Competition Steady Despite Disasters, Fitch Says

In its newest annual outlook report for property and casualty insurers, Fitch Ratings noted that while the 2018 rating outlook for insurers is stable, the fundamental forecast remains negative. Underwriting results deteriorated in the second half of 2017 following events including Hurricanes Harvey, Irma and Maria, along with fourth quarter California wildfires. As a result, Fitch projected that industry-estimated statutory net profits would fall by about 50% in 2017, projecting a market combined ratio of 104.4% for the year compared to 100.7% in 2016.

Fitch said that even with the substantial catastrophe-related losses, U.S. property and casualty insurers’ operating performance appears to be on the rebound. The agency estimates that the industry combined ratio will approach break-even levels in 2018 if natural catastrophe-related losses revert towards long-term averages.

How does all this affect the market for insurance buyers? James Auden, managing director at Fitch Ratings, Inc. told the Risk Management Monitor that from a pricing standpoint, while there is some deterioration in results, especially in property, there is plenty of capacity for coverage in just about every segment.

“We haven’t seen a reduction in capital in the broader market, so how much these losses will carry over and make changes in another segment is a question,” he said. “And there are some segments that have been suffering in their own right, such as commercial and personal auto rates, which have been going up tremendously. We’ve seen a lot of turnaround, but there is still a need for rate hikes there. You’ll probably see that continue.”

Property
Markets affected by catastrophe losses should see some large rate increases in property, which could carry over geographically, he said. Commercial property lines, which have been very soft for a while, should see broader increases. Other factors include companies’ loss history and the types of perils they face.

“I think we’ll see more rate increases geographically throughout the market next year,” Auden explained. “They will be higher in areas hit by hurricanes, but we will see them elsewhere as well. In Houston, the losses were much more commercial than residential in nature. In Florida the losses were more skewed to residential, but there were plenty of commercial losses there, too.” How far rates will rise may be dampened by the amount of capacity that still exists. “If you go back historically, when we’ve had true hard markets, it’s been tied to capacity shortages,” he said.

Auden added, “We are not seeing companies withdrawing from the market right now. We did see that in areas like commercial auto over the last couple of years, especially in long-haul trucking. In commercial property, however, I don’t think there is a big withdrawal of capacity. Companies are seeing an opportunity to improve the economics of their business and relieve pressure around pricing.”

M&A
In the area of mergers and acquisitions, there have not been many with the magnitude of last year’s Chubb-Ace deal. “We have had a few things, like Liberty Mutual’s purchase of Ironshore,” he said, adding that “There is always potential for M&As, but one thing that could restrict them is that with the stock market up so much, insurance markets have benefitted, so evaluations are a bit richer and that may limit interest from a value standpoint.”

Lloyd’s
The Lloyd’s market, which has been affected by competitive pricing over several years now, is on negative outlook. “There have been more exposures in the catastrophe piece and a weaker performance, so that has been driving our opinion there,” he said. “And there definitely are a lot of losses at Lloyd’s from the catastrophes this year.”

Competition
Despite the huge losses being seen, however, competition is still going on. “It’s relentless. There are plenty of underwriters out there trying to write the same business and to differentiate themselves on things like service,” Auden said, adding that he believes turnover will remain steady because insurance buyers typically shop their coverage frequently. “I don’t think there will be more turnover than usual.”

He concluded that in the area of property, while that there will be positive rate actions, making response to the losses more substantial, this may not be sustainable. “Do we see multiple carriers with rate increases? We think it’s likely that is not sustainable, unless we have a really bad year next year in terms of catastrophes,” Auden said.

P&C Composite Rate Up 2% in Fourth Quarter

Rate adjustments for property and casualty insurance in the United States for fourth quarter 2017 were plus 2% compared to plus 1% in the third quarter of 2017, with automobile and transportation seeing the largest increases, MarketScout reported.

Richard Kerr, MarketScout CEO commented that insurers were prepared for their losses. “Underwriters are rarely surprised by aggregate losses because they have so many pricing and modeling tools. Most insurers are assessing rate increases at a moderate pace. Automobile and transportation accounts incurred the largest rate increases at plus 5% over prior year pricing.”

In the reinsurance sector, William Hawkins, director of European insurance research at KBW made a similar observation of P&C Jan. 1, 2018 renewal pricing, stating in a podcast that, “the big four European reinsurers will have achieved 2% rate increases this [renewal] season.” He added that “the message from Monte Carlo, that the 2H 2017 natural catastrophes should draw a line under rate cuts across the board, has been delivered. But we think the upside for property catastrophe has been capped by the ongoing plentiful supply of capital.”

By coverage classification, MarketScount noted that all coverages except D&O, professional liability and auto had rate increases from the third quarter of 2017 to fourth quarter 2017. Property increased the most, from plus 1% to plus 3%.
On average, underwriters assessed rate increases for all industry groups except transportation and public entities. “Keep in mind, rates are calculated on a composite basis and represent exposures from businesses across the U.S. Insureds in catastrophe exposed areas incurred higher rates/premiums,” Kerr said.
MarketScout also noted that large accounts were seeing increases averaging 1%, while others saw 2% increases.

Get Ready for the ‘Weather Bomb’

In case you need another reason to dread getting to work this first week of 2018, several weather authorities are warning of a major storm that could affect a majority of the United States with freezing conditions. Storm advisories are being issued from New England states to southeastern winter getaways. Residents of South Carolina, Georgia and even northern Florida should be thinking about stocking up on ground salt, thermal pants and hand warmers.

Nancy Egan, Property Casualty Insurers Association of America’s (PCI) regional manager warned: “A dangerous combination of snow, sleet and freezing rain is on the horizon for the Southeast. Weather like this can cause auto accidents, and property damage, and leave thousands without power. Driving in these treacherous conditions can be tricky, so if you do venture out, make sure your vehicle has a winter storm kit in case you have an accident or get stuck and have to wait for help.”

PCI suggests that winter storm kits include a windshield scraper and small broom; flashlight with extra batteries; road salt, sand or cat litter for traction; booster cables; emergency flares and reflectors; snack food; blankets and a first aid kit.

These warnings are inspired by speculation that intensifying winds and cold will bring about a phenomenon known as “bombogenesis” from Thursday to Friday. In an online primer, Mashable delved into the relevant information that organizations need to know about the “weather bomb” or “bomb cyclone.”

[Bombogenesis] refers to a low pressure area whose minimum central air pressure plummets by at least 24 millibars in 24 hours. By feasting off of intense atmospheric disturbances as well as differences in air masses and ocean temperatures, including the moisture rich Gulf Stream waters, the upcoming tempest is projected to exceed that intensification rate by several more millibars in 24 hours. This intensification rate, if it comes to pass, would be astonishing.

The potential impact of the upcoming storm could equal that of a Category 3 hurricane, the same strength Hurricane Sandy reached at its peak in 2012. With this in mind, companies located anywhere along the projected path should be heeding the warnings and preparing.

This follows a cold snap that has so far killed at least 11 people in cold-related deaths in the U.S. since Tuesday morning, CNN reported. Some of the victims were located in Wisconsin, North Dakota, Missouri and Texas.

The Southeast has a history of being especially vulnerable to cold-weather conditions. On Jan. 29, 2014, the greater-Atlanta area was rendered nearly unnavigable due to about two inches of snow and ice. Although Georgia is the home of the Weather Channel, state officials failed to act on warnings of the precipitation and freezing conditions, and closed all schools mid-day—about the same time that businesses shuttered for the day. Between parents who were on the road to pick up their children and adults leaving their workplaces due to early closings, millions of cars ended up on roadways, causing a gridlock that prevented salt trucks from safely getting to and from storage areas.

The consequences were unprecedented for the area. Although no fatalities were recorded, the Peach State experienced thousands of traffic accidents, closures and even automobile abandonments on interstate highways.

To prevent such a disaster from reoccurring, Georgia’s Department of Transportation announced via Twitter this week that it has mobilized 13 trucks loaded with salt and gravel in anticipation of the storm. While no announcements have been distributed on the Florida Department of Transportation’s site, FloridaDisaster.org is keeping its visitors updated with news of “below average temperatures.” South Carolina has been posting updates on its DOT site, and reminding motorists to use particular caution and to “watch for slow moving SCDOT equipment applying deicing materials.”

Using ERM to Protect Your Business from The Equifax Fallout

As with many data breaches, the general conclusion of the Equifax attack is that personnel were not aware of the issue beforehand. This conclusion, however, is false.

In early September, I anticipated that a vulnerability in Equifax’s software was known ahead of time, and that this scandal was, therefore, entirely preventable. A month later, the NY Times reported that the Department of Homeland Security sent Equifax an alert about a critical vulnerability in their software. Equifax then sent out an internal email requesting its IT department to fix the software, but “an individual did not ensure communication got to the right person to manually patch the application.”

The Equifax data breach was a failure in risk management. As a credit bureau that deals with the personally identifiable information (PII) of 200 million U.S. customers, Equifax has a legal and moral responsibility to safeguard their customers’ security, and to adopt the proper systems to do so.

For instance, if Equifax had an enterprise risk management (ERM) system in place, the warning from Homeland Security would have been properly recorded and assigned out to the appropriate personnel. This system would have provided transparency over the status of the task in progress, and would have triggered reminders until the vulnerability was patched and verified by the right subject matter expert.

A Point of No Return

It’s my opinion that this scandal is a point of no return for risk management. While data breaches have abounded in recent years, there has never been one of this magnitude or one that provides every piece of information hackers need to steal our identities. Of course, lawsuits and penalties are piling up around the company’s negligence, but these financial losses are nothing compared to the reputational damages Equifax will suffer—shares fell by 18% following the breach and have yet to fully recover.

What makes this scandal so unique, and therefore a point of no return, is that these reputational damages reach far beyond Equifax. Consumers can’t always choose whether they’re a customer of Equifax, but they can choose whether to do business with the institutions that gave away their information to Equifax in the first place.

I also believe that consumers’ outrage with this scandal will cause them to shift their money, loyalty, and trust to institutions that can demonstrate effective risk management. CEOs and boards of every company will have to prove their organizations have adequate enterprise risk management systems in place. They’ll find that more effective risk management and governance programs are necessary to keep their market shares up and their reputation clean.

Where to Go from Here

While this breach may appear to be an event of the distant past, we are in the eye of the storm. Stolen information can lie dormant for months or years as criminals wait to make their move, and when they do, you’ll have either taken this period of calm as a chance to forget the scandal, finding yourself ill-prepared, or a chance to get to higher ground, finding yourself fully protected.

To protect themselves, businesses must:

  • First, to determine where to focus your security resources, recognize that people, processes, and procedures are now the biggest risks. Businesses need to perform risk assessments across all departments to determine who has access to sensitive information and authentication processes, and what the business impact would be if these employees were to be impersonated.
  • Next, to address these risks, businesses must rewrite their procedures for authenticating the people involved in sensitive requests and actions both verbally and electronically. With so much PII now in the public domain, it is no longer safe to rely on traditional authentication based on these pieces of information. For example, the security question “What was your first car?” is not effective because the answer is now easily accessible. A more effective question would be “Who was your best friend in elementary school?”
  • Finally, it is important to keep your third-party vendors in mind. Vendors often have access to sensitive information and processes, which could have an enormous impact on your company. It is crucial, therefore, to extend your internal authentication procedures out to your third parties so that they are authorizing sensitive requests and actions as securely as your own organization.

Our world, including the business world, is becoming increasingly transparent, meaning it’s up to you to act with integrity and protect your stakeholders. Keeping the Equifax data breach in mind, along with enacting these tactical steps, will help you stay ahead of the competition and out of glaring social media headlines.