo’s moving personal piece in our June 18th issue and Peter Bickford’s observation about the new styled, slimmer DFS Annual report.… News of Bob Bill’s passing can only sadden anyone who knew him. Bob worked hard and played hard and was a credit to the agency force. In no special order, we offer these observations and opinions. Enjoy your summer… until we see you in August on these pages.
The Points….and the Point
We are now three years into the Internet-Point Insurance Reduction Program I-PIRP (5) year Pilot Program that enables drivers to reduce their accrued “points” via the internet. To us, this program’s results, after speaking at length with some private providers, seems like an idea that needs revisitng.
The potential for fraud seems real, according to sources, since students may take courses for other individuals and may be able to defeat User/Student Identity Validation measures. The requirement that I-PIRP on-line courses, in order to be approved, must have proof of effectiveness in reducing both accidents and repeat traffic offenses (because on-line courses have in fact no proof of effectiveness), has been eliminated. The whole point of the courses, driver safety, is being compromised, many are saying. For the industry, automobile insurance rate cost drivers are not lessened since there is no apparent improvement in safety. And that’s the whole point.The on-line course (5) Year Pilot Program sunsets soon and might best be set aside. “Covert monitoring” complicates the process and misses the simple, direct point of the whole program. New York has the best Motor Vehicle Department anywhere and has the power to get PIRP education back to basics and make it work. Ease of completion on the point holder’s part does not equal a safer system nor better educated and practiced drivers.
NYSIF Praised
In Steve Ruchman’s May 21 column he was less than kind to the NYSIF. Response to the Steve’s opinions has been mixed. Interestingly, and unrelated to the column per se is this recent opinion from the pen of Dick Poppa to members of the IIABNY praising a “new era” in the NYSIF’s relations with the agency community. We quote in pertinent part: “We’ve recently been introduced to the new leadership at NYSIF that offers great hope for improving the day-to-day working interaction with brokers.
The fund’s new board chairman Donald T. DeCarlo, board member Eileen A. Frank (President of Manhattan-based JP West Brokerage and a former IIABNY regional director) and Chief Executive Deputy Director Dennis J. Hayes have offered an open ear to hear and understand broker and client problems. They have established a board committee focused on constituent relations that includes insureds, their brokers, safety group managers and others served by NYSIF. These steps demonstrate good faith efforts by the Fund leadership to work with us, and we are grateful for that opportunity. Incumbent upon us will be to clearly describe our issues, learn and understand the statutory limitations placed on the State Fund, then do all we can together to make things better. This is not to say we won’t find areas we simply don’t see eye-to-eye, but we must do what is right for our members and their clients, and that means doing all we can together to make improvements. Agents and brokers know that our business is a relationship business. Our goal is to build the right relationship with the State Insurance Fund to accomplish our goals with a win-win outcome.” In fact, Don De Carlo has done a lot personally these many years to improve the processes and professionalism of all parties in the WC sphere, notably through the founding of AMCOMP and through his published works. Eileen and Dennis are known to the Insurance Advocate as earnest professionals, making Dick’s observations seem on target. Steve is entitled to his opinions and we respect him enough to publish them with little more than an occasional grammatical correction or typo change. He is also, like Poppa, a careful observer of the business. For me, I cannot imagine that agents and brokers would not give the new administration a solid chance to let communications work to everyone’s advantage, notably the insureds’ best interests. Look for an interview in these pages with Dennis Hayes before long.
The U May Now Mean Universal
A few years ago, the CPCU Society removed the word “national” from its vocabulary, given the Society’s expanded presence outside of the United States. Today, more than 200 CPCUs live and work outside of the U.S. This geographic diversity comes with a number of obstacles: taking CPCU exams in a second language; finding support for study; and explaining what CPCU stands for in Belgium, Bermuda, China, France, Germany, India, Italy, Japan, Korea, Puerto Rico, Saudi Arabia, United Arab Emirates, and other countries. Anthony Fienberg, a CPCU living and working in France, led a team of internationally focused CPCUs to create the CPCU Society International Ambassador (CSIA) program. This program recognizes a foreignbased CPCU for his or her efforts in promoting the CPCU designation across borders, and provides financial support to attend the CPCU Society Annual Meetings and Seminars. Washington D.C., the 2012 venue, will provide the setting for recognizing the CSIA inaugural winner, Shahid Nadeem. Shahid Nadeem works at Gulf General Cooperative Insurance Company as an underwriting manager and, in addition to CPCU, has achieved the Associate in Risk Management (ARM), Associate in Marine Insurance Management (AMIM), and Associate in Reinsurance (ARe) professional designations. Nadeem was selected for his commitment to promoting the designation and the CPCU Society in Saudi Arabia and beyond, through a series of “Connections” visits encouraging Society membership and generating interest among future CPCUs. He will also write an original article for a CPCU Society interest group upon returning home from the Annual Meeting and Seminars. Nadeem hopes to soon realize his goal of creating a CPCU Society Chapter in the Middle East. Good luck, CPCU society and Nasheem.
Putting “Force Placed” in Place
The Department of Financial Services (DFS) has ordered insurers offering forceplaced insurance in New York to submit proposals for new premium rates after it was found that they overcharged New York homeowners to the tune of millions of dollars. Rates for force-placed insurance can be three times to as much as ten times the cost of normal homeowner’s insurance, while offering less protection to the homeowner. According to the Governor’s press release, the evidence of higher than necessary insurance premiums was made clear at a recent DFS hearing. Also, DFS discovered that the force-placed insurance market lacks the sort of competition that would keep premiums down. In New York, two companies have 90 percent of the market. In addition, the hearings made clear that high force-placed insurance costs are having a terrible impact on homeowners, while banks and insurers are profiting off of the payments.
Financial Services Superintendent Benjamin M. Lawsky said, “Our hearings suggest a lack of competition, high prices, and low loss ratios, all of which hurt homeowners. Based on what we learned at the hearings, it is now appropriate for insurers to propose new rates along with justifications for those new rates.” As a result of the foreclosure crisis, the size of the force-placed insurance market has grown from $1.5 billion in 2004 to $5.5 billion in 2010. new rates are in the offing, justifiably, we think.
“Truly Hard” Market For P/C Insurers, Unlikely
While insurance rates have been drifting upward in recent months, the property-casualty industry is unlikely to see a return to the “traditional hard market” this year or next, Bob Hartwig told a group of reinsurance actuaries at the Casualty Actuarial Society’s Seminar on Reinsurance. Hartwig, president and economist of the Insurance Information Institute, noted that four criteria have to be present for a “truly hard market” one in which rates climb sharply – in excess of 10 to 15 percent or more:
• First, the industry must endure a sustained period of large underwriting losses. Only when underwriting losses are large and sustained do insurers turn disciplined, Hartwig said. But this may be beginning, he said. Underwriting losses hit $36.5 billion last year, driven by above average losses from U.S. catastrophes.
In the United States, 2011 saw no Katrina- like megacat, but there was an unusually heavy tornado season. Tornadoes in Joplin, MO, and Tuscaloosa, AL, grabbed the biggest headlines, but there was so much bad weather last year that there was “nowhere to run, nowhere to hide east of the Rockies.” Last year was the fifth worst ever for insured catastrophe losses in the United States, adjusted for inflation. So far this year, catastrophes have been relatively benign.
• Second, the industry suffers a material decline in industry surplus or capacity. When surplus falls, rates rise as customers compete for access to the surplus.
But industry surplus remains high, Hartwig said, hitting a record $565 billion as of first quarter 2011 and falling off only slightly during 2011, despite all the catastrophic losses.
• Third, the reinsurance market must be ‘tight,’ meaning reinsurance costs are rising and there is a shortage of reinsurance capital. That’s somewhat in place, Hartwig said. Much of the excess capacity in reinsurance at the beginning of 2011 was eaten up by the cost of earthquakes in Japan and New Zealand and floods in Thailand. Reinsurance rates have risen, especially in markets where the mega-catastrophes occurred. And in the United States, reinsurance prices for catastrophe business are “modestly higher,” Hartwig said, about 8 percent. But the current increases pale in comparison to increases seen after other bad years for catastrophe, he observed. After Hurricane Andrew, the 1993 catastrophe market suffered “tremendous dislocation,” Hartwig said, with rates rising 68 percent. After Hurricane Katrina, rates rose 76 percent.
More important, the current environment contradicts “this notion that somehow big catastrophe losses are somehow [by themselves] going to affect prices here,” he said. “That notion is incorrect.”
• Finally, the industry must show renewed underwriting and pricing discipline. There are some signs this is beginning to happen, Hartwig said. Rates are creeping up in commercial lines, after having fallen steadily for several years.
Commercial insurance rates rose 4.4 percent in the first quarter, which was the third consecutive quarter of higher rates, according to the Council of Insurance Agents and Brokers. That followed 30 consecutive quarters of declining rates.
Of all lines, workers compensation rates are rising fastest, up 7.4 percent in first quarter. But that’s in part because results have deteriorated so much in that line. Workers comp combined ratios were 110.6, 116.8 and 115.0 over the past three years, vs. 99.5, 101.0 and 107.5 on commercial lines overall. Comp results are as bad as they were a decade ago, he said, the last time the industry experienced a hard market.
Smart guy, Hartwig. He has the busiest speaking schedule of anyone in the business, for sure,, so his opinions actually wind up influencing outcomes as much as describing them in some cases. Listen to him for the old E F Hutton commercial effect these days.
P/C Insurers’ Profits and Profitability Rose
ISO is also worth listening to. According to their quarterly results report, private U.S. property/casualty insurers’ net income after taxes rose to $10.1 billion in first-quarter 2012 from $7.8 billion in first-quarter 2011, with insurers’ overall profitability as measured by their annualized rate of return on average policyholders’ surplus climbing to 7.2 percent from 5.6 percent. Driving the increases in insurers’ net income and overall rate of return, net losses on underwriting receded to $0.2 billion in first-quarter 2012 from $4.5 billion in first-quarter 2011. The combined ratio – a key measure of losses and other underwriting expenses per dollar of premium – improved to 99 percent in firstquarter 2012 from 103.3 percent in firstquarter 2011, according to ISO, a Verisk Analytics company (Nasdaq:VRSK), and the Property Casualty Insurers Association of America (PCI). The improvement in underwriting results is primarily attributable to a drop in net losses and loss adjustment expenses (LLAE) from catastrophes. ISO estimates that insurers’ net LLAE from catastrophes fell to $3.4 billion in first-quarter 2012 from $6.6 billion in first-quarter 2011. Those amounts exclude LLAE that emerged after insurers closed their books for each period but do include late-emerging LLAE from events in prior periods. Partially offsetting the improvement in underwriting results, net investment gains – the sum of net investment income and realized capital gains (or losses) on investments – dropped $1.2 billion to $12.3 billion in first-quarter 2012 from $13.6 billion in first-quarter 2011. Also limiting the improvement in insurers’ overall results, insurers’ miscellaneous other income receded to $0.4 billion in first-quarter 2012 from $0.5 billion in first-quarter 2011, and insurers’ federal and foreign income taxes rose to $2.3 billion from $1.8 billion. Pretax operating income – the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income – grew to $11.8 billion in first-quarter 2012 from $8.6 billion in first-quarter 2011.Reflecting insurers’ net income after taxes and unrealized capital gains on investments (not included in net income), policyholders’ surplus – insurers’ net worth measured according to Statutory Accounting Principles – increased $20.4 billion to a record-high $570.7 billion at March 31, 2012, from $550.3 billion at December 31, 2011. The 7.2 percent annualized rate of return for first-quarter 2012 is insurers’ highest first-quarter annualized rate of return since the 13.3 percent for firstquarter 2007. Since the start of ISO’s quarterly data in 1986, insurers’ first-quarter annualized rate of return has ranged from as low as negative 2.6 percent in 1994 to as high as 17.9 percent in 2005 and has averaged 10 percent.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.
First Rehab Continues to Innovate
After its initial launch of BenePaks in Pennsylvania in January, First Rehab Life now offers these employee benefit packages in New York to make insuring easier for producers and employers alike. BenePaks simplifies the application and administration of multiple products in one package: one application for the employer, one enrollment form per employee, and only one group number for employees to remember. Additionally, benefit levels and prices are pre-set for each package. These features make the presentation and application process easy for brokers and the decision and enrollment process simple for employers as well as employees.
Employers can choose which packages to offer to their employees, or have their employees select the package of their choice. First Rehab Life currently offers three BenePaks to choose from:
• CorePak includes basic protection in the form of Term Life, AD&D, and Hospital Cash Insurance.
• ClassicPak and ChoicePak provide higher benefit levels for the CorePak products and include Dental and Vision. These packages apply to groups as small as two participating employees with guaranteed acceptance.
To accommodate today’s tight benefits budgets, BenePaks come with a built-in package discount and can be written as employer- paid, contributory, or voluntary plans that are employee-paid at the same pre-set price: rates are the same regardless of employee ages, funding option or participation level (within underwriting requirements). BenePaks also come with a two-year rate guarantee to provide peace of mind. Spouse/partner and/or dependent coverage is available at additional cost.
As an increasing number of New York property/casualty agencies are focusing more of their attention to group benefits. First Rehab Life’s is banking on its DBL roots and close-knit relationship with the independent broker community to allow the company to offer products that complement other P/C agents and brokers’ offerings.
Actuaries are always the brunt of household humor in the business, from being considered a ‘crystal ball’ profession to a lot worse. Fact is, since their irrationally challenging job is to forecast the implications of events that have yet to occur, they do merit some ribbing, even with their increasingly reliable analytical tools and training. Predicting the future of the actuarial profession itself may be more challenging, especially in this age that has been called the educational era of the nouveau dumb. At their recent conference society members dished their views on their profession. Participating in the discussion were Alice Underwood, an executive vice president at Willis Re; Mark Vonnahme, clinical professor of finance at University of Illinois at Champaign-Urbana, and Steven Armstrong, a Fellow of the Casualty Actuarial Society. The panel agreed that the profession is changing, with heightened competition arising from various sources. To most insurers, actuaries have been thought of as the numbers experts. But as insurers look deeper into their databases for a competitive edge, they’ve hired more “quants”—newly minted graduates with advanced math or statistics degrees who build sophisticated predictive models. The models are designed to help price and manage a company more effectively.
How can actuaries respond? By adding to their skill set, even after receiving their actuarial credentials, Vonnahme said. Some actuaries will become predictive modelers, but if they don’t become modelers, actuaries have a role to play by using their insurance knowledge and communication skills in important ways.
At first, predictive modeling can seem intimidating, Armstrong said. He had to supervise a predictive modeling team without having been a modeler. But once he spent some time with the group, he realized, “it’s not really rocket science, even if they have Ph.D’s in rocket science.” After about six months, he knew enough to ask challenging questions in peer review. Actuaries have professional standards and a code of ethics that non-actuaries might lack, Armstrong said. So the partnership between modelers and actuaries can be a beneficial one. Actuaries also act as intermediaries. They can develop “a way to frame a problem” that modelers can understand, Underwood said, and then help management understand the modelers’ analysis. Actuaries also play a valuable role in enterprise risk management, or ERM – a discipline that has grown over the past decade as companies have tried to deal with the risks they face in a holistic manner. With their training, actuaries would seem well suited to key ERM roles, such as chief risk officer. But actuaries haven’t always been at the forefront of the new discipline, Underwood said. That may change, as the CAS becomes one of several actuarial organizations conferring the new interdisciplinary Chartered Enterprise Risk Analyst (CERA) designation. Actuaries have often struggled for recognition outside the insurance industry, Armstrong said. “It’s a PR issue more than anything else.” Outside the insurance field, he said, actuaries need to show they have the skills to justify the higher salaries they typically command. Vonnahme said, “We have to be more proactive in marketing ourselves in a way we haven’t done before.”
Upbeat Plumieri Views Claims Pro’s Role
Using the the image of One World Trade Center in New York approaching its topping off ceremony as a testament to the crucial work of the insurance claims community, energetic Joe Plumeri, Chairman and CEO of Willis addressed the Swiss Re Americas Claims Conference in Chicago and said: “The role of insurance carriers and insurance brokers working as quickly as possible to settle claims when people need resources to rebuild must not be undervalued. These are great stories of the insurance industry doing its job, and claims professionals should be justifiably proud of their critical role in the process.” Plumeri applauded the audience of senior claims professionals on a steady improvement in performance as measured by Willis’s own carrier rating system, the Willis Quality Index, which was initiated in 2007 to give insurance carriers direct feedback on a range of measures about their services. The average score for claims performance across areas such as attitude, technical support, and timely approval and payment, has increased steadily over the last three years. In his keynote address, “A Decade’s Journey Through the Insurance Industry (and What The Next Decade Holds),” Plumeri used the occasion to review the major challenges the industry has faced, highlight some of the new risks that have emerged over the last ten years, and chart a course for the next ten years in which economic recovery and an emergent global middle class will create increased demand for coverage, and claims management, to address a new set of risks. In his presentation, Plumeri discussed six trends that Willis has identified through its Strategic Outcomes Practice, which manages major claims on behalf of its clients. These trends include 1) an increase in underwriting scrutiny, documentation and claim audit;
2) the impact of issues such as supply chain risk, government-ordered blackouts and post-catastrophe movements of populations on business interruption coverage;
3) the emergence of “haboobs,” or massive movements of sand, into commercially-sensitive areas; 4) the impact of solar flares on communications systems; 5) the emergence of ‘space junk’ as a new risk to operational satellites and ground populations; and 6) conflicting forecasts for severe weather among expert groups.
