Author Archives: Nathan Bacchus

About Nathan Bacchus

Nathan Bacchus is senior government affairs manager at theRisk and Insurance Management Society (RIMS).
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New York Institutes New Disaster Protocol for Insurers

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On October 28, New York Governor Andrew Cuomo announced the establishment of a new Emergency Disaster Protocol that insurers should expect to follow in the event of a future natural disaster. The protocol was communicated to insurers in the form of a circular letter on the same day. The new protocol includes many of the same measures that were put into place following Superstorm Sandy.
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“During Superstorm Sandy these steps helped us speed up relief to New York families and businesses, and they will now become a standard part of our storm response arsenal,” said Governor Cuomo. “Insurance companies have a vital responsibility to promptly process claims for consumers hit by a natural disaster and this new emergency protocol will help make sure that they live up to that standard.”

In future natural disasters, insurers can expect the following measures, among others, to go into effect: the creation of an expedited process for temporarily licensing new claims adjusters; establishment of an online report card to hold insurance companies publicly accountable for their claims processing performance; creation of a mediation process for homeowners; and institution of a temporary moratorium on the canceling of policies in storm-stricken areas for non-payment of premiums.

“Having an emergency protocol for insurers on the shelf and ready to activate at a moment’s notice will help ensure that consumers are protected when another storm strikes,” said Benjamin M. Lawsky, New York’s superintendent of financial services. This protocol will make it crystal clear to insurers what is expected of them when responding to future natural disasters and helping families and businesses get back on their feet.”

In his letter to insurers, Superintendent Lawsky did state that the measures laid out in this new protocol are not all-encompassing, but that they are those the administration would be most likely to employ, “in whole or in part,” following a future disaster in the state.

Difficulty in Modeling for Terrorism

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The following is an excerpt from the RIMS executive report “Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective.” The report is available for download here.

For any insurer to operate successfully and avoid going out of business, it must be able to accurately estimate the probability of its losses, the severity of those losses, and then determine the amount of premium that must be charged to cover those losses should they occur. Historical data from past events is used to predict the losses from future events and pric­ing is set accordingly.

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Even extraordinary events like Hurricane Sandy or the recent tornadoes in Oklahoma, while harder to accurately estimate, can be predicted to a certain degree based on historical data and experi­ence. Terrorism risk, however, differs substantially from these other risks in several different ways.

Terrorism risks lack certain elements possessed by other types of risk. Typically insurable risks will include the following elements: losses must be due to chance (accidental) and the risk must be predictable. The first element is lacking with terrorism risk because losses from terrorist attacks are not accidental, but rather the result of deliberate human behavior and action. For a terrorist attack to occur a plot must be hatched and then executed by one or more individuals. The motives, targets and actions of plotters are constantly changing and their motives are frequently affected by government actions that modelers and insurers are not privy to. These factors make modeling nearly impossible.

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Terrorism risk is also inherently unpredictable. Insurers can accurately predict which parts of the country will be hit by hurricanes or tornadoes and also what the anticipated losses will be based on the severity of an event. They are able to do this based on historical experience and data that thankfully does not exist for terrorism risk because of the rarity of terrorist events occurring.

The accuracy of weather predictions is enhanced by studying the “near misses” and variances in weather that resulted in a storm missing a tar­get or having its impact minimized. Information about “near misses” or foiled attacks is highly classified and not available to modelers. This lack of data, and the randomness of where terrorist events have occurred or were planned to occur, makes predicting such events impossible.

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Predicting the severity of losses from such an event is also difficult as losses vary significantly based on the scale of the attack. For example, losses from the 9/11 attacks have been estimated to be $35 billion while preliminary estimates of business losses from the Boston bombings are closer to $10 million. There are some recent attempts to model terror­ism events, however, they require making specific assumptions about the method of the attempt, the volume or size of chemicals or weapons and the specific site that will be attacked. While this information may be use­ful for strengthening a specific property’s risk of loss, it is not useful in attempting to assess potential risk exposures for a wider geographic area.

Florida Looking for NFIP Alternatives

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Last week, Florida Insurance Commissioner Kevin McCarty announced that his office is in the process of developing guidelines for insurance companies to request approval to write primary flood insurance in the state. This announcement came just one day after Rebecca Matthews, McCarty’s deputy chief of staff, told the Florida Senate Banking and Insurance Committee that the Florida Office of Insurance Regulation (FLOIR) was in talks with various insurance companies regarding writing primary flood coverage in the state. These developments are in response to continuing concerns about escalating flood insurance rates due to the Bigger-Waters Act of 2012.

The Biggert-Waters Act of 2012 extended the National Flood Insurance Program by several years while also putting in place several reforms meant to make the program more solvent. One of those reforms was a phasing in of actuarial flood insurance rates over time.

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For many the increased premium will be significant, if not severe. In Florida, the biggest hit will be to homes built prior to 1974 in high risk flood zones. At last week’s hearing it was reported that some of those homes could see rates rise from 0 to ,000.

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Current owners of those properties will continue to receive subsidized rates, but those subsidies will discontinue once the property is sold thus hindering the Florida real estate market.

Florida officials hope that the private primary flood coverage can serve as a viable alternative to the NFIP by providing lower premium rates, but there are significant hurdles to overcome. Private insurers will likely be hesitant to cover properties that the federal government has deemed high risk and there are legitimate concerns about the lack of available data and information to properly underwrite the risk.

“The private sector has not written flood insurance because when you start a company you have to have a ‘me, too’ filing of something that already exists,” said Locke Burt, an owner of Security First Insurance. No such company currently exists in Florida.

Florida Rep. Bryan Nelson added that “the big problem we have is we don’t have enough information to base a decision on, and until we have expected-loss ratios, I don’t think the private sector is going to be ready to jump in.”

Another NFIP alternative being considered would be the creation of a Florida flood insurance pool. Sen. David Simmons, chairman of the Florida Senate Banking and Insurance Committee, signaled that this could be an option if the private market is unable to respond fast enough. The hope is that the pool could provide lower rates than the NFIP.

Florida officials also continue to push for delays in NFIP rate hikes.

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Gov. Rick Scott called on President Obama to halt the hikes. “The president signed the bill. He can have an impact by stopping this.”

Insurers Discuss State of the Industry at FERMA Forum

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On Monday, FERMA presented a risk manager panel focused on buyer concerns and the need for improvement in the insurance industry.

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While the panelists gave the insurers above average marks, there were still several areas of concern. This morning executives from Lloyd’s, XL Group, Zurich, AIG and Allianz were given an opportunity to respond.

One of the concerns expressed by risk managers in Monday’s panel was the seeming inability of insurers to adapt and evolve in order to meet their clients’ needs. Mike McGavick, CEO of XL Group, agreed with their concern. “Our record of innovation in this industry is poor,” he said. “If we aren’t thinking anew about this rapidly changing world of risk, we will miss the boat, we will not move society forward, and you will find other ways to solve problems.”

“We have a lot to do on process innovation to make this industry more efficient,” added Thomas Hurlimann, CEO, global corporate of Zurich Insurance Company.

Another concern raised with the insurers was the perception that they are unwilling to pay claims. The insurers again saw this as a valid criticism.

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“I looked at the scores from the session yesterday, 5/10 for willingness to pay claims, and that’s all your buying here, actually, the promise to pay,” said Dr. Richard Ward, CEO of Lloyd’s. “Surely we can do better than that.”

Axel Theis, CEO of Allianz Global Corporate and Specialty, agreed. “In the past we haven’t given claims the platform that we should have.”

Part of the difficulty in getting claims paid has been attributed to the complex language used in policies. This issue was addressed by the morning’s panelists as well. Peter Hancock, executive vice president and CEO of AIG acknowledged that policy language was an issue.

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“Policy certainty and wording is clearly a long term objective, and I think the London market’s done a terrific job of eliminating ambiguity, but the U.S. has a long way to go to match that.”

McGavick took a different approach. “Because claims rise in unexpected ways, they don’t always fit neatly with what was discussed. As a result we have to work through it.” He went on to advise risk managers to “choose your insurer in part based on their attitude toward claims as opposed to the expectation that there will never be a conflict.”

This was the second panel in a three-part series presented at the FERMA Forum in Maastricht, Netherlands. The broker panel was held Tuesday afternoon.