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Napa Quake Economic Loss Estimates at $1 Billion

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A state of emergency was declared in California yesterday by Gov.

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Edmund G. Brown due to the effects of a 6.1 magnitude earthquake that rocked the Napa Valley area in northern California. The U.S. Geological Survey estimates that economic losses from the quake could top $1 billion and said there is a 54% likelihood of another large quake, magnitude 5 or higher, within the next week.

As of 4:15 p.m. Sunday, six aftershocks had been reported, four centered near Napa, ranging 2.5 to 3.6 magnitude. Two others, a 2.8 and a 2.6 were reported near American Canyon, according to the USGS.

The Napa quake is the largest in the Bay Area since the 1989 Loma Prieta quake, which was magnitude 6.9. That quake resulted in $1.8 billion in insured claims (in 2013 dollars) being paid to policyholders, said Robert Hartwig, Ph.D., president of the Insurance Information Institute.

In the Napa region, widespread damage has been reported to infrastructure, including roads and utilities and public buildings such as the Napa Post Office, the county’s administration building and numerous homes. The City of Napa reported that as of Sunday afternoon 120 patients had been treated or are being treated. Three patients—two adults and one child—suffered critical injuries, Gov.

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Brown’s office reported., adding that power outages also occurred, affecting 69,000 people across the region.

The costliest earthquake in United States history, was the Northridge Quake, with insured losses totaling $24.1 billion (in 2013 dollars). The U.S. has about 20,000 earthquakes annually, mostly small, and 42 states are at risk of quakes, according to the U.S. Geological Survey.

Despite the known high potential for earthquakes and resulting damages in the state, however, only about 12% of California homeowners purchase earthquake coverage, the I.I.I. said.

Of concern are business interruption (BI) losses, as the Napa region is a popular tourist destination. Many businesses that attract visitors, including wineries and restaurants, have sustained damage, both non-structural and structural, according to EQECAT.

According to the I.I.I.:

Earthquakes in the United States are not covered under standard homeowners or business insurance policies. Coverage is usually available for earthquake damage in the form of an endorsement to a home or business insurance policy. However, insurers that don’t sell earthquake insurance may still be impacted by these catastrophes due to losses from fire following a quake.

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These losses could involve claims for business interruption and additional living expenses as well. Cars and other vehicles are covered for earthquake damage under the comprehensive part of the auto insurance policy.

Financial Services Firms Report Losing 27% of Revenue Due to Poor Reputation

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Improving reputation remains a chief objective in the financial services industry — and rightfully so, according to a new study that reports firms saw an average of 27% of revenue lost in the past two years due to reputation and customer service issues stemming from the financial crisis.

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The 2014 Makovsky Wall Street Reputation Study found that 81% of financial service firms are still feeling major negative impacts on stakeholder perception, and over three-quarters of financial services executives say industry risk is the same or worse than in 2007.

Public perception, riskier markets, and regulatory actions are the biggest impediments to industry recovery, executives told the communications firm. The biggest drags on reputation come from negative public perception (64%) and regulatory actions (55%), they said. A majority agreed that the top emerging reputation risks are high frequency trading and cyber data breach.

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Further, four out of ten executives say their company’s reputation has already suffered due to recent cyber data breaches.

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Makovsky Wall Street Reputation Study

Jordan Belfort Delivers Keynote at RIMS 2014

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DENVER—In his opening keynote address at RIMS 2014, Jordan Belfort, the infamous “Wolf of Wall Street,” spoke about the moment when his successful business career took a wrong turn. It wasn’t a big dramatic moment that set off major regulatory red flags, but rather a minor ethical lapse that went largely unnoticed.

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The problem was “the ethical line moved,” he said, and it became easier and easier to compromise on his standards until eventually he was thrown in jail for securities fraud.

This proverbial death by a thousand cuts should sound familiar. It is the same thing that happened during the subprime mortgage crisis when greed got the better of mortgage brokers as they stopped really evaluating the credit worthiness of prospective borrowers. And it is the same thing that happens in any organization when complacency sets in and risks are overlooked. As Belfort said, it is the result of “human beings not using common sense” and relying too much on models to make decisions for them.

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For risk managers, it is a reminder to never lose sight of the details because details are what can create the biggest headaches.

For Belfort, it took 22 months in jail, millions of dollars in restitution payments and a family upheaval for him to learn the lesson that, “success in the absence of ethics and integrity is not success—it’s failure.”

Belfort said he regrets the harm he caused with his reckless and unethical behavior and cautioned those that are new to the business world to always do a gut check of the business they are involved in and not take it for granted that someone else is making sure everyone stays honest. “If something doesn’t smell right, it’s probably not right,” he said.

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He also advised students to master the art of persuasion and communication. It’s a skill that is great for salespeople who are trying to get a client to see positive potential, but it is also great for risk managers who are trying to communicate risk and make sure that the organization takes appropriate measures to address it.

But the point, ultimately, is that ethical behavior leads to greater success than just going for the quicker buck. Contrary to Gordon Gekko’s motto, “greed is not good,” Belfort said. “Passion is good.” At the very least, it certainly beats prison.

The Rise and Fall of Captive Reinsurers in the Mortgage Market

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Before the collapse of the housing market in 2008, it was common for large, high-volume mortgage lenders to form captives to spread their exposures to property mortgage insurance (PMI). But once the market bottomed-out, these arrangements fell under greater legal scrutiny and many courts are now finding them lacking. According to attorneys David McMahon and Peter Felsenfeld of Barger & Wolen, in a new online article in Risk Management magazine, the way premiums are collected by the captives may be a violation of federal law.

Mortgage reinsurance captives…are not funded by premiums paid by the parent company. Just like a standard reinsurer, they operate by collecting premiums from the PMI provider and sharing in the payment of losses. They are “captives” by virtue of their relationship to the parent institutional lender. In that way, they appear to the outside world just like any other wholly owned subsidiary of the lender.

Once commonplace, this arrangement may create legal exposure to lenders that outweighs the benefits of reinsuring through a captive. Courts are increasingly frowning on the captive mortgage reinsurer model, allowing class actions to proceed against lenders that allege the premiums generated constitute improper referral fees or even “kickbacks.”

As the authors report, court decisions over the last few years are increasingly chipping away at the concept of mortgage reinsurance captives and putting lenders on the defensive. For more, you can read the entire article at RMmagazine.com.