Another “Sharknado” could take the insurance industry by storm

July 29th, 2014 No comments

Carbone-WilliamAccording to forecasts by the basic-cable network SyFy, a storm similar to the sharknado that hit Los Angeles last year is making its way toward the New York area. While AIR Worldwide estimated the losses from last year’s event at $100 billion, estimates for the impact on New York would heavily depend on the storm’s path. Let’s take a look at what impact the anticipated storm could have on the tristate area’s insurance market.

Is my property covered?
New York area homeowners should know that, much like the Los Angeles area residents, their policies will cover damage from windstorms, including tornados and hurricanes, subject to a windstorm deductible. These deductibles vary by policy and, more importantly, by region. Insureds in Tornado Alley will likely be subject to more significant windstorm restrictions, often needing a policy extension to ensure adequate coverage, while New Yorkers are more likely to have manageable windstorm deductibles since they are not as prone to these losses. The impact of windstorm deductibles on both an insured’s wallet and the insurer’s bottom line can be significant, depending on how a given storm is classified. In 2012, the use of executive orders and press releases to waive hurricane deductibles after Superstorm Sandy shifted a portion of the claim costs from the insureds to the insurer.

Fortunately for New York area residents, flying debris caused by windstorms is generally covered by homeowners policies. Similarly, comprehensive auto coverage would also cover physical damage that is due to debris from a windstorm. In this paragraph, “debris” can be read to mean “flying sharks.”  These coverages are important as a significant portion of the loss caused by tornadoes is due to flying debris damaging property that narrowly missed a direct hit, but was close enough to suffer the consequences.

Who pays the bills for shark attacks?
Health insurance policies cover attacks by animals, so New Yorkers can rest easy knowing their stitches will be covered. However, the tourist population should ensure that they have adequate visitors’ health insurance, as other countries’ universal healthcare policies do not apply here. Similarly, U.S. residents should check their health insurance policies before traveling abroad. Many health insurance policies operate differently for travelers abroad, and knowing what is covered in the case of a shark attack, or other medical emergency, could have a major financial impact.

For anyone keeping sharks as pets, you would be liable if a twister lifted your shark from your property and it were to bite a neighbor. Luckily your homeowners policy would cover this liability, assuming your specific shark was not an excluded breed. Many providers will deny coverage or alter policies for dog breeds considered “dangerous,” while other insurers will review dogs on a case-by-case basis. It can be assumed the same review would go into sharks kept as pets, so you may be covered for both your hammerhead and Labradoodle but not for your great white or Doberman.

Any new considerations
After seeing how the Los Angeles event ended, there are other possible implications in the New York insurance market that may come into play. It would be wise to review the intended uses on all recently purchased chainsaws, as many product warranty policies do not cover unintended uses, such as extraction from a shark torso. Additionally, the soft aviation market may need to harden a bit if helicopter pilots plan to help end a sharknado in the area. Last year’s storms ended when homemade bombs made out of kerosene containers were thrown from a helicopter into the twister, with the explosions equalizing the pressure. Without reviewing the underwriting, these types of flights are likely riskier than those anticipated in the standard policy.

With great white sightings on the rise in Cape Cod and a relatively rare Boston area tornado this week, a sharknado in the region appears possible. Luckily, it seems that most potential sources of loss for the average resident would be covered. Policy deductibles and exclusions may increase the final cost to insureds, but they likely won’t be footing the whole bill. It helps to know that the impact of a potential sharknado won’t take too big of a bite out of your wallet.

Will Carbone - Sharknado Picture

Will Carbone conducting research for this blog.

Financial implications of raising California’s MICRA cap

July 28th, 2014 No comments

California’s Medical Injury Compensation Reform Act (MICRA) has been the blueprint used by states to reform their medical professional liability (MPL) markets since its enactment in 1976. In part, the landmark legislation helps reduce MPL premiums and increase the availability of coverage for physicians by capping noneconomic damages at $250,000.

A pending ballot initiative in California now aims to increase the cap. In this Best’s Review article by Milliman’s Susan Forray and Stephen Koca, the consultants examine the financial effects an increased cap can have on the state’s MPL industry. They also consider how other states with similar tort reforms may come into the crosshairs.

Here is an excerpt:

Three dozen states have adopted some form of a cap on damages over the years, although in 12 of these states the cap has been overturned or otherwise invalidated, and remains overturned in most of these cases. And while these caps are often less effective than California’s, either because of higher limits or exceptions, they followed MICRA’s lead and reduced costs in many MPL markets.

Texas is perhaps the best example of a state whose MPL premium has been reduced by the effects of a cap on noneconomic damages. MPL premiums in Texas had been in close step with national trends until 2003, the year reforms were enacted in the state. Premiums declined relative to national levels a year after reforms were enacted, and continued to moderate for several years.

While nationwide premium per physician is approximately 25% less than in 2003, MPL premiums in Texas have fallen by more than 60% since that time—a clear demonstration of the impact that reforms have had on the MPL costs in the state, and a warning sign of potential increases that could be seen in California if the cap is increased.

For more perspective on the impact a higher cap would have on MPL claims, read Stephen’s article “The end of an era for noneconomic caps?

Capital management in a Solvency II world

July 21st, 2014 No comments

Solvency II will change the way insurance and reinsurance undertakings determine their capital requirements as well as introducing new rules with regard to what forms of capital can be used to meet those requirements.

This paper by Eamonn Phelan, Scott Mitchell, and Sinead Clarke addresses some of the key issues, including the need for a robust decision-making framework, how investment strategy fits in, uses of reinsurance, and the new regulatory landscape. The paper also outlines Pillar II and Pillar III requirements.

Life insurance-linked securities: 18 months in review

July 17th, 2014 No comments

In 2013 and thus far in 2014, we estimate that over USD 15 billion in reserve financing and embedded value (EV) financing transactions were completed, in spite of extensive discussions at the National Association of Insurance Commissioners on the use of captives to finance excess reserves. Most of these transactions involved the financing of excess reserves for U.S. life insurers selling level premium term insurance subject to Regulation XXX or universal life products with secondary guarantees subject to Actuarial Guideline 38. The forms of financing continued to evolve in 2013.

In addition to the reserve financing transactions and the EV financing transactions, in 2013 and thus far in 2014 the market saw at least USD 530 million in transactions to hedge catastrophic morbidity or mortality risk, and continued activity in the market to hedge longevity and other pension risks.

This paper explores the life insurance-linked securities market over the past 18 months and looks ahead to the remainder of 2014.

Milliman releases annual Embedded Value Study

Milliman today announced the availability of a new report detailing embedded value results for 32 major insurance companies in Europe.

The report examines trends among European companies reporting embedded values as of year end 2013 within the context of a global economy in the early stages of recovery. The report compares practices followed by major European companies and discusses embedded value reporting issues in the broader environment of Solvency II and International Financial Reporting Standards.

Against a backdrop of continued recovery in equity and debt markets, the narrowing of credit spreads and rising interest rates, embedded value reporting remained a key area of insurance company disclosures. Key insights include:

• The overwhelming majority of the companies included in this study, over 95%, now apply some form of market consistent valuation in the calculation of their embedded value.
• The ratio of market capitalisation to embedded value recovered significantly, with average market capitalisation, as a percentage of total embedded value, rising from 90% at the end of 2012 to 110% at the end of 2013.
• CFO Forum members experienced a robust and solid performance – with the combined embedded value increasing to £250 billion (€301 billion) at the end of 2013 compared with £222 billion (€273 billion) at the end of 2012.
• In addition to an improved economic environment, recent management actions in the wake of the Global Financial Crisis, such as product repricing and redesign, have led to improved values of new business. The total value of new business for CFO Forum members increased from £9.8 billion (€12.0 billion) at the end of 2012 to £11.9 billion (€14.3 billion) at the end of 2013.
• Some companies reflected elements of the latest Solvency II developments, mainly those relating to extrapolation methodology for establishing the long-term risk-free interest rate. However, despite the significant developments in Solvency II, all companies have generally used the same methodology to derive liquidity premiums as that used at the end of 2012. In particular, no companies included in the study used the Matching Adjustment or Volatility Balancer approaches detailed in the Technical Findings on the Long-Term Guarantees Assessment.
• The average equivalent cost-of-capital charge, where disclosed, decreased slightly from 3.4% at the end of 2012 to 3.3% at the end of 2013. The size of the liquidity premium applied by companies fell significantly over 2013, which was in line with the narrowing of credit spreads.

Overall, there are some signs of continued convergence in approach and in the information reported. The coming years will be a testing period for the industry as companies navigate the challenges of implementing new solvency and reporting requirements, while maintaining a high standard of supplementary reporting to satisfy the numerous stakeholders involved..

Interested parties may obtain a copy of the Milliman study here. For further information email Philip Simpson or Tatyana Egoshina in London.

Milliman survey indicates Indexed Universal Life and chronic illness riders remain priority for life insurers

July 8th, 2014 No comments

Total Indexed Universal Life (IUL) sales, as a percent of total Universal Life (UL) and IUL sales combined, increased from 14% in 2010 to 31% during the first nine months of 2013, as reported by participants in Milliman’s annual comprehensive study of UL and IUL issues. In recent years more companies have entered the IUL market. Expectations of survey participants suggest that companies will focus more on cash accumulation IUL and current assumption IUL products, and less on universal life with secondary guarantees (ULSG). Five of the 26 survey participants reported discontinued sales of ULSG products.

The popularity of chronic illness riders has also increased over the last few years. Fourteen participants currently offer a chronic illness accelerated benefit rider on either a UL or IUL chassis. During the first nine months of 2013 sales of chronic illness riders as a percent of total sales were 11% for UL products and 33% for IUL products. The majority of participants that reported UL/IUL sales with a chronic illness rider provide a discounted death benefit as an accelerated benefit. Similarly, during the first nine months of 2013, sales of long term care (LTC) riders as a percent of total sales were 17% for UL products and 9% for IUL products. Nearly 85% of survey respondents expect to market either an LTC or chronic illness rider within 12 to 24 months.

The seventh annual Milliman study, “Universal Life and Indexed Universal Life Issues,” focuses on issues relative to Universal Life with Secondary Guarantees (ULSG), Cash Accumulation UL, Current Assumption UL, and the corresponding indexed UL (IUL) versions. Twenty-six carriers of Universal Life and Indexed Universal Life products participated in this annual survey.

The study also includes information on product and actuarial issues, such as target surplus, reserves, risk management, underwriting, product design, compensation, pricing, administration, and illustrations.

The 484 page “Universal Life and Indexed Universal Life Issues – Detailed Report” is available for purchase by visiting the Milliman website or by calling Gina Ritchie at (312) 499-5605. Participating companies receive a complimentary copy of the detailed report, as well as individual company responses reported on an anonymous basis.

United Nations decision could have big implications for sexual misconduct claims

June 25th, 2014 No comments

The United Nations (UN) has recently taken the position that childhood sexual abuse should be considered torture. Classifying childhood sexual abuse as torture may eliminate statute of limitations in which victims can file civil suits. Any institution acting in an official capacity found to have caused pain or suffering through sexual abuse could be exposed to additional litigation.

In her article “Seeking justice: Insurance and sexual misconduct,” Milliman’s Christine Fleming provides perspective on insurance coverage issues that could be triggered if the UN’s initiative comes to fruition. Here is an excerpt:

Are old CGL (commercial general liability) policies still exposed today?
In cases of childhood sexual misconduct, the abuse often occurred many years before the lawsuit was brought or the claim was reported. This long report lag exists because states set the statute of limitations within which a plaintiff can bring a suit as the time when that person reaches the age of majority. In addition, some states have extended the statute of limitations specifically for childhood sexual abuse claims. The legislatures in these states reason that there are unusual psychological barriers impeding the victim’s ability to report these incidents, and lengthening the statute of limitations achieves a higher social purpose and promotes a just outcome. Several states allow five to 10 years after reaching the age of majority in which to file a suit, or longer. Two states have no time limitation for filing childhood sexual abuse lawsuits. Many states also have an alternate trigger allowing the plaintiff to file within a certain number of years after discovering their injuries were related to the sexual abuse. This is frequently not a clearly identifiable date.

Because of this long reporting lag, older CGL policies can and do get triggered for claims related to childhood sexual misconduct.

For abuse or injuries that occurred over a long period of time, how do we determine which policy responds?
If the abuse occurred over a long period of time, and/or there is a long lag before the claim is reported, then the insured may have several CGL policies in place, any or all of which could provide coverage for the occurrence. The relevant date for determining which policies are triggered is the date the damage occurred, not the date of the conduct that led to the damage. In the case of sexual misconduct, it is the date the injury occurred, not the date of the negligent hiring or supervision, that determines the policies triggered.

However, because of the repeated and continuous nature of many sexual abuse cases, it is difficult to determine the date on which the injury actually occurred. Therefore, most courts have held that all policies in effect during the period of actual abuse are triggered. This theory is known as the “exposure” trigger of coverage. Some courts, however, have held that the injury progresses even after the abuse ends—specifically, until the date the plaintiff discovers his or her abuse-related injury (i.e., when the injury becomes “manifest”). In these jurisdictions, all policies in effect during the period of actual abuse and thereafter until the date the injuries are discovered are triggered. This theory is known as the “continuous” trigger of coverage.

The fact that many policies may be triggered does not mean that all triggered policies will pay the same amount of indemnity or defense. Generally, there are two methods courts use to allocate damages among the triggered policies: pro rata and all sums.

Under the pro rata approach, losses are divided among all triggered policies. The courts applying pro rata allocation reason that this approach is consistent with the CGL policy; namely, that a policy pays only for damages occurring during that policy period. Of course, in cases of injuries sustained as a result of continuous or repeated sexual molestation, it is impossible to determine what quantity of the damage occurred during each policy period. Therefore, courts usually allocate pro rata based upon an insurer’s share of the time on the risk or some variant thereof (e.g., some states allocate pro rata based upon a combination of time and limits on the risk). In most cases, the insured’s own self-insured retentions in triggered years are also allocated a share of the exposure.

The all sums method also finds support in the CGL policy language; namely, that the insurer is required to pay “all sums” the insured is legally obligated to pay as damages resulting from an occurrence. Under the all sums approach, all losses are allocated to one policy period and losses are paid off of those policies up to the coverage limits. In short, insurers are jointly and severally liable for the entire amount of the claim. The insurers within that policy period may then pursue other carriers for contribution. In many cases, the insured’s self-insured retentions in years other than the allocated policy period do not contribute to the losses. In some cases, the insured can select the policy period within which losses will be allocated.

If the World Cup is disrupted, insurers may be the big losers

June 9th, 2014 No comments

Carbone-WilliamMillions of eyes will turn toward the 2014 FIFA World Cup in Brazil this summer. Most will be looking to see if Neymar can lead the home squad to glory, if Argentina can pull an upset, or if one of the European powers will prevail. (Apologies to the Yanks and Sam’s Army, but the odds, and a daunting schedule, don’t bode well for Team U.S.A.) There will also be a smaller set of eyes watching the news to see if civil unrest, labor strikes, or failed infrastructure will cause games to be delayed, rescheduled, or possibly even canceled. These would be the eyes of those who have written event cancellation coverage for the World Cup.

Event cancellation coverage is common for major sporting events, from Wimbledon to the Olympics. Details of the coverage provided are hard to come by, which is due to confidentiality concerns, but the basic premise is quite clear. While complete cancellations are rare, delays and rescheduling costs are covered as well. Insurers tend to treat most events similarly, but there are certainly more risks associated with the Olympic Games and World Cup. These events span several weeks and many sites over a wide area, and have more money invested in them than annual or regional sporting events. TV coverage and corporate sponsors are also buying coverage to protect their investments. For the Sochi games, the International Olympic Committee purchased roughly $500 million of the nearly $3 billion in coverage provided. The impact of a major disruption would be immense.

This year’s World Cup appears to be a much riskier event than normal. While Sochi had to contend with credible terrorist threats and spring-like weather conditions, Brazil is facing a multitude of issues as the tournament approaches. While travel logistics were always a concern with World Cup matches taking place all across the 3 million square miles of the country, now preparations and civil unrest are the chief concerns. Stadium preparations are coming down to the wire, labor unions are striking to take advantage of the increased international attention, and the Brazilian public is generally unhappy at the level of waste and corruption as promised infrastructure improvements have fallen by the wayside. The Sochi Olympics faced similar corruption charges, but the Brazilian public has been more demonstrative in their protests than the Russians were. Combine these potential disruptions with the necessary travel to get teams from site to site on time, and the potential for delayed matches is significant.

Typically, riskier events with large coverage amounts would be priced accordingly, but not so with event cancellation insurance. Much like trip cancellation insurance, the insured often purchases coverage well in advance of the event, but the similarities don’t end there. Both coverages experience a long period between time of purchase and the peak of exposure to loss. For example, a snow-weary traveler booking a Caribbean cruise for Labor Day weekend in January will purchase a policy to cover the trip. The likelihood of the trip being canceled from January through July is slim, but the factors affecting the likelihood of a cancellation can change dramatically. The price may have risen if forecasters called for an exceedingly active hurricane season or the cruise line started on a path to failure, but the insurer cannot adjust the price of the coverage for these events. Similarly, the Brazilian World Cup coverage was priced before the Soccerex Global Convention was called off and the reports of construction delays and infrastructure issues began. Coverage for the 2016 Olympic Games in Rio was also priced without considering the experience of Pope Francis’s visit in 2013, this year’s World Cup, or the knowledge of the major delays in preparation, as cancellation policies for the Olympics were likely purchased several years ago. One important contrast to trip cancellation policies is that event cancellation risks are highly concentrated and difficult to diversify over time and location.

As it is necessary to price event cancellation policies well in advance, it is likely that the true risk of a disruption of the World Cup or the Rio Olympics was not accurately measured when the policies were sold. As the event draws closer, the true risks associated with the events become clear, but it is too late to adjust the premium. However, history has shown these cancellations are rare, so it’s possible the only claim made this year will be for the Donovan family’s trip cancellation policy.

California hospitals workers’ compensation benchmarking report

May 21st, 2014 No comments

The issues that hospitals and other facilities are facing today are more complex and continuously changing. The risks of providing medical care and the costs of protecting against those risks alone, including the protection of employees from injury or illness in the delivery of that care, require hospitals to look closely at questions related to taking fully insured, partially self-funded, or self-insured positions. As these facilities are well aware, workers’ compensation laws in California make the choice increasingly complex—and important.

Keenan Healthcare and Milliman present the results of the first annual California Hospital Workers’ Compensation and Payroll Benchmarking Survey. This survey and report aim to provide industry-wide benchmarks in terms of the fundamentals from which informed decisions related to workers’ compensation and maintaining appropriate risk can be made: claim frequency and severity, medical and indemnity costs, the allocated loss adjustment expense (ALAE), and the impact of specific factors such as age, occupation, and more.

Loss of value insurance for professional sports

May 16th, 2014 No comments

Henk-MichaelProfessional sports are a big business. Revenue from the “big 4” leagues in the United States totals over $20 billion annually. From the player’s perspective, average salaries in these leagues range from $1.3 million per year in the National Hockey League to $5.2 million per year in the National Basketball Association. Not surprisingly, the drafts in the leagues have become increasingly important as the revenue skyrockets. However, not only are teams trying to cash in at the draft, by landing a top new player who will take them over the top, but there are also thousands of amateur athletes doing what they can to cash in as well.

With so much research time and money being put into the draft, even the seemingly most minor details about amateur players can cause their projected draft positions to fall. Because potentially millions of dollars are at stake when it comes to first professional contracts, elite students in recent years have begun purchasing insurance coverage to protect anticipated earnings. One of these coverages is total disability, which, as the name indicates, protects players from the (financial) risk of a career-ending injury.

However, these types of injuries are not the only value detractors that prospective pro athletes must be cognizant of. In the 2013 National Football League draft, for example, the top draft pick (Eric Fisher, drafted by Kansas City) signed a $22 million four-year contract, with a signing bonus of over $14.5 million dollars. The 11th pick in the same draft, (D.J. Fluker, drafted by San Diego), plays the same position as the first draft pick, but signed only an $11 million four-year contract, with a signing bonus of only $6.7 million.

It wouldn’t take a career-ending injury for a potential top pick in the draft to fall outside of the top 10. A disappointing season for their team, a lackluster final year in college, a minor injury or illness, or a myriad of nonathletic issues could also be the culprit. Elite level student athletes are starting to realize this, and have begun utilizing loss of value insurance contracts to hedge against injury-related drops in their draft stock. This coverage is designed to protect against the financial risk that the athlete’s draft position will fall in the event of an injury or illness. Once purchased, the policy indemnifies athletes in the event that a subsequent injury causes them to be drafted below their projected positions.

Clearly, the first step for insurers in pricing this coverage is to determine the projected draft positions of players. Because of the proliferation of coverage of all the major sports, there are many “mock drafts” off of which policy pricing can be based. There are a number of well-respected and nationally known mock drafts from which an initial projected draft position can be determined. Insurers can either rely solely on a single mock draft, or, as various mock drafts show different success rates over the years, could calculate a credibility-weighted average of players’ draft positions, with credibility weightings equal to the prior success of the analyst developing the mock draft.

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