Monthly Archives: June 2019

Specialty Coverage

Preparing for a Festival Fiasco with Insurance

Leave a comment
Getty Images

By Brent Carris, Research Assistant, Insurance Information Institute

On Sunday, June 3rd, the Governor’s Ball Music Festival (Gov Ball), a three-day event on Randall’s Island in New York, fell victim to the perils of inclement weather. After delaying set times by nearly seven hours, it was subsequently announced to the attendees that all were to evacuate due to the inclement weather forecast. What followed was a mass exodus of frantic festival-goers trying to get off the island.

Gov Ball organizers announced that they would be offering full refunds to everyone who bought a Sunday ticket (prorated if they had purchased a three-day pass). As 150,000 visitors flocked to Randall’s Island for Gov Ball in 2017, according to a Founder’s Entertainment white paper, this could result in roughly $19 million in refunds.

But the event organizers won’t be on the hook for the full cost of those refunds as they likely have event cancelation insurance.  Event cancelation insurance typically costs 1 to 1.5 percent of the overall cost of an event, and provides cover for cancellation, abandonment, interruption or postponement of an insured event for reasons beyond the control of the event organizer.

In 2017, we witnessed the worst of a music festival gone awry with the infamous Fyre Festival (Fyre).  While the Fyre debacle was largely due to the organizers’ lack of planning, the outcome taught mega-festival organizers what not to do and how to best prepare for uncontrolled disturbances.

Ideally, risk and claim specialists tour facilities far in advance to mitigate any potential dangers and to keep all attendees safe. Determining the size and type of insurance coverage means understanding the risks of the specific event.

As noted in this  Insurance Journal article, mega-events like Coachella and Lollapalooza will take on at least five kinds of insurance policies: cancelation, including terrorism coverage, general liability, umbrella policies, workers’ compensation, and business auto coverage. Additional coverage can be bought for crime, errors and omissions policies, directors and officers’ policies, and if applicable, film insurance.

When all goes well, a music festival means great music with great friends. However, when weather doesn’t agree or emergency strikes, the result can be a calamity for the festival organizers and the attendees.

 

 

Insurers and the Economy

Bodily Injury Liability Prices and Overall Inflation

Leave a comment

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

 

There is good news on the bodily-injury liability insurance front, but no one seems to have noticed. The cost of health care for severely-injured people has barely increased in the last year.

Primarily, bodily injury (BI) liability insurance pays for the medical bills of people who have been severely injured due to the negligence of the insured. As a result, the severity of BI claims would tend to track price changes for inpatient and outpatient hospital services, where severely-injured people would go to get treatment and recover. And lately, these price changes have been shrinking—big time.

The Bureau of Labor Statistics calculates a price component for each of these each month as part of the various versions of the Consumer Price Index (CPI).[1] On June 12 the BLS published its latest data for May 2019.

For inpatient hospital services, the change in prices was +1.2 percent, when compared to prices a year earlier, in May 2018. For outpatient hospital services, the change in prices was even smaller (+0.9 percent), when compared to prices a year earlier.

To put these numbers in some context, the Consumer Price Index for All Urban Consumers (CPI-U)—the most widely-used measure of inflation—rose by 1.8 percent in May 2019 vs. May 2018. Many economists prefer to measure inflation without the effect of price changes for food and energy, which are notoriously volatile. This measure is known as the core CPI. Its May 2019 vs. May 2018 change was 2.0 percent.

When was the last time that any healthcare costs—let alone for hospital services—rose at a slower rate than general inflation? Of course, many other factors affect claims for bodily injury liability, but this is a welcome trend for a significant element.

[1]The most familiar index is the Consumer Price Index for All Urban Consumers (CPI-U)—prices as experienced by all urban consumers, but BLS also publishes CPI-W (prices as experienced by urban wage earners and clerical workers).

Catastrophes, Disaster Preparedness

Mexico’s coral reefs get insured against storm damage

Leave a comment
iStock, Riviera Maya, Quintana Roo, Mexico

An innovative insurance product is being deployed to protect several miles of coral reef  around Cancun and Puerto Morelos, reports Business Insurance.  The government of Quintana Roo, Mexico, purchased a parametric insurance product that would pay up to $3.8 million to repair hurricane damage to the reef.

Parametric insurance works using a clearly defined parameter (a metric or an index) that triggers the payout. Up until recently, parametric insurance was used by reinsurers for catastrophe risks, but it has started to be used in the travel, retail and agricultural sectors Insurance Business reported a year ago.

The reef insurance will be triggered if wind speeds above 100 knots are registered within the covered area, with a payout split of 50 percent for reefs and 50 percent for beaches.

One of the advantages of parametric coverage is that it pays out very fast, which is crucial since reef repair will need to be done very quickly to avoid further damage, according to Mark Way, director of Global Coastal Risk and Resilience at The Nature Conservancy in Washington.

“We hope this insurance approach will serve as a scalable model to build new financial mechanisms for the protection of nature,” said Mr. Way.

The insurance policy is financed by the Coastal Zone Management Trust, an organization formed in March 2018 to promote the conservation of coastal areas in the Mexican Caribbean.  Partners in the development of the reef insurance concept include the Nature Conservancy, the state government of Quintana Roo, the Cancún and Puerto Morelos Hotel Owners’ Association, CONANP, Mexican Universities and insurance industry representatives. Swiss Re Ltd. was an early partner in the development of the concept.

Insurance Industry

J.D. Power Study on insurers and data: a matter of trust

Leave a comment

As insurance professionals, we’re always talking about harnessing new data streams to improve our products. The benefits are obvious, we tell ourselves – think of the potential to align prices with real risks! But sometimes, we also need to ask ourselves: do our customers actually want us to use these data? Do they like the idea of us scouring their social media footprints to help price their insurance coverage?

A recent J.D. Power survey asks exactly these questions – and found that we have a long way to go before our customers get comfortable with their personal insurance company collecting troves of their data. The survey found that 55 percent of customers don’t trust their insurance company to collect and use “alternate data”. Only 22 percent affirmatively trust their insurer. (Alternate data includes anything from driving behavior to social media; basically, anything that goes beyond what we traditionally consider insurance-relevant data, like age.)

But the issue is somewhat more nuanced than that. Customers are, unsurprisingly, more comfortable sharing data that they already share. Thirty-nine percent are okay with sharing utility, phone, or rent payment information.  And 45 percent are willing to share their driving data with an insurer.

This could actually be good news for insurers. It shows that customers might change their perceptions of trust regarding their insurer as they become more used to sharing the data. J.D. Power notes that “Initially, customers are more comfortable sharing alternative data they are more accustomed to sharing elsewhere. Driving data and its use in telematics or usage-based insurance programs is fairly common knowledge among customers.”

It’s when the data becomes more personal, like social media posts, that customers grow wary. Only 15 percent and 14 percent were willing to share online activity and social media data, respectively. And a sizable chunk (35 percent) isn’t willing to share any alternative data at all.

Additionally, insurance customers are sensitive about what their insurers are using their data for. For example, 65 percent think it’s reasonable for an insurer to use alternative data to help recover stolen vehicles; 63 percent for an insurer to tailor coverage; and 60 percent for more accurate premium pricing. But they become less accommodating when it comes to using data for things like marketing – 55 percent don’t think that’s a reasonable use of their data.

According to J.D. Power, customers are “jaded by the current overwhelming state of marketing, [so] insurers need to underscore the value” of the data their collecting to the customer. That means the responsibility lies with insurers to prove to their customers that the data collection is worth it.

Not surprisingly, even if a customer thinks it’s okay for an insurer to collect their data, the odds are good they’re worried about privacy. Fully 85 percent consider the risks of privacy and security breaches a disadvantage to sharing their data – even if they’re okay with sharing to begin with. And 74 percent think insurers should ask their customers before collecting and using their alternative data.

The upshot is that customer acceptance of alternative data is a gradual process. Customers want to know what data is being collected. They want to know how it’s being used. And if insurers can connect the dots for them – can demonstrate the value that the alternative data is bringing – then their trust and acceptance will grow. As the J.D. Power survey shows, this has already started happening with driving data. How this will play out with other alternative data will largely be up to how well insurers can prove themselves trustworthy data custodians.

Insurance Industry

From the I.I.I. Daily: Our most popular content, May 31 to June 6

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.

 

Catastrophes

How bad is the storm damage? Ask Waffle House

Leave a comment

Some people keep an eye on the S&P 500 index. Others, on the Waffle House Index.

It all apparently began with former head of the Florida Department of Emergency Management, William Craig Fugate. Fugate would use the Waffle House diner chain as a proxy for how businesses and communities in the surrounding area were recovering after a disaster.

The Index (WHI) is pretty simple, as a FEMA blog post explains:

  • If a Waffle House is open and serving its full menu: green. That means the diner probably has power or is running on a generator.
  • If a Waffle House is open but serving a limited menu: yellow. The diner probably doesn’t have electricity or running water but can still cook on a gas stove.
  • If a Waffle House is closed: red. The disaster is bad enough that not even Waffle House is serving eggs and grits.

The WHI is a good proxy because the Waffle House – open 24/7, 365 days a year – has excellent risk management procedures in place and often stays open during natural disasters. If even the Waffle House is closed, then you know the situation is bad and the broader community is likely severely impacted.

The I.I.I.’s own Lynne McChristian was once able to grab dinner thanks to a code yellow WHI. “During the 2004 hurricanes in Florida, the disaster response team I was leading lined up outside Waffle House for dinner, as it was the only place open,” McChristian said. She fed six people for $30. Not bad.

The WHI is so good a proxy, in fact, that even FEMA keeps an eye on the index during a natural disaster.

Back in 2016, the WHI went red before Hurricane Matthew hit Florida. As FiveThirtyEight reported, it sparked a, well, colorful reaction:

Waffle House announced Oct. 6 that it was pre-emptively closing some restaurants on a 90-mile stretch of Interstate 95 between Fort Pierce and Titusville in Florida. (In the next few days, as the storm churned up the coast and flooded North Carolina, it would close 98 all told.) And as soon as the announcement went out, media tracking the storm, and customers on social media, invoked the closings as a sign of the apocalypse.

The Miami Herald: “When Waffle House surrenders to a hurricane, you know it’s bad.” The Washington Post: “Hurricane Matthew is so scary even the always-open eatery is evacuating.” A faithful customer on Twitter: “GOD IN HEAVEN THIS IS THE END!”

For those in the path of natural disasters (including tornadoes): stay safe and keep close watch on the WHI to see if you can still get an All-Star Special after the storm is over.

Insurance Industry

Updated 2019 Atlantic hurricane forecast

Leave a comment

Dr. Phil Klotzbach, an atmospheric scientist at Colorado State University (CSU), and his team released their updated forecast for the 2019 Atlantic Hurricane season which began on June 1 and continues through November 30.

The team adjusted their original forecast which predicted a slightly below average season, and now call for an average season. The new estimate calls for about 6 hurricanes (average is 6.4), 14 named storms (average is 12.1), 55 named storm days (average is 59.4), 20 hurricane days (average is 24.2), 2 major (Category 3-4-5) hurricanes (average is 2.7) and 5 major hurricane days (average is 6.2). These numbers include Subtropical Storm Andrea which formed in May.

“We …believe that 2019 will have approximately average activity. There remains considerable uncertainty as to whether El Niño conditions will persist through the Atlantic hurricane season. The tropical Atlantic has warmed slightly faster than normal over the past few weeks and now has near-average sea surface temperatures. We anticipate a near-average probability for major hurricanes making landfall along the United States coastline and in the Caribbean,” said Dr. Klotzbach.

As is the case with all hurricane seasons, coastal residents are reminded that it only takes one hurricane making landfall to make it an active season for them. They should prepare the same for every season, regardless of how much activity is predicted.

Dr. Phil Klotzbach is a non-resident scholar at the Insurance Information Institute.

Auto Insurance, Insurers and the Economy

Tariffs and Auto Insurance

Leave a comment

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

 

Thursday’s announcement of escalating tariffs on Mexico could further squeeze auto insurers by making replacement parts more expensive.

In an action to deter the flow of asylum-seekers on the southern border, President Donald Trump announced that the U.S. would impose escalating tariffs on all Mexican imports beginning June 10 at 5 percent, growing steadily to 25 percent on October 1, if Mexico does not comply.

A tariff effectively acts as a sales tax on goods entering the country, so it drives up the price of those goods.

The property/casualty industry has previously noted a 25 percent tariff on Chinese goods could raise collision repair costs by 2.7 percent, or $3.4 billion. China is the No. 2 exporter of auto parts to the United States – about $20 billion worth in 2018, according to data AutomotiveAftermarket.org culled from federal databases. Mexico is No. 1. It sends us nearly three times as much – $59 billion last year. Together, the two countries make up just over half the $158 billion in auto parts imported.

Even before tariffs, the rising cost of repairs is already an issue for auto insurers. A headlight assembly can easily top $1,000; a bumper with anti-crash sensors can cost $4,000 to replace, as we discuss in this presentation on auto costs.

Insurers bear the immediate impact of the tariffs. If the tariffs remain, they will have to raise rates to cover the increased cost. Tariffs on Mexico would also increase the cost of new cars, as the higher cost of components is passed through to consumers. This could slow the economy, and – since new cars generally cost more to insure than used ones – retard growth in personal auto premiums.

A specialty insurance line, political risk, provides coverage and protection against some government actions such as expropriation, regulatory risk, and restrictions on cross border trade. U.S. companies routinely use this coverage to protect against actions by foreign governments such as the impositions of import and export tariffs sizable enough to be debilitating to their operations and profitability. However, this coverage is not yet available in the domestic U.S. market.

There could be implications for the larger economy. On August 1 the economy will likely set a record for the longest continuation expansion ever recorded in the United States, but it may be is limping across that finish line. The Federal Reserve Bank of Atlanta forecasts just 1.2 percent growth in the seasonally adjusted annual rate of real GDP for second quarter, down from 3.1 percent last quarter. Higher tariffs place a drag on the economy, the same way any tax increase would. Rescinding the tariffs could help rekindle the economy, the same way a tax decrease would.