As selected by Insurance Journal
1. Climate Change
In February, the Intergovernmental Panel on Climate Change issued the first of three reports. It confirmed: 1) the temperature in the atmosphere and the oceans has grown warmer and can be expected to continue to do so. 2) The amount of greenhouse gasses, mainly CO2 and some methane, has increased markedly since 1750. 3) These gasses are the most significant cause for the temperature increase. 4) Human activity is primarily responsible for their production.
Al Gore helped the cause, but in reality, currently there is little being done because people want to be green on one hand, but won’t do what it takes to ‘be green’ like stop driving their SUV’s.
Despite some deadly storms no serious hurricane struck the United States in 2007. As a result, insurance company balance sheets are flush at year’s end, calls for premium reductions have increased and reinsurance treaty renewals will probably be at lower levels.
3. Soft US Market
The soft market catapulted into full swing in virtually all lines of insurance in 2007. Although the absolute level of rate decline varies substantially by line of business the rate of deterioration is accelerating, and appears to be spreading into coastal and catastrophe-prone areas of the country although insurers are still charging rates commensurate with the risks they assume.
4. Subprime Mortgage Credit Crunch
Over the last five years a combination of rising house prices and clever financial innovations, led mainly by investment banks and hedge funds, fundamentally altered the way home mortgages were structured. Home loans were “packaged” into investment vehicles ï¿½ CDO’s (commercialized debt obligations), SIV’s (structured investment vehicles), etc., and sold on to investors. Despite the fact that no one really knew what had been “packaged,” the rating agencies considered them as low risk securities, often rating them triple “A.” When balloon payment provisions caused homebuyers to default, seriously depressing house prices, financial institutions began refusing to deal in them. Global credit markets began to dry up and central banks pumped billions into the currency markets in an effort to keep the vital system going, so far with limited success.
5. Terrorism Coverage
Just two weeks before the end of the year, and the fate of the federal terrorism insurance program was still unknown. But on Dec. 26, just two days before Congress adjourned for 2007, President Bush signed legislation that reauthorizes the federal backstop for seven years.
Some key provisions of HR 2761 or the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007 include extending the current program for seven years; eliminating the distinction between foreign and domestic terrorism; and requiring the U.S. General Accountability Office (GAO) to conduct two studies. One study to address the issue of providing terrorist insurance coverage for nuclear, biological, chemical or radiological (NBCR) events and how best to expand such coverage; and the other ï¿½ to be completed in six months ï¿½ to examine the issue of high-risk areas in the United States that are faced with unique capacity constraints. Furthermore, the bill makes adjustments to the current mandatory recoupment requirements of the TRIA program through the use of accelerated policyholder surcharges during the first four years of the seven-year extension (2008-2012).
6. ‘Made in China’ Loses Its Luster
Quality control problems hit goods “Made in China” during 2007. Tainted toothpaste, lead paint on toys, poison dog food and similar product control lapses shook consumer confidence. The strict health and safety regulations in force in the United States and the European Union triggered a number of product recalls ï¿½ around 20 in the United States in August alone. Yet again, however, countless children may die but Americans will never ever decide to pay more for products made domestically over the cheaper Chinese alternatives. There will always be a market for cheap.
7. Agency Compensation
Compensation plan structures for independent agents took a turn in 2007 with a handful of major insurance carriers banning the use of contingent commissions at the beginning of the year. Insurers no longer able to compensate agencies through contingents sought out other ways to reward their profitable agencies. Travelers and Chubb were among the insurers that announced plans to replace contingent commissions with new supplemental compensations programs in 2007. The new compensation programs are even better for agents, some said, because they allow agents to know sooner what their year-end bonus might be. But at least one mega-broker, Willis Group Holdings, rejected the incentive arrangements because, it says, they fail to fix the conflicts associated with the contingent commissions they are meant to replace. While mega-brokers such as Willis, Marsh, Aon and Gallagher no longer accept contingent commissions, a number of mid-size brokers do.
8. Fires and Floods
As of the first week in December no Katrina, tsunami, earthquake or similar disaster has occurred. However, there were a number of “lesser” events. Fires in California destroyed more than 2,500 homes, severe storms and flooding struck Washington state in early December and hurricanes ravaged Haiti, Southern Mexico and Central America. The worst floods since 1947 hit the United Kingdom in June and July causing an estimated $4 billion in insured losses. Windstorm Kyrill roared through Holland, Germany, Denmark and on into Eastern Europe leaving around $4 billion in insured losses in its wake.
Regulators like incremental changes rather than revolutions. Nonetheless two major upheavals are on the table.
New York’s Insurance Superintendent Eric Dinallo has proposed doing away with the collateral trust fund requirements for reinsurers and replacing it with a system that treats the highest rated U.S. and non-U.S. reinsurance companies the same as New York reinsurance companies.
The European Commission has set 2012 for final adoption of the long-delayed Solvency II insurance accounting rules. When the European Union members enact them, they will establish a new standard based on risk levels, rather than capitalization. How to reconcile Solvency II with the U.S. system remains to be worked out.
10. Marsh Meltdown Hits MMC
Marsh & McLennan (MMC) is still arguably the world’s largest insurance intermediary. But while its non-brokerage divisions, Mercer, Oliver Wyman and Kroll, are all doing relatively well, Marsh, the brokerage division, and MMC’s original business, has faired poorly. So poorly that MMC President and CEO Michael G. Cherkasky fired its CEO Brian Storms in September, and called Marsh’s third quarter earnings performance “unacceptable.”
Any stories missed?