Video on http://financialsoftware.com/planbldr/index.htm
Surrounding the financial planning process with tools to improve your efficiency, from start to finish.
Financial Plan - Design & Delivery presented by David Stitt CEO of Plan Builder
Learn how to use your Sample Financial Plan to close fee-based engagements by offering a formal satisfaction guarantee - and by delivering a truly superior comprehensive plan for implementation.
Plan Builder - The Evolution of EnterAct financial planning software helps you develop comprehensive financial plans, quickly and easily.
Create unlimited "what-if" scenarios - including Monte Carlo simulations - then illustrate your plans with colorful charts and graphs. In real time. Use compelling, easy-to-understand presentation helps your clients see the wisdom of your plans immediately.
PowerPoint Presentation
Client Builder is a presentation system for financial advisors that motivates the prospect to engage your services on your preferred basis. It is ideal for helping you charge a separate fee for the financial plan. A sample (editable) Plan Fee Schedule is included.
Client Builder is extremely consistent with receiving insurance and securities commissions — as well as portfolio management fees.
Client Builder uses Microsoft PowerPoint, with colorful high-impact graphics and psychologically tested text. phrases. You may present Client Builder using a laptop, desktop system, with a video projector or even have your edited slides printed and assembled in a desktop flipchart easel.
* Dramatize your prospect’s immediate need for a comprehensive personal financial plan.
* Establish the basis for requiring your professional help to create this plan.
* Explain the steps in the personal financial planning process and why they need you.
* Provide a due diligence record of what you agreed to perform — and charge.
* Convey your offer of a 100% Satisfaction Guarantee — to motivate a quick decision.
* Close the engagement of your services on a profitable Plan Fee plus commission basis.
Maximize your Long-Term Professional Income!
When financial planning developed in the early 1970s the pioneers offered to their prospective clients a comprehensive financial plan, generally receiving a substantial Plan Fee. They then helped clients implement that plan with insurance, investments, loans and portfolio services. Soon many were handling $50-$100 million of client investments. The same need for a written plan exists today, but many course graduates do not have a proven system for presenting the need, explaining the process and closing the engagement. They are qualified as advisors, but haven’t the tools to close the engagement. Veteran financial advisor, Ed Morrow, used Client Builder to close hundreds of engagements for millions in plan fees — plus product commissions.
Now you can use Client Builder — and gradually customize it for your market, your way of doing business and your unique qualifications. More new clients, properly secured, means more assets to manage and more high caliber referrals — the lifeblood of a growing, successful practice.
Client Builder provides:
* Three PowerPoint and many Word files.
* 50 + page booklet describing how to use and modify the presentation.
* Sample letters, agendas, checklists and forms to secure a solid client relationship.
* Customizable screens to insert your personal identification and credentials.
Presentation Suggestions
Complete instructions on how each of the 26 slides helps you close the fee-based relationship immediately.
Full Description Screens
These helps you initially deliver the presentation. Includes a complete script, which you can easily modify.
Bullet Description Screens
For quicker presentations after you are familiar with all of the slides, forms and the delivery script.
Saturday, February 28, 2009
Friday, February 27, 2009
Emerging Risks
Emerging Risks
Archived Posts from this Category
Tue 10 Feb 2009
ID Theft on the Rise
Posted by Claire under Emerging Risks , Technology
In a reflection of current turbulent economic times, Javelin Research & Strategy’s latest annual report on identity fraud yesterday revealed for the first time since its debut in 2004 that the number of identity fraud victims has increased 22 percent to 9.9 million adults. While there were 1.8 million more victims in 2008 than in 2007, the total annual losses ($48 billion in 2008, up 7 percent from $45 billion in 2007) did not show a commensurate rise in scale. Instead, the data shows the average loss declined by 12 percent to $4,849 from $5,488 because of increased fraud prevention efforts. On a positive note, individuals spent 31 percent less (an average of $496) to clean up a fraud and more than half spent nothing. A CNNMoney.com report quoted James Van Dyke, president of Javelin as saying the increase in ID theft cases was likely due to the economic recession. “If people need to make money, and decide to do so illicitly, identity fraud is the logical opportunity,” he said. Another interesting finding: online fraud was the reason for only 11 percent of cases; improper use of checkbooks and credit or debit cards after a wallet or pocketbook is lost or stolen remains the most common means of ID theft (43 percent of cases); while 25 percent had their PINs compromised on ATM cards. Check out I.I.I. info on identity theft.
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Fri 6 Feb 2009
Data Breaches: Rising Priority
Posted by Claire under Emerging Risks , Technology
Data protection and information leakage emerged as a top priority for financial institutions in 2008, according to Deloitte’s 6th Annual Global Security survey. The top three information security priorities of financial institutions are: security regulatory compliance; data protection and information leakage; and access and identity management. Deloitte noted that recent high profile data breach and identity theft incidents and the increasing popularity of social networks and mobile media such as USB keys, MP3 players and PDAs, are contributing to increased awareness of the risk. The leading drivers for financial institutions to protect the privacy of their clients information are privacy regulatory requirements (79 percent) followed by reputation and brand concerns (70 percent), according to the survey. Meanwhile, as companies look to manage their growing exposure to data breaches, insurers are here to help. Earlier this week Lockton, in conjunction with Lloyd’s underwriters (ACE Global Markets, Brit Syndicates Ltd, Hiscox) and legal and security experts announced a risk management package designed to help companies address outsourcing risk and corporate response plans for data breaches. As the well-worn saying goes, prevention is better than cure. Check out further I.I.I. info on identity theft.
1 Comment >>
Thu 29 Jan 2009
Political Risk Rising
Posted by Claire under Emerging Risks
The impact of the global credit crunch will shift from an economic problem to a political problem in 2009 and Iceland and Greece serve as early warnings, according to the 16th annual Political Risk Map produced by Aon. In its ranking of the political risk of 209 countries and territories, Aon said the past year has seen a number of High Risk countries (Afghanistan, Congo DRC, Iran, Iraq, North Korea, Somalia and Zimbabwe) continue to deteriorate to the point that the creation of a Very High Risk category was warranted. Overall some 18 countries were downgraded to a higher risk level, reflecting the general rise in the risk level globally. On the other hand, four High Risk countries (Malawi, Moldova, Syria and Turkmenistan) saw an improvement in their status to Medium-High Risk. A total of 13 countries were upgraded to a lower risk level. The map measures the risk of: currency inconvertibility and transfer; strikes, riots and civil commotion; war; terrorism; sovereign non-payment; political interference; supply chain interruption; legal and regulatory risk. Included in this year’s map is a Commodity Crunch Exposure Matrix, which identifies the countries most vulnerable to political instability in 2009 if commodity prices (including oils, metals and minerals) continue to fall, as suggested by some forecasters. Check out I.I.I. facts & stats on terrorism.
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Wed 28 Jan 2009
Infrastructure Report
Posted by Claire under Insurers and the Economy , Emerging Risks
The American Society of Civil Engineers (ASCE) has assigned a grade of D to the nation’s infrastructure and warned that $2.2 trillion in repairs and upgrades is needed over the next five years to meet adequate conditions. The 2009 Report Card for America’s Infrastructure shows that since ASCE’s last assessment in 2005, there has been little change in the condition of America’s roads, bridges, drinking water systems and other public works. According to an early Associated Press report on the findings, out of 15 infrastructure categories, three were given lower grades in 2009: aviation and public transit went from D+ to D; while the nation’s roads went from D to D-. A key takeaway from the report is that America’s 100,000 miles of levees have been added as a new area of failing infrastructure. Levees are graded D- with ASCE warning that the risk to the public health and safety from levee failure has increased. The report is timely given renewed attention from the White House, Congress and the public on infrastructure as part of President Barack Obama’s $825 billion economic stimulus package. At last count some $77.7 billion of the $825 billion is assigned to transportation and infrastructure (including highway infrastructure, clean water, transit and water resources).
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Tue 20 Jan 2009
Administration Change Impact
Posted by Claire under Emerging Risks , Legal Environment
As America’s 44th President takes office, there are any numbers of experts ready to predict what this Administration change will mean for the country. The potential impact on the legal and judicial landscape is one such area of discussion. Empirical research from Vanderbilt professor of law and political science Tracey George shows how the United States court system, especially the Supreme Court and the Court of Appeals, could dramatically change soon after Barack Obama takes office. George says there is likelihood that as many as three Supreme Court justices could leave the court while Obama is in office. There are also currently 13 vacancies on the courts of appeals and an additional 41 vacancies on the district courts. While George W. Bush came into office with even more openings to fill, George says the number of openings may quickly rise because the change in party in power may prompt Clinton and Carter appointees to step down soon to ensure a like-minded replacement. For more on this story, check out a January 16 online article at Insurance Journal. From the perspective of insurers, an Insurance Information Institute (I.I.I.) poll indicates the changing legal landscape is on the radar screen. Sixty-three percent of insurance industry executives believe that tort trends will deteriorate in 2009, while 32 percent believe they will stay the same. Only 5 percent believe they will improve. Check out further I.I.I. info on the liability system.
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Fri 16 Jan 2009
Bird Strike Hazard
Posted by Claire under Emerging Risks , Environment
Yesterday’s narrow escape for 155 people aboard a US Airways Airbus 320 aircraft forced to make an emergency landing on the Hudson River in New York City after its engines were reportedly struck by a flock of geese is a reminder of the significant safety risk that bird and wildlife strikes pose for civil aviation around the world today. As noted previously here at Terms & Conditions, bird hazard may not be the first risk that comes to mind when stepping aboard an aircraft, but bird strikes are a major risk exposure for airlines and their insurers. Globally, wildlife strikes have killed more than 219 people and destroyed over 200 aircraft since 1988. According to the Federal Aviation Administration (FAA), some 82,057 strikes were reported to civil aircraft in the U.S. from 1990 to 2007. Birds were involved in 97.5 percent of the reported strikes, terrestrial mammals in 2.1 percent, bats in 0.3 percent and reptiles in 0.1 percent. The number of strikes annually reported more than quadrupled from 1,759 in 1990 to a record 7,666 in 2007. For the 18-year period (1990-2007), reports were received of 43 aircraft destroyed or damaged beyond repair due to wildlife strikes. The annual cost of wildlife strikes to the U.S. civil aviation industry is estimated at in excess of $628 million. The growing potential frequency and severity of wildlife-aircraft collisions is not that surprising given that natural habitats around airports tend to be home to increasing populations of large bird species that have adapted to living in urban environments. At the same time air traffic worldwide has increased substantially, adding to the risk. The Bird Strike Committee annual meeting includes a wide variety of presentations on how to mitigate bird strike hazard. Check out further I.I.I. facts on aviation.
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Wed 14 Jan 2009
Challenging Risks to Global Economy
Posted by Claire under Insurers and the Economy , Emerging Risks
Deteriorating fiscal positions, a hard landing in China, a collapse in asset prices, gaps in global governance and issues relating to natural resources and climate are the pivotal risks facing the world this year. According to the World Economic Forum’s (WEF) new Global Risks 2009 report, the economic outlook for 2009 is a grim one for most economies, as markets remain volatile, liquidity has not returned, unemployment is rising and consumer and business confidence has fallen to record lows. In this climate, risks become even more potent in their impact. The report notes that the financial crisis has exposed the lack of coordination among policymakers, regulators and supervisors, and that a key lesson to be learned from the crisis is the need to embed better risk governance globally. But while acknowledging the need for better governance globally, it warns against a knee-jerk over-reaction that would increase transaction and compliance costs and ultimately prove ineffective in the face of the next crisis. The WEF report is published in cooperation with Citigroup, MMC (Marsh & McLennan Cos), Swiss Re, the Wharton School Risk Center and Zurich Financial Services.
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Mon 15 Dec 2008
Nanotech Risk Needs Further Study
Posted by Claire under Emerging Risks
A report from the National Research Council has pointed to serious weaknesses in the United States government’s plan for research on the potential health and environmental risks posed by nanomaterials. The report criticizes the research plan developed by the National Nanotechnology Initiative, which it says misses elements crucial for progress in understanding nanomaterials’ health and safety impacts. While the National Research Council report did not evaluate whether current uses of nanomaterials represent unreasonable risks to the public, it did focus on what would constitute an effective national research strategy. The upshot is that it recommends a new national strategic plan that goes beyond federal research to incorporate research from academia, industry, consumer and environmental groups as well as other stakeholders. The findings follow a recent report by the United Kingdom’s Royal Commission on the challenges and benefits arising from nanotechnology. Food, drugs, medical devices and cosmetics are just some of the products that may incorporate nanomaterials.
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Wed 3 Dec 2008
Biological and Nuclear Attack Warning
Posted by Claire under Emerging Risks
Just a week after the terrorist attacks in Mumbai, India a Congressional report has warned that a weapon of mass destruction (biological or nuclear) is likely to be used in a terrorist attack by 2013. The report suggests a terrorist attack using a biological weapon is the more likely. It calls on the United States government to take aggressive steps to prevent biological terrorism. Among its recommendations: the U.S. should strengthen international measures to prevent biological weapons proliferation and terrorism; conduct a global assessment of biosecurity risks; strengthen global disease surveillance networks; tighten government oversight of high-containment laboratories.
Initiatives focused on prevention will be welcomed by insurers. As we know, the loss potential associated with acts of terrorism can be significant. For example a study by the American Academy of Actuaries estimated a large chemical, nuclear, biological, and radiological (CNBR) attack in New York could result in insured losses of up to $778.1 billion. Check out a Guy Carpenter bulletin for an update on the Mumbai attack. Check out further I.I.I. information on terrorism risk and insurance.
[2] Comments >>
Mon 24 Nov 2008
Hospital Infections: the new Med Mal?
Posted by Claire under Emerging Risks , Health & Safety
Medical malpractice claims related to hospital infections are on the increase according to a November 20 online article at Lawyers USA by staff writer Sylvia Hsieh. The article cites Centers for Disease Control and Prevention (CDC) data estimating that over two million hospital-acquired infections occur annually, resulting in 90,000 fatalities. In long-term care facilities the CDC estimates an additional 1.5 million health-care associated infections occur annually. The article notes that 26 states have passed laws that require reporting of hospital-acquired infections. Meanwhile, the Committee to Reduce Infection Deaths (RID) says that hospital infections add an estimated $30.5 billion to the nation’s hospital costs each year. A recent Aon analysis noted that hospital-acquired conditions (sometimes referred to as “never events”) – including hospital-acquired infections, hospital-acquired injuries, objects left in surgery and pressure ulcers account for one out of every six med mal liability claims. Aon’s 2008 Hospital Professional Liability and Physician Liability Benchmark Analysis also pointed to a potential rise in the frequency of related hospital professional liability claims. Check out I.I.I. background information on medical malpractice.
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Call for Climate Legislation
Posted by Claire under Climate Change , Emerging Risks
Five major U.S. corporations have teamed up with investor coalition Ceres to launch a new business alliance calling for strong U.S. climate and energy legislation in early 2009. The group’s key principles include stimulating renewable energy, promoting energy efficiency and green jobs, requiring 100 percent auction of carbon allowances and limiting new coal-fired power plants to those that capture and store carbon emissions. The founding members of the Business for Innovative Climate and Energy Policy (BICEP) include such household names as Starbucks and Nike. The group says it will push the Federal government to enact legislative changes to spur a clean energy economy and reduce global warming pollution. Check out the I.I.I. background paper on climate change and insurance issues.
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Fri 14 Nov 2008
The Case of Nanotechnology
Posted by Claire under Emerging Risks , Regulation
We look across the Pond today to a posting on the Lloyd’s risk blog by Trevor Maynard, head of the emerging risks team. It highlights the findings of a new report by the UK’s Royal Commission on the challenges and benefits arising from nanotechnology. The report points to areas of concern about governance and regulation of nanomaterials, such as “the profound ignorance and uncertainty about the behavior of some types of nanomaterial in the environment or the risks they pose for human health.” The Commission suggests that existing regulatory frameworks will need to be adapted to deal with nanomaterials. Here in the United States, the FDA’s Nanotechnology TaskForce report last year recommended the agency consider developing guidance to address the benefits and risks of drugs and medical devices using nanotechnology. As we’ve noted before, new technologies bring with them inherent benefits as well as risks. More than $1.1 trillion of products across a broad range of sectors incorporated nanotechnology in 2007, and this impact could extend to nearly $4 trillion by 2015, according to market research firm Lux Research. Food, drugs, medical devices and cosmetics are just some of the products that may incorporate nanomaterials. On both sides of the Atlantic, the regulation of nanotechnology is an evolving area that insurers will be monitoring.
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Thu 13 Nov 2008
Google Tracks Flu
Posted by Claire under Emerging Risks , Technology
We all recognize what a valuable source of data the Internet can be. Whether it’s a Web site or social media such as message boards and blogs, there’s an infinite wealth of data that can be extracted online. A new Web tool from Google written about in the New York Times yesterday is one with potentially useful applications for our industry. According to the article, the tool — known as Google Flu Trends — may be able to detect regional outbreaks of the flu up to 10 days before they are reported by the Centers for Disease Control and Prevention (CDC). How? Well, Google has found a correlation between how many people search for flu-related topics and how many people actually have flu symptoms. It says a pattern emerges when all the flu-related search queries from each state and region are added together. When compared with data from a surveillance system managed by the CDC, Google discovered that some search queries tend to be popular exactly when flu season is happening. By counting how often it sees these search queries, it can estimate how much flu is circulating in various regions of the United States. What this amounts to is an early warning system for influenza outbreaks. We’re wondering what other applications this tool might have for insurers managing pandemic risks…
1 Comment >>
Fri 31 Oct 2008
ID Theft Rules Deadline Extended
Posted by Claire under Emerging Risks , Business Risk
The Federal Trade Commission (FTC) has given financial institutions and creditors an extra six months, until May 1, 2009, to comply with the so-called “red flags rule” which requires them to develop and implement written identity theft prevention programs. Apparently some industries and entities within the FTC’s jurisdiction had expressed confusion and uncertainty about their coverage under the rule. Just to be clear, the FTC said the extension does not affect compliance with the original November 1, 2008 deadline for institutions subject to oversight of other federal agencies. Those of you who read our posting a year ago will already be aware that under the red flags rule, financial institutions and creditors with covered accounts must implement prevention programs to identify, detect, and respond to patterns, practices, or specific activities that could indicate ID theft. As we’ve said before, financial institutions are prime targets of ID theft, so new rules requiring them to take preventive measures could increase their potential liability. Check out further I.I.I. facts and stats on ID theft.
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Fri 17 Oct 2008
Indoor Mold Warning
Posted by Claire under Emerging Risks , Health & Safety
A study from the U.S. Government Accountability Office (GAO) once again throws the spotlight on the issue of mold. GAO’s findings suggest that while federal guidance on minimizing indoor mold growth is generally consistent, guidance on mitigating exposure to indoor mold is sometimes inconsistent about cleanup agents, protective clothing and equipment and sensitive populations. As a result, GAO warns that the public may not be sufficiently advised of indoor mold’s potential health risks. GAO notes that mold growth may be particularly severe following natural disasters such as hurricanes and flooding. However, it says that differences among guidance documents could confuse the public about the safest and most effective way to remove mold. For example, if bleach is not necessary in most instances, using it unnecessarily could lead to avoidable problems, since bleach itself is a hazardous substance that can generate toxic fumes if it is mixed with ammonia based cleaners. The GAO report also calls for better coordination of federal research activities on mold and other indoor air issues. Check out I.I.I. information on mold and the insurance industry.
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Wed 8 Oct 2008
Climate Change Initiatives
Posted by Claire under Climate Change , Emerging Risks
A couple of climate change initiatives announced this week remind us that financial risks are not the sole focus for our industry. In the first of these the National Center for Atmospheric Research (NCAR) working with federal agencies and universities as well as the insurance and energy industries has launched a study to examine how global warming will influence hurricanes in the next few decades. The project will use a combination of global climate and regional weather models, run on one of the world’s most powerful supercomputers, to look at future hurricane activity. Researchers are targeting the hurricane-prone Gulf of Mexico and the Caribbean Sea and will examine three decades in detail: 1995-2005, 2020-2030, and 2045-2055. The project includes support from the Willis Research Network.
In another initiative Munich Re is collaborating with the London School of Economics (LSE) to advance research into the economic consequences of climate change. The five-year cooperation agreement is with the LSE’s newly established Centre for Climate Change Economics and Policy, of which Munich Re is a founding corporate partner. Research will focus on a range of issues, including: analyzing the risks and opportunities for the insurance industry; the economics of climate change and product trends in the finance industry; improving models to quantify the cost of a climate-related increase in natural catastrophes and economically efficient responses to this. Check out a new I.I.I. issues update on Climate Change.
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Mon 22 Sep 2008
Texting Risk
Posted by Claire under Emerging Risks , Auto Trends
The dangers of text-messaging while driving a vehicle, at work, even crossing the street are making the headlines both in the U.S. and overseas. A September 19, 2008 New York Times article by Jennifer Steinhauer and Laura M Holson, focuses on the danger texting can pose by distracting users. The issue has been receiving widespread attention following the September 12 train collision in California that left 25 dead. Last week the National Transportation Safety Board (NTSB) confirmed it is investigating how text messaging by the Metrolink train’s engineer may have affected his operation of the train.
Meanwhile, new research conducted by the UK’s Transport Research Laboratory for the Royal Automobile Club Foundation has found that texting behind the wheel impairs driving skills more than being drunk or high. Reaction times deteriorated by over one-third (35 percent). This was worse than alcohol at the legal limit (12 percent slower) and driving under the influence of cannabis (21 percent slower). In addition, drivers drifted out of their lane more often, with steering control 91 percent worse, compared to 35 percent worse when under the influence of cannabis. The ability to maintain a safe following distance also fell. Despite the danger, 48 percent of UK drivers aged 18-24 admit to using short message services (SMS) while driving. Check out I.I.I. information on auto crashes.
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Wed 20 Aug 2008
Granite Countertops and Radon
Posted by Claire under Emerging Risks
The potential link between granite countertops and increasing indoor radon levels is the subject of an August 15 online article at Lawyers USA by staff writer Justin Rebello. The article notes that the Environmental Protection Agency (EPA) has received several complaints that claim the countertops (popular in high-end kitchens) can decay and emit radon. Radon is the second leading cause of lung cancer in America and claims about 20,000 lives annually. While to-date there has been no confirmed litigation, the article says that plaintiffs’ attorneys have already begun advertising for potential clients. For its part, the EPA at this time does not believe sufficient data exist to conclude that the types of granite commonly used in countertops are significantly increasing indoor radon levels. However, the U.S. Surgeon and the EPA recommend that all homes be tested for radon in indoor air.
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Tue 19 Aug 2008
Emerging Challenges
Posted by Claire under Emerging Risks
RAND Corp has celebrated its 60th anniversary by publishing 11 essays from its staff on important policy issues that it anticipates will likely become front-burner issues within the next five years. Published in the Summer edition of the RAND Review, the essays touch on a range of topics on the horizon of interest to insurers. From the problems posed by Social Security and Medicare’s looming budget shortfalls, to corporate income tax avoidance becoming corporate America’s next big scandal, to supporting our aging infrastructure with innovative technology solutions, the essays highlight some major policy problems and possible solutions. These issues also point to emerging risks that insurers will be monitoring closely.
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Tue 12 Aug 2008
Oil and Gas Risk Report
Posted by Claire under Emerging Risks , Business Risk
National oil companies (NOCs) are facing a riskier business environment, yet there is a gap between the importance of the risks they face and how well they are managed. A new survey from Marsh found the overall level of risk facing the industry remains high, with the NOC Risk Index score rising to 4.51 out of a possible 6 in 2008. By contrast, the Risk Management Effectiveness Index score was just 3.8. The top five risks in 2008 ranked by participants are: availability of oil and gas resources; recruitment and retention of a qualified workforce; energy price volatility; environmental impact of operations; and political/regulatory risk issues. Availability of oil and gas resources as a risk issue was rated 5.3 out of a possible 6. It was also the top-ranked risk in 2007 but with a rating of 4.9.
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Emerging Risks
Archived Posts from this Category
Wed 6 Aug 2008
Data Loss Vulnerability
Posted by Claire under Emerging Risks , Technology
Federal prosecutors yesterday said they have charged 11 individuals allegedly involved in the hacking of nine major U.S. retailers and the theft and sale of more than 40 million credit and debit card numbers. In the words of U.S. Attorney General Michael Mukasey, this is “the single largest and most complex identity theft case ever charged in this country”. The case underscores not only the increasing vulnerability of individuals to identity theft, but also the potential liability faced by companies when a breach in data security occurs. The retailers targeted included: TJX Companies, BJ’s Wholesale Club, OfficeMax, Boston Market, Barnes & Noble, Sports Authority, Forever 21 and DSW. The perpetrators used sophisticated computer hacking techniques, breaching security systems and installing programs that gathered enormous quantities of personal financial data, which they allegedly sold to others or used themselves. In total they caused widespread losses to banks, retailers and consumers. A risk survey conducted by the Economist Intelligence Unit and sponsored by ACE European Group (ACE) last year found that one in three global businesses see loss of data as a significant threat. A trend to monitor.
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Thu 31 Jul 2008
Aging Infrastructure Remains Concern
Posted by Claire under Insurers and the Economy , Emerging Risks
Tomorrow marks the one-year anniversary of the Minneapolis Interstate 35W bridge collapse that resulted in 13 fatalities (see our August 3, 2007, posting). A year on, a new report by the American Association of State Highway and Transportation Officials (AASHTO) outlines the difficult challenges that lie ahead in maintaining, repairing, and replacing the nation’s bridges. Age, deterioration, soaring construction costs, and increasing traffic congestion were cited by the AASHTO as some of the major bridge problems facing the U.S. The report notes that the average bridge in the U.S. today is 43 and almost 20 percent of these “Baby Boomer” bridges are now over 50 years old. It puts the price tag to repair or modernize the country’s 600,000 bridges at $140 billion. The report calls for increased investment in transportation at all levels of government; support for revenue options such as tolls, tax increases, annual road user fees; and a continued commitment to research, innovation and technology. What do you think of these proposed solutions?
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Fri 18 Jul 2008
Contaminated Food Concerns
Posted by Claire under Emerging Risks , Health & Safety
If you’re still avoiding raw tomatoes or spinach, you’re apparently in good company. A new Associated Press-Ipsos poll finds that 46 percent of Americans are worried they might get sick from eating contaminated food and are avoiding foods they would normally buy. The poll revealed that 86 percent would support labeling produce so its origin can be tracked should there be an outbreak of illness. Some 80 percent would also support establishing stricter federal safety standards for fresh produce. Despite the concerns, 75 percent of respondents remain confident the food they buy is safe to eat. Food for thought.
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Thu 17 Jul 2008
Obesity: Rising Prevalence
Posted by Claire under Emerging Risks , Health & Safety
The obesity epidemic among adults in the United States continues to rise. Latest data from the CDC’s Behavioral Risk Factor Surveillance System show that an estimated 25.6 percent of U.S. adults reported being obese in 2007, an increase of 1.7 percent from 23.9 percent in 2005. Alabama, Mississippi and Tennessee lead the way with all three states reporting an obesity prevalence of above 30 percent. Colorado had the lowest obesity prevalence at 18.7 percent. Obesity is defined as a body mass index (BMI) of 30 or above. BMI is calculated using height and weight. By region, the report also finds that obesity is more prominent in the South, where 27 percent of respondents were classified as obese, compared with 25.3 percent in the Midwest, 23.3 percent in the Northeast, and 22.1 percent in the West. Check out I.I.I. information on obesity liability.
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Wed 18 Jun 2008
Global D&O Protection Gap
Posted by Claire under Emerging Risks , Business Risk
Worldwide U.S. directors and officers (D&O) policies do not provide the global protection that many insureds may believe they have. That’s the upshot of the latest annual D&O liability survey by Towers Perrin. It found that only 3 percent of survey participants with international operations have purchased separate local D&O liability insurance policies for individual countries. This is despite the fact that many countries do not permit non-admitted D&O insurance policies to cover local directors and officers. Towers Perrin warns that many companies are not yet aware of this emerging issue. Given the increased claim activity outside the United States, this issue is unlikely to go away. By the way, some 43 percent of survey participants indicated that their firms are global. Something to think about.
1 Comment >>
Fri 16 May 2008
Managing Emerging Risks
Posted by Claire under Emerging Risks , Business Risk
A new report from Lloyd’s and the Economist Intelligence Unit titled Directors in the Dock: Is Business Facing a Liability Crisis? reveals that boards could make better use of the time they spend on liability and litigation issues by switching their focus to emerging risks. Many executives interviewed for the report admit that there has not yet been board-level discussion on a range of emerging threats, even though they recognize the need to tackle the issue. For example, nearly four in 10 said that they should discuss work-related stress, but have not yet raised this issue formally, while 29 percent believe technology security should be discussed. Indeed, technology risks – such as data and system security and nanotechnology – are among the top three emerging risks that executives are most concerned about. Environmental liabilities and the liabilities arising from poor corporate governance are also top board concerns. Check out further I.I.I. info on the U.S. liability system.
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Thu 1 May 2008
Climate Change Discussion
Posted by Claire under Climate Change , Emerging Risks
A panel discussion organized by the Swiss Society of New York and the Swiss-American Chamber of Commerce, and supported by Swiss Re will take place at Swiss Re’s NYC offices next Tuesday, May 6. Aptly named “Climate Change: From Dialogue to Action”, the discussion will bring together experts from the UN, Harvard Medical School, UBS and Swiss Re to discuss the impact of global climate change and propose possible solutions. The gathering will start at 5.30pm, ET, and will be followed by a moderated Q&A session and cocktail reception.
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Fri 18 Apr 2008
‘Invisible Wounds of War’
Posted by Claire under Emerging Risks , Health & Safety
Is the title of a new RAND report that estimates nearly one in five military service members who have returned from Iraq and Afghanistan report symptoms of post traumatic stress disorder or major depression, yet only slightly more than half have sought treatment. Researchers also found about 19 percent of returning service members report experiencing a possible traumatic brain injury while deployed, with 7 percent reporting both a probable brain injury and current PTSD or major depression. In what RAND describes as a “major health crisis”, researchers estimate that PTSD and depression among returning service members will cost the nation up to $6.2 billion in the two years following deployment, including both direct medical care and costs for lost productivity and suicide. Injured veterans returning from war present unique challenges for insurers as I.I.I. president Dr. Robert Hartwig outlined in a January 2006 report: When Johnny Comes Marching Home.
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Wed 16 Apr 2008
Subprime Crisis and Policy Options
Posted by Claire under Insurers and the Economy , Emerging Risks
An article by reporter Greg Ip in today’s Wall Street Journal highlights a timely new report from the Paris-based Organization for Economic Cooperation and Development (OECD) on the subprime crisis. In its analysis, the OECD now puts the total estimated loss range from the crisis at between $352 billion to $422 billion. In addition to the headline figures, the OECD also notes that the world is moving to a situation in which individuals bear more and more risks, without necessarily being able to cope with them. This concerns not only credit, including sub-prime mortgages, but also insurance or pensions. According to the OECD, this situation calls for a new culture of risk awareness and financial education mechanisms. What do you make of this warning?
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Fri 14 Mar 2008
Underestimating Risk
Posted by Claire under Emerging Risks , Business Risk
Hindsight is a beautiful thing. Just as the current credit crisis and related economic issues began to emerge in the third quarter of 2007, senior executives felt very confident about their ability to manage risk and opportunity it appears. The striking findings come in a new study conducted by Towers Perrin, in conjunction with the Economist Intelligence Unit. Towers Perrin notes that with the benefit of hindsight, the study reveals that many organizations underestimated risks or completely missed emerging risks and that the levels of optimism and confidence revealed in the third quarter of 2007, when economic times were relatively good, were not justified. Survey respondents included CEOs, CFOs, board members, presidents, managing directors and other senior execs of midsize and large companies across a range of industries, including insurance. What are your thoughts?
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Archived Posts from this Category
Tue 10 Feb 2009
ID Theft on the Rise
Posted by Claire under Emerging Risks , Technology
In a reflection of current turbulent economic times, Javelin Research & Strategy’s latest annual report on identity fraud yesterday revealed for the first time since its debut in 2004 that the number of identity fraud victims has increased 22 percent to 9.9 million adults. While there were 1.8 million more victims in 2008 than in 2007, the total annual losses ($48 billion in 2008, up 7 percent from $45 billion in 2007) did not show a commensurate rise in scale. Instead, the data shows the average loss declined by 12 percent to $4,849 from $5,488 because of increased fraud prevention efforts. On a positive note, individuals spent 31 percent less (an average of $496) to clean up a fraud and more than half spent nothing. A CNNMoney.com report quoted James Van Dyke, president of Javelin as saying the increase in ID theft cases was likely due to the economic recession. “If people need to make money, and decide to do so illicitly, identity fraud is the logical opportunity,” he said. Another interesting finding: online fraud was the reason for only 11 percent of cases; improper use of checkbooks and credit or debit cards after a wallet or pocketbook is lost or stolen remains the most common means of ID theft (43 percent of cases); while 25 percent had their PINs compromised on ATM cards. Check out I.I.I. info on identity theft.
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Fri 6 Feb 2009
Data Breaches: Rising Priority
Posted by Claire under Emerging Risks , Technology
Data protection and information leakage emerged as a top priority for financial institutions in 2008, according to Deloitte’s 6th Annual Global Security survey. The top three information security priorities of financial institutions are: security regulatory compliance; data protection and information leakage; and access and identity management. Deloitte noted that recent high profile data breach and identity theft incidents and the increasing popularity of social networks and mobile media such as USB keys, MP3 players and PDAs, are contributing to increased awareness of the risk. The leading drivers for financial institutions to protect the privacy of their clients information are privacy regulatory requirements (79 percent) followed by reputation and brand concerns (70 percent), according to the survey. Meanwhile, as companies look to manage their growing exposure to data breaches, insurers are here to help. Earlier this week Lockton, in conjunction with Lloyd’s underwriters (ACE Global Markets, Brit Syndicates Ltd, Hiscox) and legal and security experts announced a risk management package designed to help companies address outsourcing risk and corporate response plans for data breaches. As the well-worn saying goes, prevention is better than cure. Check out further I.I.I. info on identity theft.
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Thu 29 Jan 2009
Political Risk Rising
Posted by Claire under Emerging Risks
The impact of the global credit crunch will shift from an economic problem to a political problem in 2009 and Iceland and Greece serve as early warnings, according to the 16th annual Political Risk Map produced by Aon. In its ranking of the political risk of 209 countries and territories, Aon said the past year has seen a number of High Risk countries (Afghanistan, Congo DRC, Iran, Iraq, North Korea, Somalia and Zimbabwe) continue to deteriorate to the point that the creation of a Very High Risk category was warranted. Overall some 18 countries were downgraded to a higher risk level, reflecting the general rise in the risk level globally. On the other hand, four High Risk countries (Malawi, Moldova, Syria and Turkmenistan) saw an improvement in their status to Medium-High Risk. A total of 13 countries were upgraded to a lower risk level. The map measures the risk of: currency inconvertibility and transfer; strikes, riots and civil commotion; war; terrorism; sovereign non-payment; political interference; supply chain interruption; legal and regulatory risk. Included in this year’s map is a Commodity Crunch Exposure Matrix, which identifies the countries most vulnerable to political instability in 2009 if commodity prices (including oils, metals and minerals) continue to fall, as suggested by some forecasters. Check out I.I.I. facts & stats on terrorism.
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Wed 28 Jan 2009
Infrastructure Report
Posted by Claire under Insurers and the Economy , Emerging Risks
The American Society of Civil Engineers (ASCE) has assigned a grade of D to the nation’s infrastructure and warned that $2.2 trillion in repairs and upgrades is needed over the next five years to meet adequate conditions. The 2009 Report Card for America’s Infrastructure shows that since ASCE’s last assessment in 2005, there has been little change in the condition of America’s roads, bridges, drinking water systems and other public works. According to an early Associated Press report on the findings, out of 15 infrastructure categories, three were given lower grades in 2009: aviation and public transit went from D+ to D; while the nation’s roads went from D to D-. A key takeaway from the report is that America’s 100,000 miles of levees have been added as a new area of failing infrastructure. Levees are graded D- with ASCE warning that the risk to the public health and safety from levee failure has increased. The report is timely given renewed attention from the White House, Congress and the public on infrastructure as part of President Barack Obama’s $825 billion economic stimulus package. At last count some $77.7 billion of the $825 billion is assigned to transportation and infrastructure (including highway infrastructure, clean water, transit and water resources).
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Tue 20 Jan 2009
Administration Change Impact
Posted by Claire under Emerging Risks , Legal Environment
As America’s 44th President takes office, there are any numbers of experts ready to predict what this Administration change will mean for the country. The potential impact on the legal and judicial landscape is one such area of discussion. Empirical research from Vanderbilt professor of law and political science Tracey George shows how the United States court system, especially the Supreme Court and the Court of Appeals, could dramatically change soon after Barack Obama takes office. George says there is likelihood that as many as three Supreme Court justices could leave the court while Obama is in office. There are also currently 13 vacancies on the courts of appeals and an additional 41 vacancies on the district courts. While George W. Bush came into office with even more openings to fill, George says the number of openings may quickly rise because the change in party in power may prompt Clinton and Carter appointees to step down soon to ensure a like-minded replacement. For more on this story, check out a January 16 online article at Insurance Journal. From the perspective of insurers, an Insurance Information Institute (I.I.I.) poll indicates the changing legal landscape is on the radar screen. Sixty-three percent of insurance industry executives believe that tort trends will deteriorate in 2009, while 32 percent believe they will stay the same. Only 5 percent believe they will improve. Check out further I.I.I. info on the liability system.
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Fri 16 Jan 2009
Bird Strike Hazard
Posted by Claire under Emerging Risks , Environment
Yesterday’s narrow escape for 155 people aboard a US Airways Airbus 320 aircraft forced to make an emergency landing on the Hudson River in New York City after its engines were reportedly struck by a flock of geese is a reminder of the significant safety risk that bird and wildlife strikes pose for civil aviation around the world today. As noted previously here at Terms & Conditions, bird hazard may not be the first risk that comes to mind when stepping aboard an aircraft, but bird strikes are a major risk exposure for airlines and their insurers. Globally, wildlife strikes have killed more than 219 people and destroyed over 200 aircraft since 1988. According to the Federal Aviation Administration (FAA), some 82,057 strikes were reported to civil aircraft in the U.S. from 1990 to 2007. Birds were involved in 97.5 percent of the reported strikes, terrestrial mammals in 2.1 percent, bats in 0.3 percent and reptiles in 0.1 percent. The number of strikes annually reported more than quadrupled from 1,759 in 1990 to a record 7,666 in 2007. For the 18-year period (1990-2007), reports were received of 43 aircraft destroyed or damaged beyond repair due to wildlife strikes. The annual cost of wildlife strikes to the U.S. civil aviation industry is estimated at in excess of $628 million. The growing potential frequency and severity of wildlife-aircraft collisions is not that surprising given that natural habitats around airports tend to be home to increasing populations of large bird species that have adapted to living in urban environments. At the same time air traffic worldwide has increased substantially, adding to the risk. The Bird Strike Committee annual meeting includes a wide variety of presentations on how to mitigate bird strike hazard. Check out further I.I.I. facts on aviation.
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Wed 14 Jan 2009
Challenging Risks to Global Economy
Posted by Claire under Insurers and the Economy , Emerging Risks
Deteriorating fiscal positions, a hard landing in China, a collapse in asset prices, gaps in global governance and issues relating to natural resources and climate are the pivotal risks facing the world this year. According to the World Economic Forum’s (WEF) new Global Risks 2009 report, the economic outlook for 2009 is a grim one for most economies, as markets remain volatile, liquidity has not returned, unemployment is rising and consumer and business confidence has fallen to record lows. In this climate, risks become even more potent in their impact. The report notes that the financial crisis has exposed the lack of coordination among policymakers, regulators and supervisors, and that a key lesson to be learned from the crisis is the need to embed better risk governance globally. But while acknowledging the need for better governance globally, it warns against a knee-jerk over-reaction that would increase transaction and compliance costs and ultimately prove ineffective in the face of the next crisis. The WEF report is published in cooperation with Citigroup, MMC (Marsh & McLennan Cos), Swiss Re, the Wharton School Risk Center and Zurich Financial Services.
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Mon 15 Dec 2008
Nanotech Risk Needs Further Study
Posted by Claire under Emerging Risks
A report from the National Research Council has pointed to serious weaknesses in the United States government’s plan for research on the potential health and environmental risks posed by nanomaterials. The report criticizes the research plan developed by the National Nanotechnology Initiative, which it says misses elements crucial for progress in understanding nanomaterials’ health and safety impacts. While the National Research Council report did not evaluate whether current uses of nanomaterials represent unreasonable risks to the public, it did focus on what would constitute an effective national research strategy. The upshot is that it recommends a new national strategic plan that goes beyond federal research to incorporate research from academia, industry, consumer and environmental groups as well as other stakeholders. The findings follow a recent report by the United Kingdom’s Royal Commission on the challenges and benefits arising from nanotechnology. Food, drugs, medical devices and cosmetics are just some of the products that may incorporate nanomaterials.
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Wed 3 Dec 2008
Biological and Nuclear Attack Warning
Posted by Claire under Emerging Risks
Just a week after the terrorist attacks in Mumbai, India a Congressional report has warned that a weapon of mass destruction (biological or nuclear) is likely to be used in a terrorist attack by 2013. The report suggests a terrorist attack using a biological weapon is the more likely. It calls on the United States government to take aggressive steps to prevent biological terrorism. Among its recommendations: the U.S. should strengthen international measures to prevent biological weapons proliferation and terrorism; conduct a global assessment of biosecurity risks; strengthen global disease surveillance networks; tighten government oversight of high-containment laboratories.
Initiatives focused on prevention will be welcomed by insurers. As we know, the loss potential associated with acts of terrorism can be significant. For example a study by the American Academy of Actuaries estimated a large chemical, nuclear, biological, and radiological (CNBR) attack in New York could result in insured losses of up to $778.1 billion. Check out a Guy Carpenter bulletin for an update on the Mumbai attack. Check out further I.I.I. information on terrorism risk and insurance.
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Mon 24 Nov 2008
Hospital Infections: the new Med Mal?
Posted by Claire under Emerging Risks , Health & Safety
Medical malpractice claims related to hospital infections are on the increase according to a November 20 online article at Lawyers USA by staff writer Sylvia Hsieh. The article cites Centers for Disease Control and Prevention (CDC) data estimating that over two million hospital-acquired infections occur annually, resulting in 90,000 fatalities. In long-term care facilities the CDC estimates an additional 1.5 million health-care associated infections occur annually. The article notes that 26 states have passed laws that require reporting of hospital-acquired infections. Meanwhile, the Committee to Reduce Infection Deaths (RID) says that hospital infections add an estimated $30.5 billion to the nation’s hospital costs each year. A recent Aon analysis noted that hospital-acquired conditions (sometimes referred to as “never events”) – including hospital-acquired infections, hospital-acquired injuries, objects left in surgery and pressure ulcers account for one out of every six med mal liability claims. Aon’s 2008 Hospital Professional Liability and Physician Liability Benchmark Analysis also pointed to a potential rise in the frequency of related hospital professional liability claims. Check out I.I.I. background information on medical malpractice.
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Call for Climate Legislation
Posted by Claire under Climate Change , Emerging Risks
Five major U.S. corporations have teamed up with investor coalition Ceres to launch a new business alliance calling for strong U.S. climate and energy legislation in early 2009. The group’s key principles include stimulating renewable energy, promoting energy efficiency and green jobs, requiring 100 percent auction of carbon allowances and limiting new coal-fired power plants to those that capture and store carbon emissions. The founding members of the Business for Innovative Climate and Energy Policy (BICEP) include such household names as Starbucks and Nike. The group says it will push the Federal government to enact legislative changes to spur a clean energy economy and reduce global warming pollution. Check out the I.I.I. background paper on climate change and insurance issues.
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Fri 14 Nov 2008
The Case of Nanotechnology
Posted by Claire under Emerging Risks , Regulation
We look across the Pond today to a posting on the Lloyd’s risk blog by Trevor Maynard, head of the emerging risks team. It highlights the findings of a new report by the UK’s Royal Commission on the challenges and benefits arising from nanotechnology. The report points to areas of concern about governance and regulation of nanomaterials, such as “the profound ignorance and uncertainty about the behavior of some types of nanomaterial in the environment or the risks they pose for human health.” The Commission suggests that existing regulatory frameworks will need to be adapted to deal with nanomaterials. Here in the United States, the FDA’s Nanotechnology TaskForce report last year recommended the agency consider developing guidance to address the benefits and risks of drugs and medical devices using nanotechnology. As we’ve noted before, new technologies bring with them inherent benefits as well as risks. More than $1.1 trillion of products across a broad range of sectors incorporated nanotechnology in 2007, and this impact could extend to nearly $4 trillion by 2015, according to market research firm Lux Research. Food, drugs, medical devices and cosmetics are just some of the products that may incorporate nanomaterials. On both sides of the Atlantic, the regulation of nanotechnology is an evolving area that insurers will be monitoring.
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Thu 13 Nov 2008
Google Tracks Flu
Posted by Claire under Emerging Risks , Technology
We all recognize what a valuable source of data the Internet can be. Whether it’s a Web site or social media such as message boards and blogs, there’s an infinite wealth of data that can be extracted online. A new Web tool from Google written about in the New York Times yesterday is one with potentially useful applications for our industry. According to the article, the tool — known as Google Flu Trends — may be able to detect regional outbreaks of the flu up to 10 days before they are reported by the Centers for Disease Control and Prevention (CDC). How? Well, Google has found a correlation between how many people search for flu-related topics and how many people actually have flu symptoms. It says a pattern emerges when all the flu-related search queries from each state and region are added together. When compared with data from a surveillance system managed by the CDC, Google discovered that some search queries tend to be popular exactly when flu season is happening. By counting how often it sees these search queries, it can estimate how much flu is circulating in various regions of the United States. What this amounts to is an early warning system for influenza outbreaks. We’re wondering what other applications this tool might have for insurers managing pandemic risks…
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Fri 31 Oct 2008
ID Theft Rules Deadline Extended
Posted by Claire under Emerging Risks , Business Risk
The Federal Trade Commission (FTC) has given financial institutions and creditors an extra six months, until May 1, 2009, to comply with the so-called “red flags rule” which requires them to develop and implement written identity theft prevention programs. Apparently some industries and entities within the FTC’s jurisdiction had expressed confusion and uncertainty about their coverage under the rule. Just to be clear, the FTC said the extension does not affect compliance with the original November 1, 2008 deadline for institutions subject to oversight of other federal agencies. Those of you who read our posting a year ago will already be aware that under the red flags rule, financial institutions and creditors with covered accounts must implement prevention programs to identify, detect, and respond to patterns, practices, or specific activities that could indicate ID theft. As we’ve said before, financial institutions are prime targets of ID theft, so new rules requiring them to take preventive measures could increase their potential liability. Check out further I.I.I. facts and stats on ID theft.
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Fri 17 Oct 2008
Indoor Mold Warning
Posted by Claire under Emerging Risks , Health & Safety
A study from the U.S. Government Accountability Office (GAO) once again throws the spotlight on the issue of mold. GAO’s findings suggest that while federal guidance on minimizing indoor mold growth is generally consistent, guidance on mitigating exposure to indoor mold is sometimes inconsistent about cleanup agents, protective clothing and equipment and sensitive populations. As a result, GAO warns that the public may not be sufficiently advised of indoor mold’s potential health risks. GAO notes that mold growth may be particularly severe following natural disasters such as hurricanes and flooding. However, it says that differences among guidance documents could confuse the public about the safest and most effective way to remove mold. For example, if bleach is not necessary in most instances, using it unnecessarily could lead to avoidable problems, since bleach itself is a hazardous substance that can generate toxic fumes if it is mixed with ammonia based cleaners. The GAO report also calls for better coordination of federal research activities on mold and other indoor air issues. Check out I.I.I. information on mold and the insurance industry.
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Wed 8 Oct 2008
Climate Change Initiatives
Posted by Claire under Climate Change , Emerging Risks
A couple of climate change initiatives announced this week remind us that financial risks are not the sole focus for our industry. In the first of these the National Center for Atmospheric Research (NCAR) working with federal agencies and universities as well as the insurance and energy industries has launched a study to examine how global warming will influence hurricanes in the next few decades. The project will use a combination of global climate and regional weather models, run on one of the world’s most powerful supercomputers, to look at future hurricane activity. Researchers are targeting the hurricane-prone Gulf of Mexico and the Caribbean Sea and will examine three decades in detail: 1995-2005, 2020-2030, and 2045-2055. The project includes support from the Willis Research Network.
In another initiative Munich Re is collaborating with the London School of Economics (LSE) to advance research into the economic consequences of climate change. The five-year cooperation agreement is with the LSE’s newly established Centre for Climate Change Economics and Policy, of which Munich Re is a founding corporate partner. Research will focus on a range of issues, including: analyzing the risks and opportunities for the insurance industry; the economics of climate change and product trends in the finance industry; improving models to quantify the cost of a climate-related increase in natural catastrophes and economically efficient responses to this. Check out a new I.I.I. issues update on Climate Change.
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Mon 22 Sep 2008
Texting Risk
Posted by Claire under Emerging Risks , Auto Trends
The dangers of text-messaging while driving a vehicle, at work, even crossing the street are making the headlines both in the U.S. and overseas. A September 19, 2008 New York Times article by Jennifer Steinhauer and Laura M Holson, focuses on the danger texting can pose by distracting users. The issue has been receiving widespread attention following the September 12 train collision in California that left 25 dead. Last week the National Transportation Safety Board (NTSB) confirmed it is investigating how text messaging by the Metrolink train’s engineer may have affected his operation of the train.
Meanwhile, new research conducted by the UK’s Transport Research Laboratory for the Royal Automobile Club Foundation has found that texting behind the wheel impairs driving skills more than being drunk or high. Reaction times deteriorated by over one-third (35 percent). This was worse than alcohol at the legal limit (12 percent slower) and driving under the influence of cannabis (21 percent slower). In addition, drivers drifted out of their lane more often, with steering control 91 percent worse, compared to 35 percent worse when under the influence of cannabis. The ability to maintain a safe following distance also fell. Despite the danger, 48 percent of UK drivers aged 18-24 admit to using short message services (SMS) while driving. Check out I.I.I. information on auto crashes.
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Wed 20 Aug 2008
Granite Countertops and Radon
Posted by Claire under Emerging Risks
The potential link between granite countertops and increasing indoor radon levels is the subject of an August 15 online article at Lawyers USA by staff writer Justin Rebello. The article notes that the Environmental Protection Agency (EPA) has received several complaints that claim the countertops (popular in high-end kitchens) can decay and emit radon. Radon is the second leading cause of lung cancer in America and claims about 20,000 lives annually. While to-date there has been no confirmed litigation, the article says that plaintiffs’ attorneys have already begun advertising for potential clients. For its part, the EPA at this time does not believe sufficient data exist to conclude that the types of granite commonly used in countertops are significantly increasing indoor radon levels. However, the U.S. Surgeon and the EPA recommend that all homes be tested for radon in indoor air.
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Tue 19 Aug 2008
Emerging Challenges
Posted by Claire under Emerging Risks
RAND Corp has celebrated its 60th anniversary by publishing 11 essays from its staff on important policy issues that it anticipates will likely become front-burner issues within the next five years. Published in the Summer edition of the RAND Review, the essays touch on a range of topics on the horizon of interest to insurers. From the problems posed by Social Security and Medicare’s looming budget shortfalls, to corporate income tax avoidance becoming corporate America’s next big scandal, to supporting our aging infrastructure with innovative technology solutions, the essays highlight some major policy problems and possible solutions. These issues also point to emerging risks that insurers will be monitoring closely.
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Tue 12 Aug 2008
Oil and Gas Risk Report
Posted by Claire under Emerging Risks , Business Risk
National oil companies (NOCs) are facing a riskier business environment, yet there is a gap between the importance of the risks they face and how well they are managed. A new survey from Marsh found the overall level of risk facing the industry remains high, with the NOC Risk Index score rising to 4.51 out of a possible 6 in 2008. By contrast, the Risk Management Effectiveness Index score was just 3.8. The top five risks in 2008 ranked by participants are: availability of oil and gas resources; recruitment and retention of a qualified workforce; energy price volatility; environmental impact of operations; and political/regulatory risk issues. Availability of oil and gas resources as a risk issue was rated 5.3 out of a possible 6. It was also the top-ranked risk in 2007 but with a rating of 4.9.
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Emerging Risks
Archived Posts from this Category
Wed 6 Aug 2008
Data Loss Vulnerability
Posted by Claire under Emerging Risks , Technology
Federal prosecutors yesterday said they have charged 11 individuals allegedly involved in the hacking of nine major U.S. retailers and the theft and sale of more than 40 million credit and debit card numbers. In the words of U.S. Attorney General Michael Mukasey, this is “the single largest and most complex identity theft case ever charged in this country”. The case underscores not only the increasing vulnerability of individuals to identity theft, but also the potential liability faced by companies when a breach in data security occurs. The retailers targeted included: TJX Companies, BJ’s Wholesale Club, OfficeMax, Boston Market, Barnes & Noble, Sports Authority, Forever 21 and DSW. The perpetrators used sophisticated computer hacking techniques, breaching security systems and installing programs that gathered enormous quantities of personal financial data, which they allegedly sold to others or used themselves. In total they caused widespread losses to banks, retailers and consumers. A risk survey conducted by the Economist Intelligence Unit and sponsored by ACE European Group (ACE) last year found that one in three global businesses see loss of data as a significant threat. A trend to monitor.
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Thu 31 Jul 2008
Aging Infrastructure Remains Concern
Posted by Claire under Insurers and the Economy , Emerging Risks
Tomorrow marks the one-year anniversary of the Minneapolis Interstate 35W bridge collapse that resulted in 13 fatalities (see our August 3, 2007, posting). A year on, a new report by the American Association of State Highway and Transportation Officials (AASHTO) outlines the difficult challenges that lie ahead in maintaining, repairing, and replacing the nation’s bridges. Age, deterioration, soaring construction costs, and increasing traffic congestion were cited by the AASHTO as some of the major bridge problems facing the U.S. The report notes that the average bridge in the U.S. today is 43 and almost 20 percent of these “Baby Boomer” bridges are now over 50 years old. It puts the price tag to repair or modernize the country’s 600,000 bridges at $140 billion. The report calls for increased investment in transportation at all levels of government; support for revenue options such as tolls, tax increases, annual road user fees; and a continued commitment to research, innovation and technology. What do you think of these proposed solutions?
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Fri 18 Jul 2008
Contaminated Food Concerns
Posted by Claire under Emerging Risks , Health & Safety
If you’re still avoiding raw tomatoes or spinach, you’re apparently in good company. A new Associated Press-Ipsos poll finds that 46 percent of Americans are worried they might get sick from eating contaminated food and are avoiding foods they would normally buy. The poll revealed that 86 percent would support labeling produce so its origin can be tracked should there be an outbreak of illness. Some 80 percent would also support establishing stricter federal safety standards for fresh produce. Despite the concerns, 75 percent of respondents remain confident the food they buy is safe to eat. Food for thought.
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Thu 17 Jul 2008
Obesity: Rising Prevalence
Posted by Claire under Emerging Risks , Health & Safety
The obesity epidemic among adults in the United States continues to rise. Latest data from the CDC’s Behavioral Risk Factor Surveillance System show that an estimated 25.6 percent of U.S. adults reported being obese in 2007, an increase of 1.7 percent from 23.9 percent in 2005. Alabama, Mississippi and Tennessee lead the way with all three states reporting an obesity prevalence of above 30 percent. Colorado had the lowest obesity prevalence at 18.7 percent. Obesity is defined as a body mass index (BMI) of 30 or above. BMI is calculated using height and weight. By region, the report also finds that obesity is more prominent in the South, where 27 percent of respondents were classified as obese, compared with 25.3 percent in the Midwest, 23.3 percent in the Northeast, and 22.1 percent in the West. Check out I.I.I. information on obesity liability.
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Wed 18 Jun 2008
Global D&O Protection Gap
Posted by Claire under Emerging Risks , Business Risk
Worldwide U.S. directors and officers (D&O) policies do not provide the global protection that many insureds may believe they have. That’s the upshot of the latest annual D&O liability survey by Towers Perrin. It found that only 3 percent of survey participants with international operations have purchased separate local D&O liability insurance policies for individual countries. This is despite the fact that many countries do not permit non-admitted D&O insurance policies to cover local directors and officers. Towers Perrin warns that many companies are not yet aware of this emerging issue. Given the increased claim activity outside the United States, this issue is unlikely to go away. By the way, some 43 percent of survey participants indicated that their firms are global. Something to think about.
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Fri 16 May 2008
Managing Emerging Risks
Posted by Claire under Emerging Risks , Business Risk
A new report from Lloyd’s and the Economist Intelligence Unit titled Directors in the Dock: Is Business Facing a Liability Crisis? reveals that boards could make better use of the time they spend on liability and litigation issues by switching their focus to emerging risks. Many executives interviewed for the report admit that there has not yet been board-level discussion on a range of emerging threats, even though they recognize the need to tackle the issue. For example, nearly four in 10 said that they should discuss work-related stress, but have not yet raised this issue formally, while 29 percent believe technology security should be discussed. Indeed, technology risks – such as data and system security and nanotechnology – are among the top three emerging risks that executives are most concerned about. Environmental liabilities and the liabilities arising from poor corporate governance are also top board concerns. Check out further I.I.I. info on the U.S. liability system.
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Thu 1 May 2008
Climate Change Discussion
Posted by Claire under Climate Change , Emerging Risks
A panel discussion organized by the Swiss Society of New York and the Swiss-American Chamber of Commerce, and supported by Swiss Re will take place at Swiss Re’s NYC offices next Tuesday, May 6. Aptly named “Climate Change: From Dialogue to Action”, the discussion will bring together experts from the UN, Harvard Medical School, UBS and Swiss Re to discuss the impact of global climate change and propose possible solutions. The gathering will start at 5.30pm, ET, and will be followed by a moderated Q&A session and cocktail reception.
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Fri 18 Apr 2008
‘Invisible Wounds of War’
Posted by Claire under Emerging Risks , Health & Safety
Is the title of a new RAND report that estimates nearly one in five military service members who have returned from Iraq and Afghanistan report symptoms of post traumatic stress disorder or major depression, yet only slightly more than half have sought treatment. Researchers also found about 19 percent of returning service members report experiencing a possible traumatic brain injury while deployed, with 7 percent reporting both a probable brain injury and current PTSD or major depression. In what RAND describes as a “major health crisis”, researchers estimate that PTSD and depression among returning service members will cost the nation up to $6.2 billion in the two years following deployment, including both direct medical care and costs for lost productivity and suicide. Injured veterans returning from war present unique challenges for insurers as I.I.I. president Dr. Robert Hartwig outlined in a January 2006 report: When Johnny Comes Marching Home.
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Wed 16 Apr 2008
Subprime Crisis and Policy Options
Posted by Claire under Insurers and the Economy , Emerging Risks
An article by reporter Greg Ip in today’s Wall Street Journal highlights a timely new report from the Paris-based Organization for Economic Cooperation and Development (OECD) on the subprime crisis. In its analysis, the OECD now puts the total estimated loss range from the crisis at between $352 billion to $422 billion. In addition to the headline figures, the OECD also notes that the world is moving to a situation in which individuals bear more and more risks, without necessarily being able to cope with them. This concerns not only credit, including sub-prime mortgages, but also insurance or pensions. According to the OECD, this situation calls for a new culture of risk awareness and financial education mechanisms. What do you make of this warning?
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Fri 14 Mar 2008
Underestimating Risk
Posted by Claire under Emerging Risks , Business Risk
Hindsight is a beautiful thing. Just as the current credit crisis and related economic issues began to emerge in the third quarter of 2007, senior executives felt very confident about their ability to manage risk and opportunity it appears. The striking findings come in a new study conducted by Towers Perrin, in conjunction with the Economist Intelligence Unit. Towers Perrin notes that with the benefit of hindsight, the study reveals that many organizations underestimated risks or completely missed emerging risks and that the levels of optimism and confidence revealed in the third quarter of 2007, when economic times were relatively good, were not justified. Survey respondents included CEOs, CFOs, board members, presidents, managing directors and other senior execs of midsize and large companies across a range of industries, including insurance. What are your thoughts?
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Hazop Analysis
HAZOP BASIS
A HAZOP, or HAZard and OPerability analysis, is a structured technique in which a multi-discipline team performs a systematic study of a process using guide words to discover how deviations from the design intent can occur in equipment, actions, or materials, and whether the consequences of these deviations can result in a hazard.
The results of the HAZOP analysis are the team's recommendations, which include identification of hazards and the recommendations for changes in design, procedures, etc. to improve the safety of the system. Deviations during normal, startup, shutdown, and maintenance operations are discussed by the team and are included in the HAZOP. A block flow diagram of the HAZOP process is given below:
The following terms are used in the HAZOP process and in the HAZOP table (see downloadable pdf file at right):
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Design Intent - the way a process is intended to function.
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Deviation - a departure from the design intent discovered by systematically applying guide words to process parameters.
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Guide Word - simple words such as "high" pressure, "high" temperature, "leak" etc. that are used to modify the design intent and to guide and stimulate the brainstorming process for identifying process hazards. The library-based approach was used in which the most appropriate guidewords for the process were selected from the total list of possible guidewords.
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Cause - the reason why a deviation might occur.
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Consequence - the results of a deviation.
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Safeguard - engineered systems or administrative controls that prevent the causes or mitigate the consequences of deviations.
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Hazard Category - an assessment of the hazard risk of the operation. In this analysis, we have used the MIL-STD-882D, "Hazard Risk Assessment Matrix."
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Recommendations - recommendations for design changes, procedural changes, or for further study.
Guide words for flow in a chemical process include High Flow, No/Low Flow, Reverse Flow, Misdirected Flow, High Pressure, Low Pressure, High Temperature, Low Temperature, High Contaminants, Leak and Rupture.
For processes utilizing explosives, the guide words include electrical initiation, ESD spark, Impact shock, Friction, Impingement, Incompatibities, Explosive shock, Thermal ignition, Propagation, Personnel Injury, Environmental contamination, Equipment damage and Product damage.
A HAZOP, or HAZard and OPerability analysis, is a structured technique in which a multi-discipline team performs a systematic study of a process using guide words to discover how deviations from the design intent can occur in equipment, actions, or materials, and whether the consequences of these deviations can result in a hazard.
The results of the HAZOP analysis are the team's recommendations, which include identification of hazards and the recommendations for changes in design, procedures, etc. to improve the safety of the system. Deviations during normal, startup, shutdown, and maintenance operations are discussed by the team and are included in the HAZOP. A block flow diagram of the HAZOP process is given below:
The following terms are used in the HAZOP process and in the HAZOP table (see downloadable pdf file at right):
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Design Intent - the way a process is intended to function.
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Deviation - a departure from the design intent discovered by systematically applying guide words to process parameters.
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Guide Word - simple words such as "high" pressure, "high" temperature, "leak" etc. that are used to modify the design intent and to guide and stimulate the brainstorming process for identifying process hazards. The library-based approach was used in which the most appropriate guidewords for the process were selected from the total list of possible guidewords.
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Cause - the reason why a deviation might occur.
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Consequence - the results of a deviation.
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Safeguard - engineered systems or administrative controls that prevent the causes or mitigate the consequences of deviations.
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Hazard Category - an assessment of the hazard risk of the operation. In this analysis, we have used the MIL-STD-882D, "Hazard Risk Assessment Matrix."
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Recommendations - recommendations for design changes, procedural changes, or for further study.
Guide words for flow in a chemical process include High Flow, No/Low Flow, Reverse Flow, Misdirected Flow, High Pressure, Low Pressure, High Temperature, Low Temperature, High Contaminants, Leak and Rupture.
For processes utilizing explosives, the guide words include electrical initiation, ESD spark, Impact shock, Friction, Impingement, Incompatibities, Explosive shock, Thermal ignition, Propagation, Personnel Injury, Environmental contamination, Equipment damage and Product damage.
Ins. Trg-Glossary Insurance terms
http://www.iii.org/media/glossary/alfa.C/
A-SHARE VARIABLE ANNUITY
A form of variable annuity contract where the contract holder pays sales charges up front rather than eventually having to pay a surrender charge.
ABSOLUTE ASSIGNMENT*
An irrevocable transfer of complete ownership of a life insurance policy or an annuity from one party to another. Contrast with collateral assignment. (See Assignment)
ACCELERATED DEATH BENEFITS
A life insurance policy option that provides policy proceeds to insured individuals over their lifetimes, in the event of a terminal illness. This is in lieu of a traditional policy that pays beneficiaries after the insured’s death. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries.
ACCIDENT AND HEALTH INSURANCE
Coverage for accidental injury, accidental death, and related health expenses. Benefits will pay for preventative services, medical expenses and catastrophic care, with limits.
ACCIDENTAL DEATH AND DISMEMBERMENT (AD&D) BENEFIT*
A supplementary life insurance policy benefit that provides for an amount of money in addition to the policy’s basic death benefit. This additional amount is payable if the insured dies as the result of an accident or if the insured loses any two limbs or the sight in both eyes as the result of an accident.
ACCIDENTAL DEATH BENEFIT (ADB)*
A supplementary life insurance policy benefit that provides a death benefit in addition to the policy’s basic death benefit if the insured’s death occurs as the result of an accident. (See Double indemnity benefit)
ACCOUNT RECEIVABLES
See Receivables
ACCUMULATION AT INTEREST DIVIDEND OPTION*
An option, available to the owners of participating insurance policies, that allows a policyowner to leave policy dividends on deposit with the insurer and earn interest. (See Dividend)
ACTUAL CASH VALUE
A form of insurance that pays damages equal to the replacement value of damaged property minus depreciation. (See Replacement cost)
ACTUARY
An insurance professional skilled in the analysis, evaluation and management of statistical information. Evaluates insurance firms’ reserves, determines rates and rating methods, and determines other business and financial risks.
ADDITIONAL LIVING EXPENSES
Extra charges covered by homeowners policies over and above the policyholder’s customary living expenses. They kick in when the insured requires temporary shelter due to damage by a covered peril that makes the home temporarily uninhabitable.
ADDITIONAL TERM INSURANCE OPTION*
An option available to owners of participating insurance policies under which the insurer uses a policy dividend as a net single premium to purchase one-year term insurance on the insured’s life. Also known as fifth dividend option. (See Dividend; Policy dividend options)
ADJUSTABLE LIFE INSURANCE*
A form of life insurance that allows policyowners to vary the type of coverage provided by their policies as their insurance needs change.
ADJUSTER
An individual employed by a property/casualty insurer to evaluate losses and settle policyholder claims. These adjusters differ from public adjusters, who negotiate with insurers on behalf of policyholders, and receive a portion of a claims settlement. Independent adjusters are independent contractors who adjust claims for different insurance companies.
ADMITTED ASSETS
Assets recognized and accepted by state insurance laws in determining the solvency of insurers and reinsurers. To make it easier to assess an insurance company’s financial position, state statutory accounting rules do not permit certain assets to be included on the balance sheet. Only assets that can be easily sold in the event of liquidation or borrowed against, and receivables for which payment can be reasonably anticipated, are included in admitted assets. (See Assets)
ADMITTED COMPANY
An insurance company licensed and authorized to do business in a particular state.
ADVERSE SELECTION
The tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk. Insurers react either by charging higher premiums or not insuring at all, as in the case of floods. (Flood insurance is provided by the federal government and some private insurers, but is sold mostly through the private market.) In the case of natural disasters, such as earthquakes, adverse selection concentrates risk instead of spreading it. Insurance works best when risk is shared among large numbers of policyholders.
AFFINITY SALES
Selling insurance through groups such as professional and business associations.
AFTERMARKET PARTS
See Crash parts; Generic auto parts
AGENCY COMPANIES
Companies that market and sell products via independent agents.
AGENT
Insurance is sold by two types of agents: independent agents, who are self-employed, represent several insurance companies and are paid on commission; and exclusive or captive agents, who represent only one insurance company and are either salaried or work on commission. Insurance companies that use exclusive or captive agents are called direct writers.
ALEATORY CONTRACT*
A contract in which one party provides something of value to another party in exchange for a conditional promise, which is a promise that the other party will perform a stated act upon the occurrence of an uncertain event. Insurance contracts are aleatory because the policyowner pays premiums to the insurer, and in return the insurer promises to pay benefits if the event insured against occurs. Contrast with commutative contract.
ALIEN INSURANCE COMPANY
An insurance company incorporated under the laws of a foreign country, as opposed to a “foreign” insurance company which does business in states outside its own.
ALLIED LINES
Property insurance that is usually bought in conjunction with fire insurance; it includes wind, water damage and vandalism coverage.
ALTERNATIVE DISPUTE RESOLUTION / ADR
An alternative to going to court to settle disputes. Methods include arbitration, where disputing parties agree to be bound to the decision of an independent third party, and mediation, where a third party tries to arrange a settlement between the two sides.
ALTERNATIVE MARKETS
Nontraditional mechanisms used to finance risk. This includes captives, which are insurers owned by one or more noninsurers to provide owners with coverage. Risk-retention groups, formed by members of similar professions or businesses to obtain liability insurance and selfinsurance, are also included.
ANNUAL ANNUITY CONTRACT FEE
Covers the cost of administering an annuity contract.
ANNUAL STATEMENT
Summary of an insurer’s or reinsurer’s financial operations for a particular year, including a balance sheet. It is filed with the state insurance department of each jurisdiction in which the company is licensed to conduct business.
ANNUITANT
The person who receives the income from an annuity contract. Usually the owner of the contract or his or her spouse.
ANNUITIZATION
The conversion of the account balance of a deferred annuity contract to income payments.
ANNUITY
A life insurance product that pays periodic income benefits for a specific period of time or over the course of the annuitant’s lifetime. There are two basic types of annuities: deferred and immediate. Deferred annuities allow assets to grow tax-deferred over time before being converted to payments to the annuitant. Immediate annuities allow payments to begin within about a year of purchase.
ANNUITY ACCUMULATION PHASE OR PERIOD
The period during which the owner of a deferred annuity makes payments to build up assets.
ANNUITY ADMINISTRATIVE CHARGES
Covers the cost of customer services for owners of variable annuities.
ANNUITY BENEFICIARY
In certain types of annuities, a person who receives annuity contract payments if the annuity owner, or annuitant, dies while payments are still due.
ANNUITY CERTAIN*
A type of annuity contract that pays periodic income benefits for a stated period of time, regardless of whether the annuitant lives or dies. Also known as period certain annuity. Contrast with straight life annuity. (See Payout options)
ANNUITY CONTRACT
An agreement similar to an insurance policy for other insurance products such as auto insurance.
ANNUITY CONTRACT OWNER
The person or entity that purchases an annuity and has all rights to the contract. Usually, but not always, the annuitant (the person who receives income from the contract).
ANNUITY COST*
A monetary amount that is equal to the present value of future periodic income payments under an annuity. (See Gross annuity cost; Income date; Net annuity cost)
ANNUITY DATE*
See Income date
ANNUITY DEATH BENEFITS
The guarantee that if an annuity contract owner dies before annuitization (the switchover from the savings to the payment phase) the beneficiary will receive the value of the annuity that is due.
ANNUITY INSURANCE CHARGES
Covers administrative and mortality and expense risk costs.
ANNUITY INVESTMENT MANAGEMENT FEE
The fee paid for the management of variable annuity invested assets.
ANNUITY ISSUER
The insurance company that issues the annuity.
ANNUITY PROSPECTUS
Legal document providing detailed information about variable annuity contracts. Must be offered to each prospective buyer.
ANNUITY PURCHASE RATE
The cost of an annuity based on such factors as the age and gender of the contract owner.
ANTISELECTION*
The tendency of individuals who suspect or know they are more likely than average to experience loss to apply for or renew insurance to a greater extent than people who lack such knowledge of probable loss. Also known as adverse selection and selection against the company.
ANTITRUST LAWS
Laws that prohibit companies from working as a group to set prices, restrict supplies or stop competition in the marketplace. The insurance industry is subject to state antitrust laws but has a limited exemption from federal antitrust laws. This exemption, set out in the McCarran- Ferguson Act, permits insurers to jointly develop common insurance forms and share loss data to help them price policies.
APPORTIONMENT
The dividing of a loss proportionately among two or more insurers that cover the same loss.
APPRAISAL
A survey to determine a property’s insurable value, or the amount of a loss.
ARBITRATION
Procedure in which an insurance company and the insured or a vendor agree to settle a claim dispute by accepting a decision made by a third party.
ARSON
The deliberate setting of a fire.
ASSET-BACKED SECURITIES
Bonds that represent pools of loans of similar types, duration and interest rates. Almost any loan with regular repayments of principal and interest can be securitized, from auto loans and equipment leases to credit card receivables and mortgages.
ASSETS
Property owned, in this case by an insurance company, including stocks, bonds and real estate. Insurance accounting is concerned with solvency and the ability to pay claims. State insurance laws therefore require a conservative valuation of assets, prohibiting insurance companies from listing assets on their balance sheets whose values are uncertain, such as furniture, fixtures, debit balances and accounts receivable that are more than 90 days past due. (See Admitted assets)
ASSIGNED RISK PLANS
Facilities through which drivers can obtain auto insurance if they are unable to buy it in the regular or voluntary market. These are the most well-known type of residual auto insurance market, which exist in every state. In an assigned risk plan, all insurers selling auto insurance in the state are assigned these drivers to insure, based on the amount of insurance they sell in the regular market. (See Residual market)
ASSIGNMENT*
An agreement under which one party—the assignor—transfers some or all of his ownership rights in a particular property, such as a life insurance policy or an annuity contract, to another party—the assignee. (See Absolute assignment; Collateral assignment)
ASSOCIATION GROUP*
A type of group that generally is eligible for group insurance and that consists of members of an association of individuals formed for a purpose other than to obtain insurance coverage, such as teachers’ associations and physicians’ associations.
AUTO INSURANCE POLICY
There are basically six different types of coverages. Some may be required by law. Others are optional. They are:
1. 1. Bodily injury liability, for injuries the policyholder causes to someone else.
2. 2. Medical payments or Personal Injury Protection (PIP) for treatment of injuries to the driver and passengers of the policyholder’s car.
3. 3. Property damage liability, for damage the policyholder causes to someone else’s property.
4. 4. Collision, for damage to the policyholder’s car from a collision.
5. 5. Comprehensive, for damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, and riots), and theft.
6. 6. Uninsured motorists coverage, for costs resulting from an accident involving a hit-and-run driver or a driver who does not have insurance.
AUTO INSURANCE PREMIUM
The price an insurance company charges for coverage, based on the frequency and cost of potential accidents, theft and other losses. Prices vary from company to company, as with any product or service.
Premiums also vary depending on the amount and type of coverage purchased; the make and model of the car; and the insured’s driving record, years of driving and the number of miles the car is driven per year. Other factors taken into account include the driver’s age and gender, where the car is most likely to be driven and the times of day—rush hour in an urban neighborhood or leisure time driving in rural areas, for example. Some insurance companies may also use credit history related information. (See Insurance score)
AVIATION INSURANCE
Commercial airlines hold property insurance on airplanes and liability insurance for negligent acts that result in injury or property damage to passengers or others. Damage is covered on the ground and in the air. The policy limits the geographical area and individual pilots covered.
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B-SHARE VARIABLE ANNUITY
A form of variable annuity contract with no initial sales charge but if the contract is cancelled the holder pays deferred sales charges (usually from 5 to 7 percent the first year, declining to zero after from 5 to 7 years). The most common form of annuity contract.
BALANCE SHEET
Provides a snapshot of a company’s financial condition at one point in time. It shows assets, including investments and reinsurance, and liabilities, such as loss reserves to pay claims in the future, as of a certain date. It also states a company’s equity, known as policyholder surplus. Changes in that surplus are one indicator of an insurer’s financial standing.
BANK HOLDING COMPANY
A company that owns or controls one or more banks. The Federal Reserve has responsibility for regulating and supervising bank holding company activities, such as approving acquisitions and mergers and inspecting the operations of such companies. This authority applies even though a bank owned by a holding company may be under the primary supervision of the Comptroller of the Currency or the FDIC.
BASIS POINT
0.01 percent of the yield of a mortgage, bond or note. The smallest measure used.
BEACH AND WINDSTORM PLANS
State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX) offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Georgia and New York provide this kind of coverage for windstorm and hail in certain coastal communities through other property pools. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses. (See Fair access to insurance requirements plans / FAIR plans; Residual market)
BENEFICIARY*
The person or legal entity the owner of an insurance policy names to receive the policy benefit if the event insured against occurs. (See Annuity beneficiary; Contingent beneficiary; Irrevocable beneficiary)
BINDER
Temporary authorization of coverage issued prior to the actual insurance policy.
BLANKET INSURANCE
Coverage for more than one type of property at one location or one type of property at more than one location. Example: chain store
BODILY INJURY LIABILITY COVERAGE
Portion of an auto insurance policy that covers injuries the policyholder causes to someone else.
BOILER AND MACHINERY INSURANCE
Often called Equipment Breakdown, or Systems Breakdown insurance. Commercial insurance that covers damage caused by the malfunction or breakdown of boilers, and a vast array of other equipment including air conditioners, heating, electrical, telephone and computer systems.
BOND
A security that obligates the issuer to pay interest at specified intervals and to repay the principal amount of the loan at maturity. In insurance, a form of suretyship. Bonds of various types guarantee a payment or a reimbursement for financial losses resulting from dishonesty, failure to perform and other acts.
BOND RATING
An evaluation of a bond’s financial strength, conducted by such major ratings agencies as Standard & Poor’s and Moody’s Investors Service.
BOOK OF BUSINESS
Total amount of insurance on an insurer’s books at a particular point in time.
BROKER
An intermediary between a customer and an insurance company. Brokers typically search the market for coverage appropriate to their clients. They work on commission and usually sell commercial, not personal, insurance. In life insurance, agents must be licensed as securities brokers/dealers to sell variable annuities, which are similar to stock market-based investments.
BURGLARY AND THEFT INSURANCE
Insurance for the loss of property due to burglary, robbery or larceny. It is provided in a standard homeowners policy and in a business multiple peril policy.
BUSINESS INCOME AND EXTRA EXPENSE INSURANCE (also known as BUSINESS INTERRUPTION INSURANCE)
Commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time that a business must stay closed while the premises are being restored because of physical damage from a covered peril, such as a fire. It also may cover financial losses that may occur if civil authorities limit access to an area after a disaster and their actions prevent customers from reaching the business premises. Depending on the policy, civil authorities coverage may start after a waiting period and last for two or more weeks.
BUSINESSOWNERS POLICY / BOP
A policy that combines property, liability and business interruption coverages for small- to medium-sized businesses. Coverage is generally cheaper than if purchased through separate insurance policies
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C-SHARE VARIABLE ANNUITIES
A form of variable annuity contract where the contract holder pays no sales fee up front or surrender charges. Owners can claim full liquidity at any time.
CAPACITY
The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite based on its financial condition. The adequacy of an insurer’s capital relative to its exposure to loss is an important measure of solvency.
A property/casualty insurer must maintain a certain level of capital and policyholder surplus to underwrite risks. This capital is known as capacity. When the industry is hit by high losses, such as after the World Trade Center terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and or raising additional capital. When there is excess capacity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits in an effort to increase profitability. Policyholder surplus is sometimes used as a measure of capacity.
CAPITAL
Shareholder’s equity (for publicly traded insurance companies) and retained earnings (for mutual insurance companies). There is no general measure of capital adequacy for property/casualty insurers. Capital adequacy is linked to the riskiness of an insurer’s business. A company underwriting medical device manufacturers needs a larger cushion of capital than a company writing Main Street business, for example. (See Risk-based capital; Solvency; Surplus)
CAPITAL MARKETS
The markets in which equities and debt are traded. (See Securitization of insurance risk)
CAPTIVE AGENT
A person who represents only one insurance company and is restricted by agreement from submitting business to any other company, unless it is first rejected by the agent’s captive company. (See Exclusive agent)
CAPTIVES
Insurers that are created and wholly owned by one or more non-insurers, to provide the owners with coverage. A form of self-insurance.
CAR YEAR
Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance.
CASE MANAGEMENT
A system of coordinating medical services to treat a patient, improve care and reduce cost. A case manager coordinates health care delivery for patients.
CASH DIVIDEND OPTION*
For participating insurance policies, a dividend option under which the insurer sends the policy owner a check in the amount of the policy dividend. (See Dividend; Policy dividend options)
CASH PAYMENT OPTION*
One of several nonforfeiture options included in life insurance policies and some annuity contracts that allows a policy owner to receive the cash surrender value of a life insurance policy or an annuity contract in a single payment. Also known as cash surrender option. (See Cash surrender value; Nonforfeiture options)
CASH SURRENDER VALUE*
1. For life insurance, the amount, before adjustments for factors such as policy loans, that the owner of a permanent life insurance policy is entitled to receive if the policy does not remain in force until the insured’s death.
2. For annuities, the amount of a deferred annuity’s accumulated value, less any surrender charges, that the contract holder is entitled to receive if the policy is surrendered during its accumulation period. Also known as cash value and surrender value.
CASH VALUE*
See Cash surrender value
CATASTROPHE
Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million
CATASTROPHE BONDS
Risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catastrophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk. (See Securitization of insurance risk).
CATASTROPHE DEDUCTIBLE
A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level.
CATASTROPHE FACTOR
Probability of catastrophic loss, based on the total number of catastrophes in a state over a 40-year period.
CATASTROPHE MODEL
Using computers, a method to mesh long-term disaster information with current demographic, building and other data to determine the potential cost of natural disasters and other catastrophic losses for a given geographic area.
CATASTROPHE REINSURANCE
Reinsurance for catastrophic losses. The insurance industry is able to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks because losses are spread among thousands of companies including catastrophe reinsurers who operate on a global basis. Insurers’ ability and willingness to sell insurance fluctuates with the availability and cost of catastrophe reinsurance. After major disasters, such as Hurricane Andrew and the World Trade Center terrorist attack, the availability of catastrophe reinsurance becomes extremely limited. Claims deplete reinsurers’ capital and, as a result, companies are more selective in the type and amount of risks they assume. In addition, with available supply limited, prices for reinsurance rise. This contributes to an overall increase in prices for property insurance.
CELLPHONE INSURANCE
Separate insurance provided to cover cellphones for damage or theft. Policies are often sold with the cellphones themselves.
CHARTERED FINANCIAL CONSULTANT / ChFC
A professional designation given by The American College to financial services professionals who complete courses in financial planning.
CHARTERED LIFE UNDERWRITER / CLU
A professional designation by The American College for those who pass business examinations on insurance, investments and taxation, and have life insurance planning experience.
CHARTERED PROPERTY/CASUALTY UNDERWRITER / CPCU
A professional designation given by the American Institute for Chartered Property Casualty Underwriters. National examinations and three years of work experience are required.
CLAIMS MADE POLICY
A form of insurance that pays claims presented to the insurer during the term of the policy or within a specific term after its expiration. It limits liability insurers’ exposure to unknown future liabilities. (See Occurrence policy)
COBRA
Short for Consolidated Omnibus Budget Reconciliation Act. A federal law under which group health plans sponsored by employers with 20 or more employees must offer continuation of coverage to employees who leave their jobs and their dependents. The employee must pay the entire premium. Coverage can be extended up to 18 months. Surviving dependents can receive longer coverage.
COINSURANCE
In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.
COLLATERAL
Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. Also called security.
COLLATERAL ASSIGNMENT*
A temporary transfer of some of the ownership rights in a particular property, such as a life insurance policy or an annuity contract, as collateral for a loan. The transfer is made on the condition that upon payment of the debt for which the contract is collateral, all transferred rights shall revert back to the original owner. Contrast with absolute assignment.
COLLATERAL SOURCE RULE
Bars the introduction of information that indicates a person has been compensated or reimbursed by a source other than the defendant in civil actions related to negligence or other liability.
COLLISION COVERAGE
Portion of an auto insurance policy that covers the damage to the policyholder’s car from a collision.
COMBINED RATIO
Percentage of each premium dollar a property/casualty insurer spends on claims and expenses. A decrease in the combined ratio means financial results are improving; an increase means they are deteriorating.
COMMERCIAL GENERAL LIABILITY INSURANCE / CGL
A broad commercial policy that covers all liability exposures of a business that are not specifically excluded. Coverage includes product liability, completed operations, premises and operations, and independent contractors.
COMMERCIAL LINES
Products designed for and bought by businesses. Among the major coverages are boiler and machinery, business income, commercial auto, comprehensive general liability, directors and officers liability, fire and allied lines, inland marine, medical malpractice liability, product liability, professional liability, surety and fidelity, and workers compensation. Most of these commercial coverages can be purchased separately except business income, which must be added to a fire insurance (property) policy. (See Commercial multiple peril policy)
COMMERCIAL MULTIPLE PERIL POLICY
Package policy that includes property, boiler and machinery, crime and general liability coverages.
COMMERCIAL PAPER
Short-term, unsecured, and usually discounted promissory note issued by commercial firms and financial companies, often to finance current business. Commercial paper, which is rated by debt rating agencies, is sold through dealers or directly placed with an investor.
COMMISSION
Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer, and the marketing methods.
COMMUNITY RATING LAWS
Enacted in several states on health insurance policies. Insurers are required to accept all applicants for coverage and charge all applicants the same premium for the same coverage regardless of age or health. Premiums are based on the rate determined by the geographic region’s health and demographic profile.
COMMUTATIVE CONTRACT*
An agreement under which the contracting parties specify the values that they will exchange; moreover, the parties generally exchange items or services that they think are of relatively equal value. Contrast with aleatory contract.
COMPETITIVE REPLACEMENT PARTS
See Crash parts; Generic auto parts
COMPETITIVE STATE FUND
A facility established by a state to sell workers compensation insurance in competition with private insurers.
COMPLAINT RATIO
A measure used by some state insurance departments to track consumer complaints against insurance companies. Generally, it is stated as the number of complaints upheld against an insurance company, as a percentage of premiums written. In some states, complaints from medical providers over the promptness of payments may also be included.
COMPLETED OPERATIONS COVERAGE
Pays for bodily injury or property damage caused by a completed project or job. Protects a business that sells a service against liability claims.
COMPREHENSIVE COVERAGE
Portion of an auto insurance policy that covers damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods and riots) and theft.
COMPULSORY AUTO INSURANCE
The minimum amount of auto liability insurance that meets a state law. Financial responsibility laws in every state require all automobile drivers to show proof, after an accident, of their ability to pay damages up to the state minimum. In compulsory liability states this proof, which is usually in the form of an insurance policy, is required before you can legally drive a car.
CONTESTABLE PERIOD*
The time during which an insurer has the right to cancel or rescind an insurance policy if the application contained a material misrepresentation. (See Incontestability provision)
CONTINGENT BENEFICIARY*
The party designated to receive the proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured. Also known as secondary beneficiary and successor beneficiary. (See Primary beneficiary)
CONTINGENT LIABILITY
Liability of individuals, corporations, or partnerships for accidents caused by people other than employees for whose acts or omissions the corporations or partnerships are responsible.
CONVERTIBLE TERM INSURANCE POLICY*
A term life insurance policy that gives the policy owner the right to convert the policy to a permanent plan of insurance.
COVERAGE
Synonym for insurance.
CRASH PARTS
Sheet metal parts that are most often damaged in a car crash. (See Generic auto parts)
CREDIT
The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
CREDIT DERIVATIVES
A contract that enables a user, such as a bank, to better manage its credit risk. A way of transferring credit risk to another party.
CREDIT ENHANCEMENT
A technique to lower the interest payments on a bond by raising the issue’s credit rating, often through insurance in the form of a financial guarantee or with standby letters of credit issued by a bank.
CREDIT INSURANCE
Commercial coverage against losses resulting from the failure of business debtors to pay their obligation to the insured, usually due to insolvency. The coverage is geared to manufacturers, wholesalers and service providers who may be dependent on a few accounts and therefore could lose significant income in the event of an insolvency.
CREDIT LIFE INSURANCE
Life insurance coverage on a borrower designed to repay the balance of a loan in the event the borrower dies before the loan is repaid. It may also include disablement and can be offered as an option in connection with credit cards and auto loans.
CREDIT RATING
See Bond rating
CREDIT SCORE
The number produced by an analysis of an individual’s credit history. The use of credit information affects all consumers in many ways, including getting a job, finding a place to live, securing a loan, getting telephone service and buying insurance. Credit history is routinely reviewed by insurers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety, which can lead to more accidents and more claims. Auto and home insurers may use information in a credit history to produce an insurance score. Insurance scores may be used in underwriting and rating insurance policies. (See Insurance score)
CRIME INSURANCE
Term referring to property coverages for the perils of burglary, theft and robbery.
CRITICAL ILLNESS (CI) INSURANCE*
A type of individual health insurance that pays a lump-sum benefit when the insured is diagnosed with a specified illness. Also known as critical diagnosis insurance. Contrast with specified disease coverage.
CROP-HAIL INSURANCE
Protection against damage to growing crops from hail, fire or lightning provided by the private market. By contrast, multiple peril crop insurance covers a wider range of yield reducing conditions, such as drought and insect infestation, and is subsidized by the federal government.
CURRENT ASSUMPTION WHOLE LIFE INSURANCE*
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D
DEATH BENEFIT*
(1) For a life insurance contract, the amount of money paid by an insurer to a beneficiary when a person insured under the life insurance policy dies. (2) For an annuity contract, the amount of money paid to a beneficiary if the contract owner dies before the annuity payments begin.
DECLARATION
Part of a property or liability insurance policy that states the name and address of policyholder, property insured, its location and description, the policy period, premiums and supplemental information. Referred to as the “dec page.”
DECLINED RISK CLASS*
In insurance underwriting, the group of proposed insureds whose impairments or anticipated extra mortality are so great that an insurer cannot provide insurance coverage to them at an affordable cost. Also known as uninsurable class. Contrast with preferred risk class, standard risk class and substandard risk class.
DECREASING TERM LIFE INSURANCE*
Term life insurance that provides a death benefit that decreases in amount over the policy term. Contrast with increasing term life insurance.
DEDUCTIBLE
The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.
DEFERRED ANNUITY
An annuity contract, also referred to as an investment annuity, that is purchased either with a single tax-deferred premium or with periodic tax-deferred premiums over time. Payments begin at a predetermined point in time, such as retirement. Money contributed to such an annuity is intended primarily to grow tax-deferred for future use.
DEFINED BENEFIT PLAN
A retirement plan under which pension benefits are fixed in advance by a formula based generally on years of service to the company multiplied by a specific percentage of wages, usually average earnings over that period or highest average earnings over the final years with the company.
DEFINED CONTRIBUTION PLAN
An employee benefit plan under which the employer sets up benefit accounts and contributions are made to it by the employer and by the employee. The employer usually matches the employee’s contribution up to a stated limit.
DEMAND DEPOSIT
Customer assets that are held in a checking account. Funds can be readily withdrawn by check, “on demand.”
DEMUTUALIZATION
The conversion of insurance companies from mutual companies owned by their policyholders into publicly traded stock companies.
DEPOSITORY INSTITUTION
Financial institutions that obtain their funds mainly through deposits from the public. They include commercial banks, savings and loan associations, savings banks and credit unions.
DEREGULATION
In insurance, reducing regulatory control over insurance rates and forms. Commercial insurance for businesses of a certain size has been deregulated in many states.
DERIVATIVES
Contracts that derive their value from an underlying financial asset, such as publicly traded securities and foreign currencies. Often used as a hedge against changes in value.
DIFFERENCE IN CONDITIONS
Policy designed to fill in gaps in a business’s commercial property insurance coverage. There is no standard policy. Policies are specifically tailored to the policyholder’s needs.
DIMINUTION OF VALUE
The idea that a vehicle loses value after it has been damaged in an accident and repaired.
DIRECT PREMIUMS
Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their reinsurers.
DIRECT SALES/ DIRECT RESPONSE
Method of selling insurance directly to the insured through an insurance company’s own employees, through the mail, by telephone or via the Internet. This is in lieu of using captive or exclusive agents.
DIRECT WRITERS
Insurance companies that sell directly to the public using exclusive agents or their own employees, through the mail, by telephone or via the Internet. Large insurers, whether predominately direct writers or agency companies, are increasingly using many different channels to sell insurance. In reinsurance, denotes reinsurers that deal directly with the insurance companies they reinsure without using a broker.
DIRECTORS AND OFFICERS LIABILITY INSURANCE/D&O
Directors and officers liability insurance (D&O) covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in suits against the company. There are a variety of D&O coverages. Corporate reimbursement coverage indemnifies directors and officers of the organization. Side-A coverage provides D&O coverage for personal liability when directors and officers are not indemnified by the firm. Entity coverage, for claims made specifically against the company, is also available. D&O policies may be broadened to include coverage for employment practices liability.
DISABILITY INCOME INSURANCE*
A type of health insurance designed to compensate an insured person for a portion of the income lost because of a disabling injury or illness. Benefit payments are made either weekly or monthly for a specified period during the continuance of an insured’s disability. (See income protection insurance)
DISABILITY*
In disability insurance, the inability of an insured person to work due to an injury or sickness. Each disability policy has a definition of disability that must be satisfied in order for the insured to receive the policy’s benefits. (See Residual disability; Total disability)
DIVIDEND
Money returned to policyholders from an insurance company’s earnings. Considered a partial premium refund rather than a taxable distribution, reflecting the difference between the premium charged and actual losses. Many life insurance policies and some property/casualty policies pay dividends to their owners. Life insurance policies that pay dividends are called participating policies.
DIVIDEND ACCUMULATIONS OPTION*
See Accumulation at interest option.
DOMESTIC INSURANCE COMPANY
Term used by a state to refer to any company incorporated there.
DOUBLE INDEMNITY BENEFIT*
An accidental death benefit that is equal to the face amount of a life insurance policy’s basic death benefit and is paid when the insured’s death is the result of an accident as defined in the policy. (See Accidental death benefit/ADB)
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E
EARLY WARNING SYSTEM
EARLY WARNING SYSTEM A system of measuring insurers’ financial stability set up by insurance industry regulators. An example is the Insurance Regulatory Information System (IRIS), which uses financial ratios to identify insurers in need of regulatory attention.
EARNED PREMIUM
The portion of premium that applies to the expired part of the policy period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.
EARTHQUAKE INSURANCE
Covers a building and its contents, but includes a large percentage deductible on each. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies.
ECONOMIC LOSS
Total financial loss resulting from the death or disability of a wage earner, or from the destruction of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of restoring or replacing property and legal expenses. It does not include noneconomic losses, such as pain caused by an injury.
ELECTRONIC COMMERCE / ECOMMERCE
The sale of products such as insurance over the Internet.
ELIMINATION PERIOD
A kind of deductible or waiting period usually found in disability policies. It is counted in days from the beginning of the illness or injury.
EMPLOYEE DISHONESTY COVERAGE
Covers direct losses and damage to businesses resulting from the dishonest acts of employees. (See Fidelity bond)
EMPLOYEE RETIREMENT INCOME SECURITY ACT / ERISA
Federal legislation that protects employees by establishing minimum standards for private pension and welfare plans.
EMPLOYER’S LIABILITY
Part B of the workers compensation policy that provides coverage for lawsuits filed by injured employees who, under certain circumstances, can sue under common law. (See Exclusive remedy)
EMPLOYMENT PRACTICES LIABILITY COVERAGE
Liability insurance for employers that covers wrongful termination, discrimination and other violations of employees’ legal rights.
ENDORSEMENT
A written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions. Sometimes called a rider.
ENDOWMENT INSURANCE*
Life insurance that provides a policy benefit payable either when the insured dies or on a stated date if the insured is still alive on that date.
ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE
A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.
EQUITY
In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to bonds.
EQUITY INDEXED ANNUITY
Nontraditional fixed annuity. The specified rate of interest guarantees a fixed minimum rate of interest like traditional fixed annuities. At the same time, additional interest may be credited to policy values based upon positive changes, if any, in an established index such as the S&P 500. The amount of additional interest depends upon the particular design of the policy. They are sold by licensed insurance agents and regulated by state insurance departments.
ERRORS AND OMISSIONS COVERAGE / E&O
A professional liability policy covering the policyholder for negligent acts and omissions that may harm his or her clients.
ESCROW ACCOUNT
Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes.
EXCESS AND SURPLUS LINES
Property/casualty coverage that is not available from insurers licensed by the state (called admitted insurers) and must be purchased from a nonadmitted carrier.
EXCESS OF LOSS REINSURANCE
A contract between an insurer and a reinsurer, whereby the insurer agrees to pay a specified portion of a claim and the reinsurer to pay all or a part of the claim above that amount.
EXCLUSION
A provision in an insurance policy that eliminates coverage for certain risks, people, property classes or locations.
EXCLUSIVE AGENT
A captive agent, or a person who represents only one insurance company and is restricted by agreement from submitting business to any other company unless it is first rejected by the agent’s company. (See Captive agent)
EXCLUSIVE REMEDY
Part of the social contract that forms the basis for workers compensation statutes under which employers are responsible for work-related injury and disease, regardless of whether it was the employee’s fault and in return the injured employee gives up the right to sue when the employer’s negligence causes the harm.
EXPENSE RATIO
Percentage of each premium dollar that goes to insurers’ expenses including overhead, marketing and commissions.
EXPERIENCE
Record of losses.
EXPOSURE
Possibility of loss.
EXTENDED COVERAGE
An endorsement added to an insurance policy, or clause within a policy, that provides additional coverage for risks other than those in a basic policy.
EXTENDED REPLACEMENT COST COVERAGE
Pays a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent. Similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction. (See Guaranteed replacement cost coverage)
EXTENDED TERM INSURANCE OPTION*
One of several nonforfeiture options included in life insurance policies that allows the owner of a policy with a cash value to discontinue premium payments and to use the policy’s net cash value to purchase term insurance for the full coverage amount provided under the original policy for as long a term as the net cash value can provide. (See Nonforfeiture options)
A-SHARE VARIABLE ANNUITY
A form of variable annuity contract where the contract holder pays sales charges up front rather than eventually having to pay a surrender charge.
ABSOLUTE ASSIGNMENT*
An irrevocable transfer of complete ownership of a life insurance policy or an annuity from one party to another. Contrast with collateral assignment. (See Assignment)
ACCELERATED DEATH BENEFITS
A life insurance policy option that provides policy proceeds to insured individuals over their lifetimes, in the event of a terminal illness. This is in lieu of a traditional policy that pays beneficiaries after the insured’s death. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries.
ACCIDENT AND HEALTH INSURANCE
Coverage for accidental injury, accidental death, and related health expenses. Benefits will pay for preventative services, medical expenses and catastrophic care, with limits.
ACCIDENTAL DEATH AND DISMEMBERMENT (AD&D) BENEFIT*
A supplementary life insurance policy benefit that provides for an amount of money in addition to the policy’s basic death benefit. This additional amount is payable if the insured dies as the result of an accident or if the insured loses any two limbs or the sight in both eyes as the result of an accident.
ACCIDENTAL DEATH BENEFIT (ADB)*
A supplementary life insurance policy benefit that provides a death benefit in addition to the policy’s basic death benefit if the insured’s death occurs as the result of an accident. (See Double indemnity benefit)
ACCOUNT RECEIVABLES
See Receivables
ACCUMULATION AT INTEREST DIVIDEND OPTION*
An option, available to the owners of participating insurance policies, that allows a policyowner to leave policy dividends on deposit with the insurer and earn interest. (See Dividend)
ACTUAL CASH VALUE
A form of insurance that pays damages equal to the replacement value of damaged property minus depreciation. (See Replacement cost)
ACTUARY
An insurance professional skilled in the analysis, evaluation and management of statistical information. Evaluates insurance firms’ reserves, determines rates and rating methods, and determines other business and financial risks.
ADDITIONAL LIVING EXPENSES
Extra charges covered by homeowners policies over and above the policyholder’s customary living expenses. They kick in when the insured requires temporary shelter due to damage by a covered peril that makes the home temporarily uninhabitable.
ADDITIONAL TERM INSURANCE OPTION*
An option available to owners of participating insurance policies under which the insurer uses a policy dividend as a net single premium to purchase one-year term insurance on the insured’s life. Also known as fifth dividend option. (See Dividend; Policy dividend options)
ADJUSTABLE LIFE INSURANCE*
A form of life insurance that allows policyowners to vary the type of coverage provided by their policies as their insurance needs change.
ADJUSTER
An individual employed by a property/casualty insurer to evaluate losses and settle policyholder claims. These adjusters differ from public adjusters, who negotiate with insurers on behalf of policyholders, and receive a portion of a claims settlement. Independent adjusters are independent contractors who adjust claims for different insurance companies.
ADMITTED ASSETS
Assets recognized and accepted by state insurance laws in determining the solvency of insurers and reinsurers. To make it easier to assess an insurance company’s financial position, state statutory accounting rules do not permit certain assets to be included on the balance sheet. Only assets that can be easily sold in the event of liquidation or borrowed against, and receivables for which payment can be reasonably anticipated, are included in admitted assets. (See Assets)
ADMITTED COMPANY
An insurance company licensed and authorized to do business in a particular state.
ADVERSE SELECTION
The tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk. Insurers react either by charging higher premiums or not insuring at all, as in the case of floods. (Flood insurance is provided by the federal government and some private insurers, but is sold mostly through the private market.) In the case of natural disasters, such as earthquakes, adverse selection concentrates risk instead of spreading it. Insurance works best when risk is shared among large numbers of policyholders.
AFFINITY SALES
Selling insurance through groups such as professional and business associations.
AFTERMARKET PARTS
See Crash parts; Generic auto parts
AGENCY COMPANIES
Companies that market and sell products via independent agents.
AGENT
Insurance is sold by two types of agents: independent agents, who are self-employed, represent several insurance companies and are paid on commission; and exclusive or captive agents, who represent only one insurance company and are either salaried or work on commission. Insurance companies that use exclusive or captive agents are called direct writers.
ALEATORY CONTRACT*
A contract in which one party provides something of value to another party in exchange for a conditional promise, which is a promise that the other party will perform a stated act upon the occurrence of an uncertain event. Insurance contracts are aleatory because the policyowner pays premiums to the insurer, and in return the insurer promises to pay benefits if the event insured against occurs. Contrast with commutative contract.
ALIEN INSURANCE COMPANY
An insurance company incorporated under the laws of a foreign country, as opposed to a “foreign” insurance company which does business in states outside its own.
ALLIED LINES
Property insurance that is usually bought in conjunction with fire insurance; it includes wind, water damage and vandalism coverage.
ALTERNATIVE DISPUTE RESOLUTION / ADR
An alternative to going to court to settle disputes. Methods include arbitration, where disputing parties agree to be bound to the decision of an independent third party, and mediation, where a third party tries to arrange a settlement between the two sides.
ALTERNATIVE MARKETS
Nontraditional mechanisms used to finance risk. This includes captives, which are insurers owned by one or more noninsurers to provide owners with coverage. Risk-retention groups, formed by members of similar professions or businesses to obtain liability insurance and selfinsurance, are also included.
ANNUAL ANNUITY CONTRACT FEE
Covers the cost of administering an annuity contract.
ANNUAL STATEMENT
Summary of an insurer’s or reinsurer’s financial operations for a particular year, including a balance sheet. It is filed with the state insurance department of each jurisdiction in which the company is licensed to conduct business.
ANNUITANT
The person who receives the income from an annuity contract. Usually the owner of the contract or his or her spouse.
ANNUITIZATION
The conversion of the account balance of a deferred annuity contract to income payments.
ANNUITY
A life insurance product that pays periodic income benefits for a specific period of time or over the course of the annuitant’s lifetime. There are two basic types of annuities: deferred and immediate. Deferred annuities allow assets to grow tax-deferred over time before being converted to payments to the annuitant. Immediate annuities allow payments to begin within about a year of purchase.
ANNUITY ACCUMULATION PHASE OR PERIOD
The period during which the owner of a deferred annuity makes payments to build up assets.
ANNUITY ADMINISTRATIVE CHARGES
Covers the cost of customer services for owners of variable annuities.
ANNUITY BENEFICIARY
In certain types of annuities, a person who receives annuity contract payments if the annuity owner, or annuitant, dies while payments are still due.
ANNUITY CERTAIN*
A type of annuity contract that pays periodic income benefits for a stated period of time, regardless of whether the annuitant lives or dies. Also known as period certain annuity. Contrast with straight life annuity. (See Payout options)
ANNUITY CONTRACT
An agreement similar to an insurance policy for other insurance products such as auto insurance.
ANNUITY CONTRACT OWNER
The person or entity that purchases an annuity and has all rights to the contract. Usually, but not always, the annuitant (the person who receives income from the contract).
ANNUITY COST*
A monetary amount that is equal to the present value of future periodic income payments under an annuity. (See Gross annuity cost; Income date; Net annuity cost)
ANNUITY DATE*
See Income date
ANNUITY DEATH BENEFITS
The guarantee that if an annuity contract owner dies before annuitization (the switchover from the savings to the payment phase) the beneficiary will receive the value of the annuity that is due.
ANNUITY INSURANCE CHARGES
Covers administrative and mortality and expense risk costs.
ANNUITY INVESTMENT MANAGEMENT FEE
The fee paid for the management of variable annuity invested assets.
ANNUITY ISSUER
The insurance company that issues the annuity.
ANNUITY PROSPECTUS
Legal document providing detailed information about variable annuity contracts. Must be offered to each prospective buyer.
ANNUITY PURCHASE RATE
The cost of an annuity based on such factors as the age and gender of the contract owner.
ANTISELECTION*
The tendency of individuals who suspect or know they are more likely than average to experience loss to apply for or renew insurance to a greater extent than people who lack such knowledge of probable loss. Also known as adverse selection and selection against the company.
ANTITRUST LAWS
Laws that prohibit companies from working as a group to set prices, restrict supplies or stop competition in the marketplace. The insurance industry is subject to state antitrust laws but has a limited exemption from federal antitrust laws. This exemption, set out in the McCarran- Ferguson Act, permits insurers to jointly develop common insurance forms and share loss data to help them price policies.
APPORTIONMENT
The dividing of a loss proportionately among two or more insurers that cover the same loss.
APPRAISAL
A survey to determine a property’s insurable value, or the amount of a loss.
ARBITRATION
Procedure in which an insurance company and the insured or a vendor agree to settle a claim dispute by accepting a decision made by a third party.
ARSON
The deliberate setting of a fire.
ASSET-BACKED SECURITIES
Bonds that represent pools of loans of similar types, duration and interest rates. Almost any loan with regular repayments of principal and interest can be securitized, from auto loans and equipment leases to credit card receivables and mortgages.
ASSETS
Property owned, in this case by an insurance company, including stocks, bonds and real estate. Insurance accounting is concerned with solvency and the ability to pay claims. State insurance laws therefore require a conservative valuation of assets, prohibiting insurance companies from listing assets on their balance sheets whose values are uncertain, such as furniture, fixtures, debit balances and accounts receivable that are more than 90 days past due. (See Admitted assets)
ASSIGNED RISK PLANS
Facilities through which drivers can obtain auto insurance if they are unable to buy it in the regular or voluntary market. These are the most well-known type of residual auto insurance market, which exist in every state. In an assigned risk plan, all insurers selling auto insurance in the state are assigned these drivers to insure, based on the amount of insurance they sell in the regular market. (See Residual market)
ASSIGNMENT*
An agreement under which one party—the assignor—transfers some or all of his ownership rights in a particular property, such as a life insurance policy or an annuity contract, to another party—the assignee. (See Absolute assignment; Collateral assignment)
ASSOCIATION GROUP*
A type of group that generally is eligible for group insurance and that consists of members of an association of individuals formed for a purpose other than to obtain insurance coverage, such as teachers’ associations and physicians’ associations.
AUTO INSURANCE POLICY
There are basically six different types of coverages. Some may be required by law. Others are optional. They are:
1. 1. Bodily injury liability, for injuries the policyholder causes to someone else.
2. 2. Medical payments or Personal Injury Protection (PIP) for treatment of injuries to the driver and passengers of the policyholder’s car.
3. 3. Property damage liability, for damage the policyholder causes to someone else’s property.
4. 4. Collision, for damage to the policyholder’s car from a collision.
5. 5. Comprehensive, for damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, and riots), and theft.
6. 6. Uninsured motorists coverage, for costs resulting from an accident involving a hit-and-run driver or a driver who does not have insurance.
AUTO INSURANCE PREMIUM
The price an insurance company charges for coverage, based on the frequency and cost of potential accidents, theft and other losses. Prices vary from company to company, as with any product or service.
Premiums also vary depending on the amount and type of coverage purchased; the make and model of the car; and the insured’s driving record, years of driving and the number of miles the car is driven per year. Other factors taken into account include the driver’s age and gender, where the car is most likely to be driven and the times of day—rush hour in an urban neighborhood or leisure time driving in rural areas, for example. Some insurance companies may also use credit history related information. (See Insurance score)
AVIATION INSURANCE
Commercial airlines hold property insurance on airplanes and liability insurance for negligent acts that result in injury or property damage to passengers or others. Damage is covered on the ground and in the air. The policy limits the geographical area and individual pilots covered.
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B
SEARCH:
B-SHARE VARIABLE ANNUITY
A form of variable annuity contract with no initial sales charge but if the contract is cancelled the holder pays deferred sales charges (usually from 5 to 7 percent the first year, declining to zero after from 5 to 7 years). The most common form of annuity contract.
BALANCE SHEET
Provides a snapshot of a company’s financial condition at one point in time. It shows assets, including investments and reinsurance, and liabilities, such as loss reserves to pay claims in the future, as of a certain date. It also states a company’s equity, known as policyholder surplus. Changes in that surplus are one indicator of an insurer’s financial standing.
BANK HOLDING COMPANY
A company that owns or controls one or more banks. The Federal Reserve has responsibility for regulating and supervising bank holding company activities, such as approving acquisitions and mergers and inspecting the operations of such companies. This authority applies even though a bank owned by a holding company may be under the primary supervision of the Comptroller of the Currency or the FDIC.
BASIS POINT
0.01 percent of the yield of a mortgage, bond or note. The smallest measure used.
BEACH AND WINDSTORM PLANS
State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX) offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Georgia and New York provide this kind of coverage for windstorm and hail in certain coastal communities through other property pools. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses. (See Fair access to insurance requirements plans / FAIR plans; Residual market)
BENEFICIARY*
The person or legal entity the owner of an insurance policy names to receive the policy benefit if the event insured against occurs. (See Annuity beneficiary; Contingent beneficiary; Irrevocable beneficiary)
BINDER
Temporary authorization of coverage issued prior to the actual insurance policy.
BLANKET INSURANCE
Coverage for more than one type of property at one location or one type of property at more than one location. Example: chain store
BODILY INJURY LIABILITY COVERAGE
Portion of an auto insurance policy that covers injuries the policyholder causes to someone else.
BOILER AND MACHINERY INSURANCE
Often called Equipment Breakdown, or Systems Breakdown insurance. Commercial insurance that covers damage caused by the malfunction or breakdown of boilers, and a vast array of other equipment including air conditioners, heating, electrical, telephone and computer systems.
BOND
A security that obligates the issuer to pay interest at specified intervals and to repay the principal amount of the loan at maturity. In insurance, a form of suretyship. Bonds of various types guarantee a payment or a reimbursement for financial losses resulting from dishonesty, failure to perform and other acts.
BOND RATING
An evaluation of a bond’s financial strength, conducted by such major ratings agencies as Standard & Poor’s and Moody’s Investors Service.
BOOK OF BUSINESS
Total amount of insurance on an insurer’s books at a particular point in time.
BROKER
An intermediary between a customer and an insurance company. Brokers typically search the market for coverage appropriate to their clients. They work on commission and usually sell commercial, not personal, insurance. In life insurance, agents must be licensed as securities brokers/dealers to sell variable annuities, which are similar to stock market-based investments.
BURGLARY AND THEFT INSURANCE
Insurance for the loss of property due to burglary, robbery or larceny. It is provided in a standard homeowners policy and in a business multiple peril policy.
BUSINESS INCOME AND EXTRA EXPENSE INSURANCE (also known as BUSINESS INTERRUPTION INSURANCE)
Commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time that a business must stay closed while the premises are being restored because of physical damage from a covered peril, such as a fire. It also may cover financial losses that may occur if civil authorities limit access to an area after a disaster and their actions prevent customers from reaching the business premises. Depending on the policy, civil authorities coverage may start after a waiting period and last for two or more weeks.
BUSINESSOWNERS POLICY / BOP
A policy that combines property, liability and business interruption coverages for small- to medium-sized businesses. Coverage is generally cheaper than if purchased through separate insurance policies
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C-SHARE VARIABLE ANNUITIES
A form of variable annuity contract where the contract holder pays no sales fee up front or surrender charges. Owners can claim full liquidity at any time.
CAPACITY
The supply of insurance available to meet demand. Capacity depends on the industry’s financial ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite based on its financial condition. The adequacy of an insurer’s capital relative to its exposure to loss is an important measure of solvency.
A property/casualty insurer must maintain a certain level of capital and policyholder surplus to underwrite risks. This capital is known as capacity. When the industry is hit by high losses, such as after the World Trade Center terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and or raising additional capital. When there is excess capacity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits in an effort to increase profitability. Policyholder surplus is sometimes used as a measure of capacity.
CAPITAL
Shareholder’s equity (for publicly traded insurance companies) and retained earnings (for mutual insurance companies). There is no general measure of capital adequacy for property/casualty insurers. Capital adequacy is linked to the riskiness of an insurer’s business. A company underwriting medical device manufacturers needs a larger cushion of capital than a company writing Main Street business, for example. (See Risk-based capital; Solvency; Surplus)
CAPITAL MARKETS
The markets in which equities and debt are traded. (See Securitization of insurance risk)
CAPTIVE AGENT
A person who represents only one insurance company and is restricted by agreement from submitting business to any other company, unless it is first rejected by the agent’s captive company. (See Exclusive agent)
CAPTIVES
Insurers that are created and wholly owned by one or more non-insurers, to provide the owners with coverage. A form of self-insurance.
CAR YEAR
Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance.
CASE MANAGEMENT
A system of coordinating medical services to treat a patient, improve care and reduce cost. A case manager coordinates health care delivery for patients.
CASH DIVIDEND OPTION*
For participating insurance policies, a dividend option under which the insurer sends the policy owner a check in the amount of the policy dividend. (See Dividend; Policy dividend options)
CASH PAYMENT OPTION*
One of several nonforfeiture options included in life insurance policies and some annuity contracts that allows a policy owner to receive the cash surrender value of a life insurance policy or an annuity contract in a single payment. Also known as cash surrender option. (See Cash surrender value; Nonforfeiture options)
CASH SURRENDER VALUE*
1. For life insurance, the amount, before adjustments for factors such as policy loans, that the owner of a permanent life insurance policy is entitled to receive if the policy does not remain in force until the insured’s death.
2. For annuities, the amount of a deferred annuity’s accumulated value, less any surrender charges, that the contract holder is entitled to receive if the policy is surrendered during its accumulation period. Also known as cash value and surrender value.
CASH VALUE*
See Cash surrender value
CATASTROPHE
Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million
CATASTROPHE BONDS
Risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catastrophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk. (See Securitization of insurance risk).
CATASTROPHE DEDUCTIBLE
A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level.
CATASTROPHE FACTOR
Probability of catastrophic loss, based on the total number of catastrophes in a state over a 40-year period.
CATASTROPHE MODEL
Using computers, a method to mesh long-term disaster information with current demographic, building and other data to determine the potential cost of natural disasters and other catastrophic losses for a given geographic area.
CATASTROPHE REINSURANCE
Reinsurance for catastrophic losses. The insurance industry is able to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks because losses are spread among thousands of companies including catastrophe reinsurers who operate on a global basis. Insurers’ ability and willingness to sell insurance fluctuates with the availability and cost of catastrophe reinsurance. After major disasters, such as Hurricane Andrew and the World Trade Center terrorist attack, the availability of catastrophe reinsurance becomes extremely limited. Claims deplete reinsurers’ capital and, as a result, companies are more selective in the type and amount of risks they assume. In addition, with available supply limited, prices for reinsurance rise. This contributes to an overall increase in prices for property insurance.
CELLPHONE INSURANCE
Separate insurance provided to cover cellphones for damage or theft. Policies are often sold with the cellphones themselves.
CHARTERED FINANCIAL CONSULTANT / ChFC
A professional designation given by The American College to financial services professionals who complete courses in financial planning.
CHARTERED LIFE UNDERWRITER / CLU
A professional designation by The American College for those who pass business examinations on insurance, investments and taxation, and have life insurance planning experience.
CHARTERED PROPERTY/CASUALTY UNDERWRITER / CPCU
A professional designation given by the American Institute for Chartered Property Casualty Underwriters. National examinations and three years of work experience are required.
CLAIMS MADE POLICY
A form of insurance that pays claims presented to the insurer during the term of the policy or within a specific term after its expiration. It limits liability insurers’ exposure to unknown future liabilities. (See Occurrence policy)
COBRA
Short for Consolidated Omnibus Budget Reconciliation Act. A federal law under which group health plans sponsored by employers with 20 or more employees must offer continuation of coverage to employees who leave their jobs and their dependents. The employee must pay the entire premium. Coverage can be extended up to 18 months. Surviving dependents can receive longer coverage.
COINSURANCE
In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.
COLLATERAL
Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. Also called security.
COLLATERAL ASSIGNMENT*
A temporary transfer of some of the ownership rights in a particular property, such as a life insurance policy or an annuity contract, as collateral for a loan. The transfer is made on the condition that upon payment of the debt for which the contract is collateral, all transferred rights shall revert back to the original owner. Contrast with absolute assignment.
COLLATERAL SOURCE RULE
Bars the introduction of information that indicates a person has been compensated or reimbursed by a source other than the defendant in civil actions related to negligence or other liability.
COLLISION COVERAGE
Portion of an auto insurance policy that covers the damage to the policyholder’s car from a collision.
COMBINED RATIO
Percentage of each premium dollar a property/casualty insurer spends on claims and expenses. A decrease in the combined ratio means financial results are improving; an increase means they are deteriorating.
COMMERCIAL GENERAL LIABILITY INSURANCE / CGL
A broad commercial policy that covers all liability exposures of a business that are not specifically excluded. Coverage includes product liability, completed operations, premises and operations, and independent contractors.
COMMERCIAL LINES
Products designed for and bought by businesses. Among the major coverages are boiler and machinery, business income, commercial auto, comprehensive general liability, directors and officers liability, fire and allied lines, inland marine, medical malpractice liability, product liability, professional liability, surety and fidelity, and workers compensation. Most of these commercial coverages can be purchased separately except business income, which must be added to a fire insurance (property) policy. (See Commercial multiple peril policy)
COMMERCIAL MULTIPLE PERIL POLICY
Package policy that includes property, boiler and machinery, crime and general liability coverages.
COMMERCIAL PAPER
Short-term, unsecured, and usually discounted promissory note issued by commercial firms and financial companies, often to finance current business. Commercial paper, which is rated by debt rating agencies, is sold through dealers or directly placed with an investor.
COMMISSION
Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer, and the marketing methods.
COMMUNITY RATING LAWS
Enacted in several states on health insurance policies. Insurers are required to accept all applicants for coverage and charge all applicants the same premium for the same coverage regardless of age or health. Premiums are based on the rate determined by the geographic region’s health and demographic profile.
COMMUTATIVE CONTRACT*
An agreement under which the contracting parties specify the values that they will exchange; moreover, the parties generally exchange items or services that they think are of relatively equal value. Contrast with aleatory contract.
COMPETITIVE REPLACEMENT PARTS
See Crash parts; Generic auto parts
COMPETITIVE STATE FUND
A facility established by a state to sell workers compensation insurance in competition with private insurers.
COMPLAINT RATIO
A measure used by some state insurance departments to track consumer complaints against insurance companies. Generally, it is stated as the number of complaints upheld against an insurance company, as a percentage of premiums written. In some states, complaints from medical providers over the promptness of payments may also be included.
COMPLETED OPERATIONS COVERAGE
Pays for bodily injury or property damage caused by a completed project or job. Protects a business that sells a service against liability claims.
COMPREHENSIVE COVERAGE
Portion of an auto insurance policy that covers damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods and riots) and theft.
COMPULSORY AUTO INSURANCE
The minimum amount of auto liability insurance that meets a state law. Financial responsibility laws in every state require all automobile drivers to show proof, after an accident, of their ability to pay damages up to the state minimum. In compulsory liability states this proof, which is usually in the form of an insurance policy, is required before you can legally drive a car.
CONTESTABLE PERIOD*
The time during which an insurer has the right to cancel or rescind an insurance policy if the application contained a material misrepresentation. (See Incontestability provision)
CONTINGENT BENEFICIARY*
The party designated to receive the proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured. Also known as secondary beneficiary and successor beneficiary. (See Primary beneficiary)
CONTINGENT LIABILITY
Liability of individuals, corporations, or partnerships for accidents caused by people other than employees for whose acts or omissions the corporations or partnerships are responsible.
CONVERTIBLE TERM INSURANCE POLICY*
A term life insurance policy that gives the policy owner the right to convert the policy to a permanent plan of insurance.
COVERAGE
Synonym for insurance.
CRASH PARTS
Sheet metal parts that are most often damaged in a car crash. (See Generic auto parts)
CREDIT
The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
CREDIT DERIVATIVES
A contract that enables a user, such as a bank, to better manage its credit risk. A way of transferring credit risk to another party.
CREDIT ENHANCEMENT
A technique to lower the interest payments on a bond by raising the issue’s credit rating, often through insurance in the form of a financial guarantee or with standby letters of credit issued by a bank.
CREDIT INSURANCE
Commercial coverage against losses resulting from the failure of business debtors to pay their obligation to the insured, usually due to insolvency. The coverage is geared to manufacturers, wholesalers and service providers who may be dependent on a few accounts and therefore could lose significant income in the event of an insolvency.
CREDIT LIFE INSURANCE
Life insurance coverage on a borrower designed to repay the balance of a loan in the event the borrower dies before the loan is repaid. It may also include disablement and can be offered as an option in connection with credit cards and auto loans.
CREDIT RATING
See Bond rating
CREDIT SCORE
The number produced by an analysis of an individual’s credit history. The use of credit information affects all consumers in many ways, including getting a job, finding a place to live, securing a loan, getting telephone service and buying insurance. Credit history is routinely reviewed by insurers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety, which can lead to more accidents and more claims. Auto and home insurers may use information in a credit history to produce an insurance score. Insurance scores may be used in underwriting and rating insurance policies. (See Insurance score)
CRIME INSURANCE
Term referring to property coverages for the perils of burglary, theft and robbery.
CRITICAL ILLNESS (CI) INSURANCE*
A type of individual health insurance that pays a lump-sum benefit when the insured is diagnosed with a specified illness. Also known as critical diagnosis insurance. Contrast with specified disease coverage.
CROP-HAIL INSURANCE
Protection against damage to growing crops from hail, fire or lightning provided by the private market. By contrast, multiple peril crop insurance covers a wider range of yield reducing conditions, such as drought and insect infestation, and is subsidized by the federal government.
CURRENT ASSUMPTION WHOLE LIFE INSURANCE*
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D
DEATH BENEFIT*
(1) For a life insurance contract, the amount of money paid by an insurer to a beneficiary when a person insured under the life insurance policy dies. (2) For an annuity contract, the amount of money paid to a beneficiary if the contract owner dies before the annuity payments begin.
DECLARATION
Part of a property or liability insurance policy that states the name and address of policyholder, property insured, its location and description, the policy period, premiums and supplemental information. Referred to as the “dec page.”
DECLINED RISK CLASS*
In insurance underwriting, the group of proposed insureds whose impairments or anticipated extra mortality are so great that an insurer cannot provide insurance coverage to them at an affordable cost. Also known as uninsurable class. Contrast with preferred risk class, standard risk class and substandard risk class.
DECREASING TERM LIFE INSURANCE*
Term life insurance that provides a death benefit that decreases in amount over the policy term. Contrast with increasing term life insurance.
DEDUCTIBLE
The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.
DEFERRED ANNUITY
An annuity contract, also referred to as an investment annuity, that is purchased either with a single tax-deferred premium or with periodic tax-deferred premiums over time. Payments begin at a predetermined point in time, such as retirement. Money contributed to such an annuity is intended primarily to grow tax-deferred for future use.
DEFINED BENEFIT PLAN
A retirement plan under which pension benefits are fixed in advance by a formula based generally on years of service to the company multiplied by a specific percentage of wages, usually average earnings over that period or highest average earnings over the final years with the company.
DEFINED CONTRIBUTION PLAN
An employee benefit plan under which the employer sets up benefit accounts and contributions are made to it by the employer and by the employee. The employer usually matches the employee’s contribution up to a stated limit.
DEMAND DEPOSIT
Customer assets that are held in a checking account. Funds can be readily withdrawn by check, “on demand.”
DEMUTUALIZATION
The conversion of insurance companies from mutual companies owned by their policyholders into publicly traded stock companies.
DEPOSITORY INSTITUTION
Financial institutions that obtain their funds mainly through deposits from the public. They include commercial banks, savings and loan associations, savings banks and credit unions.
DEREGULATION
In insurance, reducing regulatory control over insurance rates and forms. Commercial insurance for businesses of a certain size has been deregulated in many states.
DERIVATIVES
Contracts that derive their value from an underlying financial asset, such as publicly traded securities and foreign currencies. Often used as a hedge against changes in value.
DIFFERENCE IN CONDITIONS
Policy designed to fill in gaps in a business’s commercial property insurance coverage. There is no standard policy. Policies are specifically tailored to the policyholder’s needs.
DIMINUTION OF VALUE
The idea that a vehicle loses value after it has been damaged in an accident and repaired.
DIRECT PREMIUMS
Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their reinsurers.
DIRECT SALES/ DIRECT RESPONSE
Method of selling insurance directly to the insured through an insurance company’s own employees, through the mail, by telephone or via the Internet. This is in lieu of using captive or exclusive agents.
DIRECT WRITERS
Insurance companies that sell directly to the public using exclusive agents or their own employees, through the mail, by telephone or via the Internet. Large insurers, whether predominately direct writers or agency companies, are increasingly using many different channels to sell insurance. In reinsurance, denotes reinsurers that deal directly with the insurance companies they reinsure without using a broker.
DIRECTORS AND OFFICERS LIABILITY INSURANCE/D&O
Directors and officers liability insurance (D&O) covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in suits against the company. There are a variety of D&O coverages. Corporate reimbursement coverage indemnifies directors and officers of the organization. Side-A coverage provides D&O coverage for personal liability when directors and officers are not indemnified by the firm. Entity coverage, for claims made specifically against the company, is also available. D&O policies may be broadened to include coverage for employment practices liability.
DISABILITY INCOME INSURANCE*
A type of health insurance designed to compensate an insured person for a portion of the income lost because of a disabling injury or illness. Benefit payments are made either weekly or monthly for a specified period during the continuance of an insured’s disability. (See income protection insurance)
DISABILITY*
In disability insurance, the inability of an insured person to work due to an injury or sickness. Each disability policy has a definition of disability that must be satisfied in order for the insured to receive the policy’s benefits. (See Residual disability; Total disability)
DIVIDEND
Money returned to policyholders from an insurance company’s earnings. Considered a partial premium refund rather than a taxable distribution, reflecting the difference between the premium charged and actual losses. Many life insurance policies and some property/casualty policies pay dividends to their owners. Life insurance policies that pay dividends are called participating policies.
DIVIDEND ACCUMULATIONS OPTION*
See Accumulation at interest option.
DOMESTIC INSURANCE COMPANY
Term used by a state to refer to any company incorporated there.
DOUBLE INDEMNITY BENEFIT*
An accidental death benefit that is equal to the face amount of a life insurance policy’s basic death benefit and is paid when the insured’s death is the result of an accident as defined in the policy. (See Accidental death benefit/ADB)
------------------------------
E
EARLY WARNING SYSTEM
EARLY WARNING SYSTEM A system of measuring insurers’ financial stability set up by insurance industry regulators. An example is the Insurance Regulatory Information System (IRIS), which uses financial ratios to identify insurers in need of regulatory attention.
EARNED PREMIUM
The portion of premium that applies to the expired part of the policy period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.
EARTHQUAKE INSURANCE
Covers a building and its contents, but includes a large percentage deductible on each. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies.
ECONOMIC LOSS
Total financial loss resulting from the death or disability of a wage earner, or from the destruction of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of restoring or replacing property and legal expenses. It does not include noneconomic losses, such as pain caused by an injury.
ELECTRONIC COMMERCE / ECOMMERCE
The sale of products such as insurance over the Internet.
ELIMINATION PERIOD
A kind of deductible or waiting period usually found in disability policies. It is counted in days from the beginning of the illness or injury.
EMPLOYEE DISHONESTY COVERAGE
Covers direct losses and damage to businesses resulting from the dishonest acts of employees. (See Fidelity bond)
EMPLOYEE RETIREMENT INCOME SECURITY ACT / ERISA
Federal legislation that protects employees by establishing minimum standards for private pension and welfare plans.
EMPLOYER’S LIABILITY
Part B of the workers compensation policy that provides coverage for lawsuits filed by injured employees who, under certain circumstances, can sue under common law. (See Exclusive remedy)
EMPLOYMENT PRACTICES LIABILITY COVERAGE
Liability insurance for employers that covers wrongful termination, discrimination and other violations of employees’ legal rights.
ENDORSEMENT
A written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions. Sometimes called a rider.
ENDOWMENT INSURANCE*
Life insurance that provides a policy benefit payable either when the insured dies or on a stated date if the insured is still alive on that date.
ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE
A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.
EQUITY
In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to bonds.
EQUITY INDEXED ANNUITY
Nontraditional fixed annuity. The specified rate of interest guarantees a fixed minimum rate of interest like traditional fixed annuities. At the same time, additional interest may be credited to policy values based upon positive changes, if any, in an established index such as the S&P 500. The amount of additional interest depends upon the particular design of the policy. They are sold by licensed insurance agents and regulated by state insurance departments.
ERRORS AND OMISSIONS COVERAGE / E&O
A professional liability policy covering the policyholder for negligent acts and omissions that may harm his or her clients.
ESCROW ACCOUNT
Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes.
EXCESS AND SURPLUS LINES
Property/casualty coverage that is not available from insurers licensed by the state (called admitted insurers) and must be purchased from a nonadmitted carrier.
EXCESS OF LOSS REINSURANCE
A contract between an insurer and a reinsurer, whereby the insurer agrees to pay a specified portion of a claim and the reinsurer to pay all or a part of the claim above that amount.
EXCLUSION
A provision in an insurance policy that eliminates coverage for certain risks, people, property classes or locations.
EXCLUSIVE AGENT
A captive agent, or a person who represents only one insurance company and is restricted by agreement from submitting business to any other company unless it is first rejected by the agent’s company. (See Captive agent)
EXCLUSIVE REMEDY
Part of the social contract that forms the basis for workers compensation statutes under which employers are responsible for work-related injury and disease, regardless of whether it was the employee’s fault and in return the injured employee gives up the right to sue when the employer’s negligence causes the harm.
EXPENSE RATIO
Percentage of each premium dollar that goes to insurers’ expenses including overhead, marketing and commissions.
EXPERIENCE
Record of losses.
EXPOSURE
Possibility of loss.
EXTENDED COVERAGE
An endorsement added to an insurance policy, or clause within a policy, that provides additional coverage for risks other than those in a basic policy.
EXTENDED REPLACEMENT COST COVERAGE
Pays a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent. Similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction. (See Guaranteed replacement cost coverage)
EXTENDED TERM INSURANCE OPTION*
One of several nonforfeiture options included in life insurance policies that allows the owner of a policy with a cash value to discontinue premium payments and to use the policy’s net cash value to purchase term insurance for the full coverage amount provided under the original policy for as long a term as the net cash value can provide. (See Nonforfeiture options)
Ins trg-Review-1st Nine Months 2008
INDUSTRY FINANCIALS AND OUTLOOK
2008 - First Nine Months Results
Dr. Robert P. Hartwig, CPCU
President
Insurance Information Institute
bobh@iii.org
December 16, 2008
The property/casualty (P/C) insurance industry reported an annualized statutory rate of return on average surplus of 1.1 percent during the first nine months of 2008, down sharply from 13.1 percent during the first nine months of 2007 and by more than half from the 12.3 percent return for all of 2007. The sharp decline in performance during the quarter is primarily due to a broad, rapid and steep deterioration in financial market conditions on a global scale. Even the most conservative of portfolios was impacted significantly during the quarter, which bore witness to some of the most traumatic events in the economic history of the United States, including the largest bank failure ever (Washington Mutual), the collapse of the 158 year-old investment bank Lehman Brothers and the government rescue of insurer American International Group. The turmoil on Wall Street and in the credit markets led to a $9.7 billion realized capital loss on investments for property/casualty insurers through the first nine months. Exacerbating the problem was the continuing spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the property/casualty insurance industry. Profitability was negatively impacted by a substantial deterioration in underwriting performance driven first and foremost by $14.3 billion in catastrophe losses during the third quarter (mostly from hurricanes Ike and Gustav), and second by continued cyclical deterioration. The combination of higher catastrophe losses, cyclical deterioration in underwriting performance and severe stress in the mortgage and financial guarantee segments pushed the nine-month combined ratio up to 105.6, nearly 12 points above the 93.8 combined ratio for the same period last year and fully 10 points above the 95.6 combined ratio for full-year 2007. Excluding mortgage and financial guarantee insurers reveals declines of a more modest and cyclical nature, with return on average surplus coming in at 4.2 percent. Net written premium growth, which turned negative in 2007 for the first time since 1943 (down 0.7 percent), continued on its negative trajectory, falling by 0.4 percent through the first nine months of the year (-0.5 percent excluding mortgage and financial guarantee insurers). Policyholders’ surplus, a measure of capacity, decreased for the fourth consecutive quarter, down $39.4 billion, or 7.6 percent, to $478.5 billion as of September 30 from $517.9 billion at year-end 2007. The results were released by ISO and the Property Casualty Insurers Association of America (PCI).
Financial Crisis: Impacts on the Insurance Industry
Insurers and all other segments of the financial services industry have been adversely impacted by the current economic and financial conditions. While the impact of turmoil in the financial markets affects individual insurers differently, the insurance industry, as a whole, remains fundamentally strong. Moreover, the basic function of insurance—the orderly transfer of risk from client to insurer—continues without interruption. This means that insurers today continue to sell and renew policies, pay claims and develop new products to protect people’s property, businesses and lives, and help support their retirements. The bottom line is that unlike banking, insurance markets are functioning normally.
It is important to recognize that the insurance industry is not suffering from a credit or liquidity crisis. Unlike many of the banks and other financial companies that have struggled, insurance companies, in general, do not borrow to make investments. Nor do they borrow to pay claims. So, even when some investments perform poorly, the effect is not magnified as it is when investments are highly leveraged.
It is true, however, that investment losses incurred by a non-insurance financial products subsidiary of one of the nation’s largest insurers have resulted in it receiving some $150 billion in federal assistance. Its insurance operations remain solvent and continue to operate normally. It is also true that several predominantly life insurance companies have indicated their desire to receive federal funds as well. Other insurers have stated they have no need for federal assistance and do not intend to seek it.
Insurance companies are regulated by state insurance departments that closely monitor the financial strength of insurers domiciled or doing business in their states. State regulators have repeatedly stressed that the insurance system is financially sound. Independent rating agencies also closely scrutinize the financial strength of individual insurance companies and make their rankings available to the public.
Throughout its nearly 200-year history in the United States, the insurance industry has endured every conceivable economic circumstance and crisis and managed to persevere. These include not only events like the Great Depression and numerous economic recessions, but also stock market crashes, gyrations in interest rates and inflationary spikes.
Impacts of the Economic Crisis on P/C Insurer Investment Earnings
The economic crisis has so far affected property/casualty profitability primarily through reduced investment earnings—one of only two sources of revenue for insurers (the other being premium income). Insurers are among the largest institutional investors in the world with P/C insurers managing assets totaling some $1.3 trillion as of year-end 2007. Earnings on investments fall into several categories, the largest being investment income (primarily interest generated from bond holdings and dividends from stocks). Capital gains are the second most important source of investment earnings. Both are down through the first nine months of 2008. Given the 20.7 percent decline in the Standard & Poor’s 500 index through September 30, it is no surprise that the opportunity to realize net capital gains on stock holdings has effectively vanished. As noted by ISO/PCI, realized capital gains were nonexistent in the quarter—with the industry instead turning in a realized capital loss of $8.6 billion compared to a $4.0 billion gain in the same quarter a year earlier. The cumulative realized capital loss through the first nine months was $9.7 billion compared to a gain of $8.2 billion in 2007—an unprecedented 12-month swing of $17.9 billion. Continued market deterioration in the fourth quarter (the S&P 500 was down 40.9 percent through December 15) assures that the industry’s realized capital losses in 2008 will be the largest in history, dwarfing the $1.2 billion loss in 2002 in the wake of the tech bubble collapse and the market crash following the September 11, 2001 terrorist attack.
It is interesting to note that realized losses are much larger in 2008 than they were in 2002 for several reasons—but not because the markets were down more through the first nine months of 2008. In fact, the S&P 500 was down substantially more in 2002—off 29.0 percent through September 30 compared with 20.7 percent in 2008. Beyond the current market swoon is the fact that insurers are having to write off or write down billions of dollars in assets. Assets in this case include not only stocks but credit instruments such as bonds and collateralized debt obligations that have lost value.
The subprime mortgage crisis that began in mid-2007 began to seep into other sectors of the economy late in that year. Indeed, the National Bureau of Economic Research recently announced that the U.S. economy fell into recession in December 2007. During the third quarter of 2008 the crisis had exploded into a global credit catastrophe.
Property/casualty insurers, in general, maintain a fairly conservative investment profile. Insurers invest two-thirds of their assets in highly rated bonds (credit sensitive investments). While the actual default rate on most credit instruments remains low, mark-to-market requirements have forced prices down on some assets held by some insurers. The International Monetary Fund estimates that the credit crisis cost financial institutions worldwide $706 billion through September 2008 with insurers (globally) absorbing $106 billion or 15 percent of those losses.
Although stocks in 2008 will record their first losing year since 2002, when the S&P 500 Index lost 23.4 percent of its value, it is important to note that only 17 percent of P/C insurer invested assets are equities (stocks) while two-thirds are bonds. Nevertheless, the weak economy has taken a toll on the stock prices of almost every publicly traded firm and their investors have suffered along with them.
It is also worth noting that stock markets in the United States have experienced unprecedented volatility in 2008. The VIX Volatility Index, also known as the “Investor Fear Index” published by the Chicago Board Options Exchange reached record highs during the year. The index value is typically between 15 and 20, implying low volatility. Values greater than 30 signify extreme volatility. By September, the index value had reached 30.2 and new records were set in both October and November when the index soared to 61.2 and 62.6, respectively.
Interest rates on the safest of assets are headed down, reducing the ability to generate investment income in the future. The Federal Reserve had cut its key federal funds rate on four occasions by the end of March, including twice by three quarters of a point—the first 75 basis point cut by the Fed since November 1994. By the end of the first quarter the fed funds rate stood at 2.00 percent, compared with 4.25 percent on January 1, where it remained through the second and third quarters. Mounting evidence of a rapid deterioration in the economy compelled the Fed to cut the federal funds rates twice in October, to 1.00 percent, the lowest level since early 2004. On December 16, the Fed cut rates below 1.00 percent for the first time ever, targeting a range between zero and 0.25 percent. Because the Fed has now lowered the interest rates it controls effectively to zero, it has essentially reached the limits of what it can do to stimulate the economy by reducing borrowing costs, the traditional antirecessionary policy prescription administered by the Fed for decades. The Fed has not been rendered impotent, however. Chairman Bernanke has indicated that the Fed will engage in “quantitative easing” which means that it will likely purchase agency debt (such as debt issued by Fannie Mae and Freddie Mac) as well as longer-dated Treasury securities. Both efforts would have the effect of pushing down longer-term interest rates in an effort to stimulate mortgage lending and capital investment, thereby adding to the economic stimulus of traditional interest rate policy.
Interest rates are falling not only because the Fed is trying to decrease the cost of credit in an economy where credit markets have frozen, but also because fear has driven a flight to quality in Treasury securities. Interest rates charged to even the most creditworthy of corporate, consumer and municipal government risks soared during the third quarter. On the flip side of this severe dislocation of credit market risk was the stampede into Treasury securities. Because U.S. Treasury securities are assumed to have zero default risk, they are widely viewed as the safest in the world. The immense demand for Treasury debt means that their price at auction was pushed up and that their yield was pushed down. Indeed, the Treasury actually issued $30 billion of one-month bills in early December 2008 with a yield of 0.000 percent. In other words, fear-stricken investors were willing to accept no return on their investment. The yield on three-month bills was actually briefly negative during the month, implying that investors were actually willing to pay the Treasury to hold their money for them.
Lower interest rates are an important consideration for insurers. As large as the realized capital losses are, capital gains (losses) are generally a smaller proportion of investment earnings than investment income, which decreased only modestly through the first nine months of 2008. In fact, because capital gains and underwriting profits are both in negative territory in 2008, investment income will account for all of the industry’s net income (profit) this year. Through nine-months 2008, investment income totaled $38.0 billion, down 4 percent from $39.6 billion during the first nine months of 2008. The decline is largely attributable to lower interest rates in 2008 as well as lower cash flows.
Impacts of the Economic Crisis on P/C Insurer Policyholder Surplus (Capacity/Capital)
Property/casualty insurance is a highly cyclical business. Because the industry’s peak profits in the most recent cycle were achieved in 2006 and 2007, insurers entered the credit crisis and recession from a position of financial strength. Insurers routinely plow back most of their earnings into the business in order to build up their capital positions. The expanded capital cushion not only provides insurers with the necessary resources to pay large scale catastrophe losses such as Hurricane Katrina ($41.1 billion) or the September 11 terrorist attacks ($32.5 billion), but also helps insurers ride out stock market crashes, credit market turmoil, recessions, inflations and every other sort of economic and financial market disruption.
That being said, no investor will emerge from the current economic crisis unscathed and in the end there will be a significant impact on insurance industry capacity. As noted by ISO/PCI, industry policyholder surplus (the industry’s primary measure of capacity—akin to net worth in other industries) continues to trend downward. Policyholders’ surplus decreased in the first nine months by $39.4 billion, or 7.6 percent, to $478.5 billion from $517.9 billion at year-end 2007. The decline is the fourth consecutive quarterly drop in policyholders’ surplus, which peaked a year earlier at $521.8 billion during the third quarter of 2007. The net $43.3 billion decline in surplus represents a reduction of 8.3 percent in the industry’s capital base. In contrast, surplus increased by 6.2 percent in 2007, 14.3 percent in 2006, 8.2 percent in 2005, 13.4 percent in 2004 and 21.6 percent in 2003, following declines in 2000, 2001 and 2002. The return to negative capital accumulation is attributable to several factors, the largest and most obvious being declining prices for financial assets. During the first nine months, insurers recorded unrealized capital losses totaling $31.1 billion in addition to $9.7 billion in realized capital losses and $19.9 billion in underwriting losses. The reduction in capital has led many (though not all) insurers to scale back, suspend or discontinue the return of capital to shareholders through share buybacks. Share buybacks reached a record $23.2 billion in 2007.
The diminution of capital, combined with reduced investment earnings, implies that insurers will need to be very disciplined in their underwriting if they hope to earn risk appropriate rates of return. In effect, this involves a return to the way property/casualty insurance companies were managed for many decades before the era of high interest began in the mid-1970s. Prior to that time insurers managed their operations with the intent of earning underwriting profits every year and were generally successfully at doing so in most. Investment earnings were considered helpful but were certainly not viewed as a reliable source of significant earnings.
Underwriting Performance: Not as Bad as It Seems
The combined ratio through the first nine months was 105.6, up 11.8 from the same period a year earlier. Despite the jump, the results are not as poor as they might initially appear to be. In fact, two of the three key factors that drove underwriting performance during the first nine months were either unusual ($24.9 billion in catastrophe losses) or not reflective of the business mix of most insurers (mortgage insurance and financial guarantee operations). Virtually all insurers, however, continued to experience deterioration in underwriting performance due to flat or falling prices for many types of insurance. Each of these factors is discussed in detail below.
Catastrophe Losses: Nine-Month Total Exceeds All of 2007—By Far
As noted by ISO, insured catastrophe losses reached $24.9 billion during the first nine months, their highest level since 2005, the year of Hurricane Katrina. The nine-month total for 2008 is higher than the full-year totals for both 2006 and 2007, at $9.2 billion and $6.7 billion, respectively. The nine-month total alone secures 2008’s place as the fourth most expensive year ever for catastrophe losses (behind 2005, 2004 and 2001). ISO states that higher catastrophe losses through the first nine months of 2008 added five points to the industry combined ratio above the level of catastrophe losses experienced over the same period in 2007.
Catastrophe losses during the first half of 2008 were fueled primarily by record-breaking tornado activity and severe hail and wind losses (apart from tornadoes). The third quarter, however, is historically the most expensive for insurers due to the fact that the peak of hurricane season occurs in September. The most significant catastrophe in 2008 was Hurricane Ike, which roared ashore in Galveston, Texas, on September 13 as a strong Category 2 storm. Official PCS insured loss figures put total insured damages at $10.655 billion, making Ike the fourth most expensive hurricane in U.S. history. Ahead of Ike (stated in 2007 dollars) are Hurricane Katrina ($43.6 billion), Hurricane Andrew ($22.9 billion) and Hurricane Wilma ($10.9 billion). A significant share of the loss in Texas will be borne by the Texas Windstorm Insurance Association, which insures the majority of properties in the state’s coastal counties.
Hurricane Ike was not the only severe hurricane of the year. Hurricane Gustav caused $2.1 billion in insured losses, according to PCS, when it struck the Louisiana coast on September 1.
Underwriting: Separating Mortgage and Financial Guarantee Impacts
The first nine-months' underwriting performance was influenced significantly by underwriting losses reported by many mortgage and financial guarantee insurers. This category of insurer generated a negative 130.6 percent rate of return during the first nine months of 2008. While it is not unusual for results in any given quarter to be driven by the experience in a small number of lines or by a specific event (such as home and commercial property coverage after a major catastrophe), it is rare for lines that account for just a sliver of industry premiums to produce large-scale impacts on industry performance. The mortgage and financial guarantee lines—with $6.4 billion in net written premiums during the first nine months—accounted for just 1.9 percent of the $336.0 billion industrywide total. Nevertheless, according to ISO, the loss and loss adjustment expenses of this segment ballooned to $17.9 billion through September 30—an increase of 352.1 percent—propelling its combined ratio to an unprecedented 279.4 through the first nine months compared to 93.1 during the same period in 2007. That was enough to add 3.7 points to the industrywide combined ratio, which finished the first nine months at 105.6—its highest level since 2001.
Cyclical Considerations
Another important factor influencing the nine-month underwriting performance was the continuation of the soft market, now well into its fourth year. As previously discussed, stripping out the mortgage and financial guarantee insurer results yields a combined ratio of 101.9, up from 93.8 in first half 2007 and 95.6 for all of 2007. The deterioration is generally in line with expectations and reflects the effects of a sustained, highly competitive pricing environment for most types of insurance, particularly commercial lines, as well as adverse claim frequency and/or severity trends in some key lines—not to mention higher catastrophe losses. According to the Council of Insurance Agents and Brokers, commercial renewals for larger brokered accounts were down 13.5 percent during the first quarter, 12.9 percent during the second and 11.0 in the third. Of course, actual changes experienced by individual insurers can vary substantially and few commercial insurers are actually reporting premium declines of this magnitude. In contrast, pricing in personal auto insurance, which accounts for one-third of industry premiums, appeared to become somewhat firmer during the first nine months of 2008. According to the U.S. Bureau of Labor Statistics, auto insurance prices averaged 2.1 percent higher during the first nine months of 2008 compared with the same period in 2007. This contrasts with an increase of 0.4 percent for all of 2007 relative to 2006. The pace of increase appears to be quickening. Through the first 11 months of 2008, auto insurance prices averaged 2.4 percent higher than during the same period one year earlier. In fact, auto insurance prices were up 0.9 percent in January 2008 compared with January 2007, but were up 3.7 percent in November versus a year earlier. Pressure on auto insurance rates is driven primarily by rising claim cost severity (average cost per claim) and increasing claim frequency for some coverages in some states.
Premium Growth Remains Negative
Net written premiums declined by 0.4 percent during the first nine months. Excluding mortgage and financial guarantee insurers produced a net decline of 0.5 percent. The premium decline is larger when mortgage and financial guarantee insurers are excluded because of that segment’s 4.5 percent increase in premiums written through the first three quarters. The overall decline comes on the heels of a 0.7 percent decline in calendar year 2007. Last year’s decline was the first in 64 years, when premium growth fell in 1943 in the midst of World War II. It appears likely that 2007-2008 will become the first consecutive years of negative premium growth since the Great Depression, when industry premiums fell for four consecutive years (1930 through 1933, inclusive) after peaking in 1929.
Summary
Economic turbulence has had an impact on the financial and underwriting performance of the P/C insurance industry during the first nine months of 2008. The sharp decline in profitability is primarily attributable to poor investment market performance, high catastrophe losses and a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the property/casualty insurance industry. Excluding this segment and normalizing catastrophe losses reveals a much more modest decline in profitability more in keeping with the pace normally associated with cyclical downturns. One continued cause for concern in 2008 is that premium growth remains in negative territory, though there are some early signs of a reversal of this trend.
Fundamentally, the property/casualty insurance industry remains quite strong financially, with policyholders’ surplus close to all-time record highs.
A detailed industry income statement for the first nine months of 2008 follows:
First Nine-Months 2008 Financial Results*
($ Billions)
$
Net Earned Premiums $330.40
Incurred Losses 258.8
(Including loss adjustment expenses)
Expenses 90.5
Policyholder Dividends 1
Net Underwriting Gain (Loss) -19.9
Investment Income 38
Other Items 0.7
Pre-Tax Operating Gain 18.9
Realized Capital Gains (Losses) -9.7
Pre-Tax Income 9.2
Taxes 5.1
Net After-Tax Income $4.10
Surplus (End of Period) $478.50
Combined Ratio 105.6**
2008 - First Nine Months Results
Dr. Robert P. Hartwig, CPCU
President
Insurance Information Institute
bobh@iii.org
December 16, 2008
The property/casualty (P/C) insurance industry reported an annualized statutory rate of return on average surplus of 1.1 percent during the first nine months of 2008, down sharply from 13.1 percent during the first nine months of 2007 and by more than half from the 12.3 percent return for all of 2007. The sharp decline in performance during the quarter is primarily due to a broad, rapid and steep deterioration in financial market conditions on a global scale. Even the most conservative of portfolios was impacted significantly during the quarter, which bore witness to some of the most traumatic events in the economic history of the United States, including the largest bank failure ever (Washington Mutual), the collapse of the 158 year-old investment bank Lehman Brothers and the government rescue of insurer American International Group. The turmoil on Wall Street and in the credit markets led to a $9.7 billion realized capital loss on investments for property/casualty insurers through the first nine months. Exacerbating the problem was the continuing spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the property/casualty insurance industry. Profitability was negatively impacted by a substantial deterioration in underwriting performance driven first and foremost by $14.3 billion in catastrophe losses during the third quarter (mostly from hurricanes Ike and Gustav), and second by continued cyclical deterioration. The combination of higher catastrophe losses, cyclical deterioration in underwriting performance and severe stress in the mortgage and financial guarantee segments pushed the nine-month combined ratio up to 105.6, nearly 12 points above the 93.8 combined ratio for the same period last year and fully 10 points above the 95.6 combined ratio for full-year 2007. Excluding mortgage and financial guarantee insurers reveals declines of a more modest and cyclical nature, with return on average surplus coming in at 4.2 percent. Net written premium growth, which turned negative in 2007 for the first time since 1943 (down 0.7 percent), continued on its negative trajectory, falling by 0.4 percent through the first nine months of the year (-0.5 percent excluding mortgage and financial guarantee insurers). Policyholders’ surplus, a measure of capacity, decreased for the fourth consecutive quarter, down $39.4 billion, or 7.6 percent, to $478.5 billion as of September 30 from $517.9 billion at year-end 2007. The results were released by ISO and the Property Casualty Insurers Association of America (PCI).
Financial Crisis: Impacts on the Insurance Industry
Insurers and all other segments of the financial services industry have been adversely impacted by the current economic and financial conditions. While the impact of turmoil in the financial markets affects individual insurers differently, the insurance industry, as a whole, remains fundamentally strong. Moreover, the basic function of insurance—the orderly transfer of risk from client to insurer—continues without interruption. This means that insurers today continue to sell and renew policies, pay claims and develop new products to protect people’s property, businesses and lives, and help support their retirements. The bottom line is that unlike banking, insurance markets are functioning normally.
It is important to recognize that the insurance industry is not suffering from a credit or liquidity crisis. Unlike many of the banks and other financial companies that have struggled, insurance companies, in general, do not borrow to make investments. Nor do they borrow to pay claims. So, even when some investments perform poorly, the effect is not magnified as it is when investments are highly leveraged.
It is true, however, that investment losses incurred by a non-insurance financial products subsidiary of one of the nation’s largest insurers have resulted in it receiving some $150 billion in federal assistance. Its insurance operations remain solvent and continue to operate normally. It is also true that several predominantly life insurance companies have indicated their desire to receive federal funds as well. Other insurers have stated they have no need for federal assistance and do not intend to seek it.
Insurance companies are regulated by state insurance departments that closely monitor the financial strength of insurers domiciled or doing business in their states. State regulators have repeatedly stressed that the insurance system is financially sound. Independent rating agencies also closely scrutinize the financial strength of individual insurance companies and make their rankings available to the public.
Throughout its nearly 200-year history in the United States, the insurance industry has endured every conceivable economic circumstance and crisis and managed to persevere. These include not only events like the Great Depression and numerous economic recessions, but also stock market crashes, gyrations in interest rates and inflationary spikes.
Impacts of the Economic Crisis on P/C Insurer Investment Earnings
The economic crisis has so far affected property/casualty profitability primarily through reduced investment earnings—one of only two sources of revenue for insurers (the other being premium income). Insurers are among the largest institutional investors in the world with P/C insurers managing assets totaling some $1.3 trillion as of year-end 2007. Earnings on investments fall into several categories, the largest being investment income (primarily interest generated from bond holdings and dividends from stocks). Capital gains are the second most important source of investment earnings. Both are down through the first nine months of 2008. Given the 20.7 percent decline in the Standard & Poor’s 500 index through September 30, it is no surprise that the opportunity to realize net capital gains on stock holdings has effectively vanished. As noted by ISO/PCI, realized capital gains were nonexistent in the quarter—with the industry instead turning in a realized capital loss of $8.6 billion compared to a $4.0 billion gain in the same quarter a year earlier. The cumulative realized capital loss through the first nine months was $9.7 billion compared to a gain of $8.2 billion in 2007—an unprecedented 12-month swing of $17.9 billion. Continued market deterioration in the fourth quarter (the S&P 500 was down 40.9 percent through December 15) assures that the industry’s realized capital losses in 2008 will be the largest in history, dwarfing the $1.2 billion loss in 2002 in the wake of the tech bubble collapse and the market crash following the September 11, 2001 terrorist attack.
It is interesting to note that realized losses are much larger in 2008 than they were in 2002 for several reasons—but not because the markets were down more through the first nine months of 2008. In fact, the S&P 500 was down substantially more in 2002—off 29.0 percent through September 30 compared with 20.7 percent in 2008. Beyond the current market swoon is the fact that insurers are having to write off or write down billions of dollars in assets. Assets in this case include not only stocks but credit instruments such as bonds and collateralized debt obligations that have lost value.
The subprime mortgage crisis that began in mid-2007 began to seep into other sectors of the economy late in that year. Indeed, the National Bureau of Economic Research recently announced that the U.S. economy fell into recession in December 2007. During the third quarter of 2008 the crisis had exploded into a global credit catastrophe.
Property/casualty insurers, in general, maintain a fairly conservative investment profile. Insurers invest two-thirds of their assets in highly rated bonds (credit sensitive investments). While the actual default rate on most credit instruments remains low, mark-to-market requirements have forced prices down on some assets held by some insurers. The International Monetary Fund estimates that the credit crisis cost financial institutions worldwide $706 billion through September 2008 with insurers (globally) absorbing $106 billion or 15 percent of those losses.
Although stocks in 2008 will record their first losing year since 2002, when the S&P 500 Index lost 23.4 percent of its value, it is important to note that only 17 percent of P/C insurer invested assets are equities (stocks) while two-thirds are bonds. Nevertheless, the weak economy has taken a toll on the stock prices of almost every publicly traded firm and their investors have suffered along with them.
It is also worth noting that stock markets in the United States have experienced unprecedented volatility in 2008. The VIX Volatility Index, also known as the “Investor Fear Index” published by the Chicago Board Options Exchange reached record highs during the year. The index value is typically between 15 and 20, implying low volatility. Values greater than 30 signify extreme volatility. By September, the index value had reached 30.2 and new records were set in both October and November when the index soared to 61.2 and 62.6, respectively.
Interest rates on the safest of assets are headed down, reducing the ability to generate investment income in the future. The Federal Reserve had cut its key federal funds rate on four occasions by the end of March, including twice by three quarters of a point—the first 75 basis point cut by the Fed since November 1994. By the end of the first quarter the fed funds rate stood at 2.00 percent, compared with 4.25 percent on January 1, where it remained through the second and third quarters. Mounting evidence of a rapid deterioration in the economy compelled the Fed to cut the federal funds rates twice in October, to 1.00 percent, the lowest level since early 2004. On December 16, the Fed cut rates below 1.00 percent for the first time ever, targeting a range between zero and 0.25 percent. Because the Fed has now lowered the interest rates it controls effectively to zero, it has essentially reached the limits of what it can do to stimulate the economy by reducing borrowing costs, the traditional antirecessionary policy prescription administered by the Fed for decades. The Fed has not been rendered impotent, however. Chairman Bernanke has indicated that the Fed will engage in “quantitative easing” which means that it will likely purchase agency debt (such as debt issued by Fannie Mae and Freddie Mac) as well as longer-dated Treasury securities. Both efforts would have the effect of pushing down longer-term interest rates in an effort to stimulate mortgage lending and capital investment, thereby adding to the economic stimulus of traditional interest rate policy.
Interest rates are falling not only because the Fed is trying to decrease the cost of credit in an economy where credit markets have frozen, but also because fear has driven a flight to quality in Treasury securities. Interest rates charged to even the most creditworthy of corporate, consumer and municipal government risks soared during the third quarter. On the flip side of this severe dislocation of credit market risk was the stampede into Treasury securities. Because U.S. Treasury securities are assumed to have zero default risk, they are widely viewed as the safest in the world. The immense demand for Treasury debt means that their price at auction was pushed up and that their yield was pushed down. Indeed, the Treasury actually issued $30 billion of one-month bills in early December 2008 with a yield of 0.000 percent. In other words, fear-stricken investors were willing to accept no return on their investment. The yield on three-month bills was actually briefly negative during the month, implying that investors were actually willing to pay the Treasury to hold their money for them.
Lower interest rates are an important consideration for insurers. As large as the realized capital losses are, capital gains (losses) are generally a smaller proportion of investment earnings than investment income, which decreased only modestly through the first nine months of 2008. In fact, because capital gains and underwriting profits are both in negative territory in 2008, investment income will account for all of the industry’s net income (profit) this year. Through nine-months 2008, investment income totaled $38.0 billion, down 4 percent from $39.6 billion during the first nine months of 2008. The decline is largely attributable to lower interest rates in 2008 as well as lower cash flows.
Impacts of the Economic Crisis on P/C Insurer Policyholder Surplus (Capacity/Capital)
Property/casualty insurance is a highly cyclical business. Because the industry’s peak profits in the most recent cycle were achieved in 2006 and 2007, insurers entered the credit crisis and recession from a position of financial strength. Insurers routinely plow back most of their earnings into the business in order to build up their capital positions. The expanded capital cushion not only provides insurers with the necessary resources to pay large scale catastrophe losses such as Hurricane Katrina ($41.1 billion) or the September 11 terrorist attacks ($32.5 billion), but also helps insurers ride out stock market crashes, credit market turmoil, recessions, inflations and every other sort of economic and financial market disruption.
That being said, no investor will emerge from the current economic crisis unscathed and in the end there will be a significant impact on insurance industry capacity. As noted by ISO/PCI, industry policyholder surplus (the industry’s primary measure of capacity—akin to net worth in other industries) continues to trend downward. Policyholders’ surplus decreased in the first nine months by $39.4 billion, or 7.6 percent, to $478.5 billion from $517.9 billion at year-end 2007. The decline is the fourth consecutive quarterly drop in policyholders’ surplus, which peaked a year earlier at $521.8 billion during the third quarter of 2007. The net $43.3 billion decline in surplus represents a reduction of 8.3 percent in the industry’s capital base. In contrast, surplus increased by 6.2 percent in 2007, 14.3 percent in 2006, 8.2 percent in 2005, 13.4 percent in 2004 and 21.6 percent in 2003, following declines in 2000, 2001 and 2002. The return to negative capital accumulation is attributable to several factors, the largest and most obvious being declining prices for financial assets. During the first nine months, insurers recorded unrealized capital losses totaling $31.1 billion in addition to $9.7 billion in realized capital losses and $19.9 billion in underwriting losses. The reduction in capital has led many (though not all) insurers to scale back, suspend or discontinue the return of capital to shareholders through share buybacks. Share buybacks reached a record $23.2 billion in 2007.
The diminution of capital, combined with reduced investment earnings, implies that insurers will need to be very disciplined in their underwriting if they hope to earn risk appropriate rates of return. In effect, this involves a return to the way property/casualty insurance companies were managed for many decades before the era of high interest began in the mid-1970s. Prior to that time insurers managed their operations with the intent of earning underwriting profits every year and were generally successfully at doing so in most. Investment earnings were considered helpful but were certainly not viewed as a reliable source of significant earnings.
Underwriting Performance: Not as Bad as It Seems
The combined ratio through the first nine months was 105.6, up 11.8 from the same period a year earlier. Despite the jump, the results are not as poor as they might initially appear to be. In fact, two of the three key factors that drove underwriting performance during the first nine months were either unusual ($24.9 billion in catastrophe losses) or not reflective of the business mix of most insurers (mortgage insurance and financial guarantee operations). Virtually all insurers, however, continued to experience deterioration in underwriting performance due to flat or falling prices for many types of insurance. Each of these factors is discussed in detail below.
Catastrophe Losses: Nine-Month Total Exceeds All of 2007—By Far
As noted by ISO, insured catastrophe losses reached $24.9 billion during the first nine months, their highest level since 2005, the year of Hurricane Katrina. The nine-month total for 2008 is higher than the full-year totals for both 2006 and 2007, at $9.2 billion and $6.7 billion, respectively. The nine-month total alone secures 2008’s place as the fourth most expensive year ever for catastrophe losses (behind 2005, 2004 and 2001). ISO states that higher catastrophe losses through the first nine months of 2008 added five points to the industry combined ratio above the level of catastrophe losses experienced over the same period in 2007.
Catastrophe losses during the first half of 2008 were fueled primarily by record-breaking tornado activity and severe hail and wind losses (apart from tornadoes). The third quarter, however, is historically the most expensive for insurers due to the fact that the peak of hurricane season occurs in September. The most significant catastrophe in 2008 was Hurricane Ike, which roared ashore in Galveston, Texas, on September 13 as a strong Category 2 storm. Official PCS insured loss figures put total insured damages at $10.655 billion, making Ike the fourth most expensive hurricane in U.S. history. Ahead of Ike (stated in 2007 dollars) are Hurricane Katrina ($43.6 billion), Hurricane Andrew ($22.9 billion) and Hurricane Wilma ($10.9 billion). A significant share of the loss in Texas will be borne by the Texas Windstorm Insurance Association, which insures the majority of properties in the state’s coastal counties.
Hurricane Ike was not the only severe hurricane of the year. Hurricane Gustav caused $2.1 billion in insured losses, according to PCS, when it struck the Louisiana coast on September 1.
Underwriting: Separating Mortgage and Financial Guarantee Impacts
The first nine-months' underwriting performance was influenced significantly by underwriting losses reported by many mortgage and financial guarantee insurers. This category of insurer generated a negative 130.6 percent rate of return during the first nine months of 2008. While it is not unusual for results in any given quarter to be driven by the experience in a small number of lines or by a specific event (such as home and commercial property coverage after a major catastrophe), it is rare for lines that account for just a sliver of industry premiums to produce large-scale impacts on industry performance. The mortgage and financial guarantee lines—with $6.4 billion in net written premiums during the first nine months—accounted for just 1.9 percent of the $336.0 billion industrywide total. Nevertheless, according to ISO, the loss and loss adjustment expenses of this segment ballooned to $17.9 billion through September 30—an increase of 352.1 percent—propelling its combined ratio to an unprecedented 279.4 through the first nine months compared to 93.1 during the same period in 2007. That was enough to add 3.7 points to the industrywide combined ratio, which finished the first nine months at 105.6—its highest level since 2001.
Cyclical Considerations
Another important factor influencing the nine-month underwriting performance was the continuation of the soft market, now well into its fourth year. As previously discussed, stripping out the mortgage and financial guarantee insurer results yields a combined ratio of 101.9, up from 93.8 in first half 2007 and 95.6 for all of 2007. The deterioration is generally in line with expectations and reflects the effects of a sustained, highly competitive pricing environment for most types of insurance, particularly commercial lines, as well as adverse claim frequency and/or severity trends in some key lines—not to mention higher catastrophe losses. According to the Council of Insurance Agents and Brokers, commercial renewals for larger brokered accounts were down 13.5 percent during the first quarter, 12.9 percent during the second and 11.0 in the third. Of course, actual changes experienced by individual insurers can vary substantially and few commercial insurers are actually reporting premium declines of this magnitude. In contrast, pricing in personal auto insurance, which accounts for one-third of industry premiums, appeared to become somewhat firmer during the first nine months of 2008. According to the U.S. Bureau of Labor Statistics, auto insurance prices averaged 2.1 percent higher during the first nine months of 2008 compared with the same period in 2007. This contrasts with an increase of 0.4 percent for all of 2007 relative to 2006. The pace of increase appears to be quickening. Through the first 11 months of 2008, auto insurance prices averaged 2.4 percent higher than during the same period one year earlier. In fact, auto insurance prices were up 0.9 percent in January 2008 compared with January 2007, but were up 3.7 percent in November versus a year earlier. Pressure on auto insurance rates is driven primarily by rising claim cost severity (average cost per claim) and increasing claim frequency for some coverages in some states.
Premium Growth Remains Negative
Net written premiums declined by 0.4 percent during the first nine months. Excluding mortgage and financial guarantee insurers produced a net decline of 0.5 percent. The premium decline is larger when mortgage and financial guarantee insurers are excluded because of that segment’s 4.5 percent increase in premiums written through the first three quarters. The overall decline comes on the heels of a 0.7 percent decline in calendar year 2007. Last year’s decline was the first in 64 years, when premium growth fell in 1943 in the midst of World War II. It appears likely that 2007-2008 will become the first consecutive years of negative premium growth since the Great Depression, when industry premiums fell for four consecutive years (1930 through 1933, inclusive) after peaking in 1929.
Summary
Economic turbulence has had an impact on the financial and underwriting performance of the P/C insurance industry during the first nine months of 2008. The sharp decline in profitability is primarily attributable to poor investment market performance, high catastrophe losses and a spillover of the housing and credit bubble collapse into the mortgage and financial guarantee segments of the property/casualty insurance industry. Excluding this segment and normalizing catastrophe losses reveals a much more modest decline in profitability more in keeping with the pace normally associated with cyclical downturns. One continued cause for concern in 2008 is that premium growth remains in negative territory, though there are some early signs of a reversal of this trend.
Fundamentally, the property/casualty insurance industry remains quite strong financially, with policyholders’ surplus close to all-time record highs.
A detailed industry income statement for the first nine months of 2008 follows:
First Nine-Months 2008 Financial Results*
($ Billions)
$
Net Earned Premiums $330.40
Incurred Losses 258.8
(Including loss adjustment expenses)
Expenses 90.5
Policyholder Dividends 1
Net Underwriting Gain (Loss) -19.9
Investment Income 38
Other Items 0.7
Pre-Tax Operating Gain 18.9
Realized Capital Gains (Losses) -9.7
Pre-Tax Income 9.2
Taxes 5.1
Net After-Tax Income $4.10
Surplus (End of Period) $478.50
Combined Ratio 105.6**
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