Monthly Archives: April 2019

Catastrophes

All about pandemic catastrophe bonds

Leave a comment

In previous articles, we discussed how communicable diseases and pandemics are (or are not) addressed in personal and commercial insurance policies. Today, we’ll talk about pandemic catastrophe bonds.

The Ebola outbreak between 2014 and 2016 ultimately resulted in more than 28,000 cases and 11,000 deaths, most of them concentrated in the West African countries of Guinea, Liberia, and Sierra Leone.

The outbreak inspired the World Bank to develop a so-called “pandemic catastrophe bond,” an instrument designed to quickly provide financial support in the event of an outbreak. The World Bank reportedly estimated that if the West African countries affected by the Ebola outbreak had had quicker access to financial support, then only 10 percent of the total deaths would have occurred.

But wait, what are “catastrophe bonds” and what’s so special about a pandemic bond?

“Traditional” catastrophe bonds

Like good old-fashioned insurance, catastrophe bonds are a way to transfer risk, often for natural disasters. They usually work like this: investors buy a high-yield bond issued by an insurance company. If a specific qualifying event occurs, such as if claims from a natural disaster exceed a certain amount (an “indemnity trigger”), the bond holders forfeit the principal of the bond, which goes to the insurer to help defray costs.

Catastrophe bonds are high-risk investments – hence the high yields they pay to investors to compensate for that risk. After all, there’s a pretty good chance a sizeable hurricane will hit in any given year.

Pandemic catastrophe bonds

Pandemic catastrophe bonds are similar. An entity (like the World Bank) sells a bond, which pays interest to the investors over time. If certain triggers occur, then the principal from the bond sale is quickly funneled to medical efforts to contain and quell the disease outbreak. That way, affected regions don’t have to wait for aid money to be raised and coordinated.

Pandemic bonds are somewhat different from traditional catastrophe bonds, though. Remember, traditional catastrophe bond triggers are usually based on insurance losses (indemnity triggers), which don’t make much sense in the context of a disease outbreak. Insurance losses can take quite some time to adjust and finalize.

There’s no time for that kind of thing when we’re dealing with a pandemic. Capital needs to move quickly to the affected region. So if a trigger can be quickly determined, then the capital payouts can be made quickly as well.

That’s why pandemic bonds are triggered by, for example, the number of patients or the speed of disease spread (a “parametric trigger”). Parametric triggers are usually objectively verifiable, such as how many cases of a disease have been reported in a given time. Once that trigger is activated, the bond gets to work. No further adjustment needed.

Why are catastrophe bonds useful for fighting pandemics?

And that’s what makes pandemic bonds attractive for addressing disease outbreaks: speed. Since pandemic bonds are not triggered by losses, but rather by the actual, real-time spread of the disease, capital can flow much faster than if it had to wait until insurance losses began rolling in. That means near-immediate financial support for health clinics, aid workers, containment efforts, and more.

Indeed, the speed of capital flow to emergency response is crucial for pandemics. Global supply chains and interchange, not to mention the exponential growth in international travel, mean that disease outbreaks can spread much faster and can cause much more widespread damage than in the past. The faster a disease can be nipped in the bud, the fewer people infected – and the less disastrous the outbreak.

Pandemic bonds in the real world

In 2016 the World Bank developed the Pandemic Emergency Financing Facility (PEF), which created, in part, a pandemic catastrophe bond to help provide capital in the event of another disease outbreak in West Africa. The PEF is triggered by number of deaths, speed of disease spread, and the spread of disease across international borders, and provides coverage for six viruses, including Ebola. The program has been supported by private reinsurers as well, including Munich Re and Swiss Re.

You can learn more about the PEF here.

Insurance Industry

From the I.I.I. Daily: Our most popular content, April 19 to April 25

Leave a comment

Here are the 5 most clicked on articles from this week’s I.I.I. Daily newsletter.

To subscribe to the I.I.I. Daily email daily@iii.org.

 

 

 

 

Workers Compensation

It’s safe to work in (not on) marijuana

Leave a comment

There’s a pervasive myth out there that the marijuana industry is an unregulated Wild West populated by desperadoes and mountebanks out to score a quick buck.

But even a passing familiarity with how the industry operates in states with legal recreational and medical marijuana should be enough to dispel that myth. Marijuana operations are subject to extremely strict licensing requirements and regulatory oversight. Every player in the marijuana supply chain is tightly controlled – from cultivators to retail stores to, yes, the buyers themselves.

In fact, a recent analysis from workers compensation insurer Pinnacol Assurance suggests that the industry’s strict regulatory oversight may also be the reason why it’s a safe industry to work in.

Pinnacol’s analysis looked at Colorado claims data for marijuana workers. There were 350 injuries in 2018, most of which were strains, cuts, and slips and falls. Pinnacol concluded that the industry is relatively safe when compared to similar job-types in Colorado.

In addition to tight regulations, the analysis suggests that Colorado marijuana operators are also increasingly focused on safety and risk mitigation.

But working in marijuana is different from working on marijuana. Working stoned is probably a bad idea. You can read more about marijuana and employment issues here.

Auto Insurance, Homeowners Insurance

Florida legislature passes AOB reform

1 Comment

Insurance Journal reports that the Florida Senate has passed a bill designed to reform parts of the state’s insurance assignment of benefits (AOB) system. Governor Ron DeSantis has stated that he plans to sign the bill into law.

Florida’s AOB system has long been in dire need of reform.

As we document in our report “Florida’s assignment of benefits crisis”, an assignment of benefits (AOB) is a contract that allows a third party – a contractor, a medical provider, an auto repair shop – to bill an insurance company directly for repairs or other services done for the policyholder.

The process is innocuous and common throughout the country. But as our report notes, Florida’s unique legal systems richly rewards plaintiff’s attorneys and vendors when they submit inflated bills to insurance companies and then file lawsuits when those bills are disputed.

Not just a few lawsuits. Lots of lawsuits. The numbers are staggering. There were roughly 1,300 AOB lawsuits statewide in 2000. There were more than 79,000 in 2013 and more than 153,000 in 2018, a 94 percent increase in just five years.

Inflated claims and massive volumes of lawsuits have the predictable result of driving up insurance companies’ legal costs. Insurers are forced to then pass those costs on to consumers. In the study, we estimate that Florida’s auto and homeowners policyholders have paid about $2.5 billion more for insurance over the past dozen years to cover the increase in legal costs.

That doesn’t even count the billions more in excess claim settlements that are at the heart of the problem.

The new bill seeks to address the problem by reforming how AOBs can be executed and how plaintiff’s attorneys can get paid for lawsuit settlements. If signed, the bill will come into effect on July 1, 2019.

You can download our report documenting the crisis here.

Insurance Industry

From the I.I.I. Daily: Our most popular content, April 12 to April 18

Leave a comment

Here are the 5 most clicked on articles from this week’s I.I.I. Daily newsletter.

To subscribe to the I.I.I. Daily email daily@iii.org.

 

 

 

Corporate Social Responsibility

Recruiting young workers through a culture of volunteerism

Leave a comment
photo courtesy of State Farm®

Did you know that volunteering your time and expertise can make you happier and healthier? It’s been shown that unpaid work for the good of others enables people to make new friends, learn new skills and experience reduced stress levels.

And it’s not just individuals who benefit. Companies that create a culture of volunteering have better employee morale, workplace atmosphere and brand perception. A Deloitte study found that a large majority (89 percent) of employees think that companies that sponsor volunteer activities offer a better work environment. Volunteer activities were also reported to be more effective at boosting staff morale than company-sponsored happy hours, and more than three-quarters of workers said that volunteering is essential to employee well-being.

The insurance industry is no slouch when it comes to volunteering. The Insurance Industry Charitable Foundation (IICF) has contributed more than 300,000 volunteer hours to hundreds of community nonprofit organizations since its inception in 1994. The industry gives back to communities in significant and varied ways including pro bono and skills-sharing support to nonprofit organizations, disaster response, relief and recovery, employee-driven outreach in local communities and many other creative corporate social responsibility initiatives.

The industry is also hoping to recruit and retain workers by emphasizing the culture of volunteering. On April 10, the IICF released a white paper documenting the findings of its Millennial Ideas Summit. The summit convened in late 2018 with more than 50 young leaders and emerging talent from across the insurance industry to discuss key topics and challenges facing the industry. These included talent and recruitment of millennials; technology, innovation and change; and social responsibility, particularly the industry’s philanthropic response following natural disasters.

The paper, What Millennials Want, how are we engaging the millennial workforce, concluded that communicating to the younger workforce that insurance is a business of service and one that helps people in their times of need is critically important to millennials, who want opportunities to give back and make a difference through experiences and grassroots ways that help their communities.

April is National Volunteer Month. What is your company doing to promote volunteerism? Let us know in the comments section.

 

Workers Compensation

WCRI releases 2019 workers compensation law compendium

Leave a comment

This week, the Workers Compensation Research Institute (WCRI) published its latest edition of workers compensation laws in the U.S. and Canada, which includes regulations and benefit levels as of January 1, 2019.

Per WCRI:

In Canada and the United States, workers’ compensation is entirely under the control of sub-national legislative bodies and administrative agencies. The differences between jurisdictional laws and regulations can be subtle and this survey gives you the ability to understand those differences.

WCRI members can download the report here.

For the more casual readers out there, check out our page on workers compensation and how it works.

Careers and Employment, Insurers and the Economy

Making sense of the dip in property/casualty carrier employment

1 Comment

By Dr. Steven Weisbart, Chief Economist, Insurance Information Institute

 

On a seasonally-adjusted basis, the number of people working for property/casualty (p/c) insurers has been dropping continually for two years (since February 2017), from 551,200 to 520,700 (the preliminary estimate for February 2019).

Seasonal adjustment plays a small part in determining these numbers. The not-seasonally-adjusted p/c carrier employment for February 2017 was 549,500, and the February 2019 preliminary estimate was 518,600.

What’s going on? Is this a trend? Based on the numbers alone, it’s hard to tell. Consider the following graph of seasonally-adjusted p/c carrier employment since January 2011 — 18 months after the official end of the Great Recession:

Source: Bureau of Labor Statistics

Don’t be misled by the spike in March 2015-March 2016. This is how the Bureau of Labor Statistics incorporates a change in classification—that is, in this case, some people who were previously not considered employed by p/c carriers were, as of March 2015, now considered as employed in this industry. Rather than an instant change, the adjustment is made over twelve months beginning and ending in March.

Since the data that begin in March 2016 also show a downtrend, it is easy to infer that, if there had been no reclassification in 2015-16, the downward trend that started (on the graph) in 2011 would in 2019 probably show p/c carrier employment at or below 500,000.

Although we don’t readily have policy counts over that span, it is reasonable to assume that, with growth in the population and the economy, p/c carriers are growing, and doing so with fewer employees. It is likely that at least some of this is due to the use of digital methods for activities that humans previously did. P/C carriers are becoming more productive.

Insurance Industry

From the I.I.I. Daily: Our most popular content, April 4 to April 11

Leave a comment

Here are the 5 most clicked on articles from this week’s I.I.I. Daily newsletter.

To subscribe to the I.I.I. Daily email daily@iii.org.

 

Health & Safety

Commercial insurance, diseases and epidemics

Leave a comment

In a previous article, we discussed how personal insurance policies address communicable diseases and epidemics. In this article, we’ll look at how commercial insurance policies handle these issues.

Between 1918 and 1919 the so-called Spanish influenza pandemic* killed at least 50 million people worldwide and infected about 500 million people – or about 1/3 of the entire world’s population at the time.

While the Spanish flu’s destructiveness has been an outlier over the last several decades, epidemics and pandemics on a smaller scale do still happen (avian flu, swine flu, Ebola, etc.).

How could disease outbreaks impact commercial property and general liability insurance?

[Content warning: wonky]

Continue reading Commercial insurance, diseases and epidemics →