Monthly Archives: July 2019

Business Risk, Legal Environment

How underwriters can prepare for child sexual abuse claims

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Seventeen states and Washington, D.C. have laws taking effect in 2019 that either abolish or extend statutes of limitations for victims of child sexual abuse to sue or seek criminal charges against their abusers. A recent A.M. Best report compares child sexual-abuse claims to asbestos liability because the claims can affect decades-old insurance policies and the settlement amounts can be hard to predict.

In a recent blog post, Carey Quigley, a Gen Re treaty account underwriter, discusses what the new laws mean for underwriters that handle commercial “child custodial care” risks. These risks encompass schools, churches, sports, camps, day care and any other organized activities involving minors.

Quigley notes that unless their policies were written on a claims-made basis, the liability of these organizations for the past conduct of employees and volunteers does not typically affect their exposure under current insurance policies. Nevertheless, he recommends that underwriters take the following three steps in reviewing guidelines and policy forms:

Build a hazard scale: The degree of risk increases with the length of the activity, so a boarding school would be on the far end of the spectrum. Since parents are now more involved with their children’s activities, local groups and gatherings would present a lower risk.

Review insurance forms: Most general commercial writers may have a local dance school or a small church in their portfolio. For these types of policyholders insurers have developed Sexual Abuse and Molestation (SAM) endorsements offering critical but not unlimited protection.

Quigley recommends that insurers include language in their SAM endorsement to: Move all coverage into the policy when the abuse first began; treat all abuse by a single perpetrator as a single claim; treat all related or interrelated abuse as a single claim, without further qualification; and provide coverage on a claims-made basis.

Decide exclusions and check wording: When writing exclusions it’s important to determine whether they will extend to all types of physical abuse, or only sexual abuse. Often these terms are defined to prevent overlap with the GL policy and stacked limits from the endorsement and base policy. If a lawsuit alleges sexual abuse with false imprisonment or battery for instance, the insurer probably intends that all such allegations trigger only the SAM endorsement.

In conclusion Quigley says that underwriters should monitor court decisions to learn how policy language is interpreted by courts and check forms filed by other insurers to see how they address stacking issues.

Regulation

Insurance Rating Variables: A Closer Look

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Figuring out what the cost of an insurance premium should be is quite complicated — so complicated that insurance companies employ entire actuarial departments to do just that. Rating variables are an indispensable tool for setting the cost of insurance.

In a new paper, Insurance Rating Variables: What they are and why they matter, the Insurance Information Institute (I.I.I.) and the Casualty Actuarial Society (CAS) explain why actuaries apply variables when setting rates – for example using a driver’s age and gender, accident history and vehicle model year to calculate the premium on an auto policy.

Rating variables are basically the characteristics of individual policyholders that can help approximate the cost of their risks. Insurance companies have been using rating variables to help set rates (and thereby price their policies) for decades.

However, the use of some rating variables has recently generated discussion within the United States. Some states have even passed legislation controlling the use of certain variables, such as gender.  “Variables are designed to make insurance affordable and available to everyone,” said Ken Williams, FCAS, CAS staff actuary. “When a variable is removed from rate setting, the consumer stands to lose the most because lower-risk individuals will end up subsidizing higher-risk individuals; or, insurance companies may choose to accept fewer applications from consumers who might cause them to lose money.”

The paper explains that when regulators restrict the use of a particular variable, actuaries may replace it with another variable as a “proxy,” which might not help them price policies as well.

“Imagine that male drivers have higher accident costs and are more likely to drive pickup trucks,” Williams explained. “If gender is restricted, the proxy for gender could become pickup trucks. In this scenario, rates for pickup trucks may increase while rates for other types of vehicles may decrease.”

It is important to note that all rating variables, including proxies, are regulated in every state. For example, rating variables and proxies cannot directly or indirectly impact groups based on certain characteristics, such as race.

The paper notes that the use of rating variables has resulted in a drastic reduction in the number of consumers seeking coverage in state-supported auto risk pools. Since the increased use of rating variables, the number of consumers in assigned risk pools has decreased almost 90 percent.

James Lynch, FCAS, chief actuary and vice president of research and education at the I.I.I., added, “Rating variables are regulated by state and federal authorities and they meet a variety of important criteria: they are credible, objective, and verifiable. They are an essential tool for setting accurate prices that are lower for low risk customers, higher for high risk customers, yet sufficient to cover an insurer’s costs.”

Here are a few key points from the report:

  • Insurance companies use rating variables to develop premiums that better reflect the risks that consumers face.
    • Rating variables are characteristics of individual consumers that can help approximate the cost of their risks, like vehicle model year in auto insurance or the age of a building in homeowners insurance.
    • Rating variables help ensure that less risky consumers pay lower rates than consumers who are at greater risk.
  • Rating variables are studied rigorously by actuaries for their effectiveness and impact on the societal goal of keeping insurance available and affordable. They are also closely regulated.
    • Actuaries are very careful to make sure that each variable is effective and is subject to a wide range of criteria, including being credible, objective, verifiable, and inexpensive to administer.
    • Actuaries also make sure variables are legal. Variables are subject to regulation, and state and federal laws prohibit using rating variables that either directly or indirectly impact groups based on characteristics such as race, nationality, religion, or income.
    • Almost every state in the U.S. has the regulatory authority to reject a rating variable that it feels does not meet state requirements.
  • Widespread use of rating variables has given consumers more choice and more fairness in the insurance marketplace.
    • The ability to set accurate prices is a cornerstone to setting actuarially sound premiums that are lower for low risk customers, higher for high risk customers, yet overall sufficient to cover all the insurer’s costs.
    • Better and more available data for use in rating variables means increased ability to determine a person’s exact risk profile.
  • Restriction of rating variables that do their job well can lead to potential unintended consequences for the consumer.
    • Restrictions on some variables may result in lower-risk consumers effectively subsidizing higher-risk consumers.
    • Restricting rating variables affects consumers much more than it impacts insurance companies.

Click here to read the paper.

 

Insurance Industry

From the I.I.I. Daily: Our most popular content, July 11 to July 18

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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.

 

 

Careers and Employment

Passion Pays Off

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People who work at our member companies are passionate about their jobs, and sometimes they tell us why. Here’s a story from Hadie Bartholomew who works at I.I.I. member Westfield Insurance as a Media Relations Manager.

Hadie Bartholomew

Everyone loves a good story. But what makes a great story? As a communication professional, I have found storytelling with a purpose always adds value. A few chapters ago, before I started a career in insurance, I worked in the non-profit world to help save and heal lives through organ and tissue donation. Easy peasy! How could I not be passionate about telling captivating stories about people getting a second chance at life?! This set the bar high and, as I moved on, it was a challenge telling equally compelling stories across various industries.  At times, it was tough to connect personally. So, how could I promote content if my heart wasn’t that into it?

What I learned from working at that non-profit is that I need to care about and connect to the content I am publishing and promoting. What’s more, I need to truly believe the industry I’m working in matters and is making a difference.  I’ve worked in local television news, manufacturing, and technology and it was difficult to keep the fire of my passion burning bright. It was time for a change, and when I accepted a position at an insurance carrier, I’ll admit, I was a little skeptical. I bought into all those insurance stereotypes. But I was optimistic and came into my position with an open mind.

Two weeks after I started my new communications career in the insurance industry, Hurricane Irma came barreling across the Caribbean, Florida and up the coast. I quickly discovered how the insurance industry is truly a noble profession.  I saw first-hand how insurance professionals put lives and communities back together and stay in the area long after the storm has passed through community giving campaigns. I travelled to Florida in the days following the storm and rode along with our catastrophic claims team. What a memorable, eye-opening experience. Watching our Claims team in action, making sure customers were safe and feeling cared for, answering their questions and providing support and guidance – it was incredibly moving.  It was my ah-ha moment. I was fortunate to have this experience so quickly after starting a new job. This was a GREAT story and one that I wanted to shout from the rooftops. Seeing the compassion from the field lit my fuse. I found my passion in insurance. It’s more than insurance policies. We offer protection and help people when they need it the most.  These are stories worth telling and inspire my passion.

I know I am not the first person to feel energized by what our industry means to people, families and communities.  So let’s continue uncovering and discovering the stories that paint the true picture of this noble profession. Every agent, underwriter or risk manager can most likely tell dozens of stories of the customers’ lives they helped or homes and business that were restored. This industry isn’t boring, it’s life changing. We help people during some of their most difficult times, provide roadmaps to protect them and that’s a gratifying experience. For me, the key to being happy and fulfilled is seeing the positive impact a job has on my life and the lives of other people. As a content creator for Westfield, I found happiness telling the stories of how insurance makes a big difference in everyday life.

So, when I’m asked, “What do you do?” I ignore the eye rolls (or sighs) and am proud to say I work in the insurance industry. I share all my stories in my short tenure of how as insurance professionals we protect dreams and rebuild lives. It doesn’t get any better than that.

Floods

Buyer beware: In Barry’s wake, flooded cars are about to hit the used car market, NICB warns

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Hurricane Barry made landfall on July 13 as the first hurricane of the 2019 season, dumping heavy rain on parts of Louisiana, Mississippi and Arkansas. Unfortunately, whenever there’s flooding there are unscrupulous people ready to unload flooded cars onto credulous consumers, and vehicles flooded by Barry may soon appear for sale around the nation.

The National Insurance Crime Bureau (NICB) warns that buyers should be particularly careful in the coming weeks and months as thousands of Barry-damaged vehicles may reappear for sale in their areas. Vehicles that were not insured may be cleaned up and put up for sale with no disclosure of the flood damage, which is illegal.

“When tragedy strikes criminals have the tendency to swoop in and scam consumers especially when it comes to the resale of flooded vehicles,” said Brooke Kelley, communications vice president of the National Insurance Crime Bureau (NICB).

Flood-damaged vehicles can exhibit a host of problems ranging from electrical malfunctions, mold and mildew, corrosion of various parts and slippery brakes. Corrosion can find its way to the car’s vital electronics, including airbag controllers, warns Consumer Reports.

The NICB offer the following tips to avoid being scammed:

  • Don’t rush to buy a used vehicle, especially if the price looks too good to be true.
  • Look for water stains, mildew, sand or silt under the carpet, floor mats, and dashboard, and in the wheel well where the spare is stored. Look for fogging inside the headlights and taillights.
  • Do a smell test. A heavy aroma of cleaners and disinfectants is a sign that someone’s trying to mask a mold or odor problem.
  • Get a vehicle history report. Check a trusted database service. You can check NICB’s free VINCheck database.
  • Have a trusted mechanic inspect the car’s mechanical and electrical components, and systems that contain fluids, for water contamination.

After a disaster, NICB works with its member companies, law enforcement, and auto auction companies to identify the vehicles that have had an insurance claim filed. Most of the vehicles are sold to parts companies who will dismantle them and resell usable parts that were not damaged by the flooding.

The Vehicle Identification Number (VIN) of vehicles that have been damaged by Barry will be searchable through NICB’s free VINCheck® service as well as the National Motor Vehicle Title Information System (NMVTIS) database.

VINCheck allows car buyers to see whether a vehicle has ever been declared as “salvage” or a total loss by an NICB member that participates in the program. Insurers representing about 88 percent of the personal auto insurance market provide their salvage data to the program. It also alerts users if a vehicle has been stolen and is still unrecovered.

 

Workers Compensation

The gig economy’s impact on workers compensation insurance

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The gig economy, or independent contract work has been around for centuries. Before the Industrial Revolution, and for some years after, most workers were self-employed or worked in small businesses.

Recently “gig work” has received a lot of buzz due to the rise of technology companies such as Uber, Lyft and TaskRabbit that electronically mediate contract work.

The National Council on Compensation Insurance (NCCI) closely examined the gig economy and nontraditional work arrangements in its 2019 Q2 Economic Briefing. Since workers in nontraditional arrangements rarely receive the same benefits as wage and salary workers, this issue has obvious relevance for workers compensation.

Some of the key takeaways from the Briefing include:

  • There is mixed evidence about the rise in alternative work. Large surveys have found little change in self-employment and alternative work in the last 10–20 years, but administrative data (such as tax records) shows these types of work arrangements are growing. The evidence suggests little change in the number of Americans in alternative work arrangements as their primary source of income but increasing numbers of people engaging in alternative work arrangements to generate supplemental income.
  • Today about 30 percent of adults in the U.S. are engaged in some type of informal or alternative work, and lawmakers continue to take notice and investigate ways to regulate workers and companies in this growing sector.
  • About 4.5 percent of households earned some income from electronically mediated work between April 2017 and March 2018—three times higher than the percentage in the first 12 months of the study period, October 2012 to September 2013. Two-thirds of this 4.5 percent had no income from electronically mediated work in the past month—most people only did electronically mediated work occasionally.
  • The risk of workers compensation leakage is likely to rise during and after the next recession, whenever that may occur. (Electronically mediated work was in its infancy during the Great Recession.) When firms shed payroll in a future downturn and workers have difficulty finding traditional jobs, then the labor supply for nontraditional work will increase. At the same time, cost-cutting firms will have incentive to experiment. If firms and at least some workers favor new arrangements, then payroll lost in a recession is likely to shift to nontraditional work during recovery.

 

 

Disaster Preparedness

IBHS CEO Impact Report: Do hail Impacted Rated shingles measure up?

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By Roy Wright, President & CEO, Insurance Institute for Business & Home Safety

High-performing impact-resistant shingles can prevent avoidable damage caused by hail attacking roofs. Consumers should have confidence that products labeled as “impact resistant” live up to their expectations. This is the predicate for the Insurance Institute for Business and Home Safety’s (IBHS) groundbreaking work to improve roof performance against hail.

One month ago, IBHS reached an institutional milestone by releasing the IBHS Hail Impact Test Protocol for Asphalt Shingles—a new test method that uses best-available science for predicating performance of asphalt shingles when exposed to hailstorms. This is the first performance scorecard rating of eight asphalt shingle products labeled as impact resistant. By bringing together years of work in the field and in the lab, IBHS continues to be a leader in the hail research space.

IBHS’s new test standard combines the results of lab and field work that advanced industry understanding of hailstone mass, strength, and kinetic energy. Applying those findings allows us to manufacture hailstones in our lab and mimic the way natural hail attacks a roof. We assess damage from the top side of the shingle – the same way a claims adjuster would – and use artificial intelligence along with experts to evaluate the performance range.

 

Hail Cannon Testing. Photo courtesy of IBHS

Yet this milestone is just the beginning. The IBHS Hail Impact Performance program is poised to drive change and innovation across industries for years to come.

With the performance of eight products now rated and released, three new products are already at the IBHS Research Center in Richburg, South Carolina awaiting testing at the specific request of the relevant product manufacturers. These new arrivals demonstrate our commitment to ongoing testing of new products brought to the market. In addition, we are committed to retest products every two years, ensuring performance scorecards remain up to date and offering manufacturers the chance to improve product offerings based on our results.

Exclusively for the member-companies supporting the IBHS mission, we have provided a data set that expands on what is publicly available and provides greater quantitative insights and relative consumer price comparisons. We answered questions live during a Hail Impact Standard Question and Answer webinar for the IBHS Members as we strive to help put this data to work for the insurance industry.

Roofing manufacturers have actively engaged with our research team throughout the development and release processes and continue to be engaged. Some have been excited to share the results while others look forward to the next round of testing. Each manufacturer has been on our research center campus observing testing, asking questions, and striving to put their product at the top. Since the release last month, we have already had manufacturers back at the research center talking with our researchers and continuing to push for improvement.

IBHS research is inspiring conversations to drive shingle performance forward, and that will pay dividends to the Members of IBHS, to the insurance industry, and to consumers. These conversations, initiated by the performance data, are only possible with the commitment IBHS, and IBHS Members, have made to resiliency. And these very same conversations are stimulating awareness of impact-resistant shingle performance in order to improve shingles and to inform consumers of their options.

Through this new work, we are showing the insurance industry and consumers which products live up to those expectations of resilience.

 

 

Disaster Preparedness, Earthquakes

California Earthquakes: How Modern Building Codes Are Making Safer, More Resilient Communities

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By Sean M. Kevelighan, CEO, The Insurance Information Institute

 

 

The earthquakes that hit southern California on July 4 and 5 gave us all reason to reflect on a natural disaster that infrequently makes headlines here in the U.S.  A major seismic event occurring near several population centers is the sort of thing that many fear—but it’s also something insurers study constantly to make sure quake-impacted affected areas can recover and rebuild.

Earthquakes and other natural disasters are facts of life. The International Code Council (ICC) helps to create resilience through modern building codes that enable households and communities to rebound faster and more completely after an earthquake.

The ICC reports:

 “On the morning of July 4, a 6.4 magnitude earthquake rattled through Southern California, with another 7.1 magnitude quake striking the region the following evening.

“The damage resulting from these events could have been significant. Thanks to the modern, up-to-date building codes in California – based on the International Codes (I-Codes) – the Searles Valley Earthquake resulted in no loss of life and minimal structural damage. The I-Codes are keeping us safe, and this event reminds us of the importance of adopting and effectively implementing current model building codes as a key defense against natural disasters. Building codes save lives.

“According to structural engineers working with the Earthquake Engineering Research Institute, the homes and buildings experiencing the most severe damage date back to the 1930s, ’40s and ’50s. Modern buildings built using model codes experienced damage that was largely limited to nonstructural elements or contents.”

We encourage you to read the entire article to learn more about the essential role of building codes in creating a “resilience culture” to make our communities safer and more productive.

Business Risk, Earthquakes

Got Earthquake Insurance? Businesses Should AssesS Their Readiness for “The Big One” and Other Natural Disasters

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By Loretta L. Worters, Vice President – Media Relations, Insurance Information Institute

Every year businesses temporarily shut down – or close forever – because of a disaster.  The 6.4- and 7.1-magnitude earthquakes which struck near Ridgecrest, California late last week are stark reminders of a quake’s ability to disrupt a business’ operations. Even though many California businesses are in seismically active areas, only one out of 10 commercial buildings are insured for quakes, according to the California Department of Insurance.

Depending upon a business’ location, the threat to its operations may come from risks other than earthquakes, such as a hurricane, tornado, or wildfire. Forty-plus percent of U.S. small businesses do not reopen after a disaster impacts them, the Federal Emergency Management Agency (FEMA) estimates. But by taking measures to prepare, businesses can increase their chance of recovering financially from a disaster.

Steps businesses can take in the aftermath of this month’s southern California earthquakes:

1) Review Insurance Coverage: It is important businesses have the right amount and types of insurance for their needs and risk profile. There are two types of policies that can be purchased by a business owner.

  • A Businessowners Policy (BOP) is commonly purchased by small businesses. BOP policies combine property, liability, and business interruption coverages in one policy and are usually less comprehensive than a commercial multiple peril (CMP) policy. Business interruption coverage, also known as business income insurance, reimburses a business owner for lost profits and continuing fixed expenses during the time a business stays closed because of a covered event, such as a hurricane, tornado, or wildfire.
  • A Commercial Multiple Peril (CMP) policy combines several coverages—such as property, boiler and machinery, and general liability—into a single policy. It is typically less expensive to buy a CMP policy than to buy these coverages individually. Boiler and machinery insurance, also known as Equipment Breakdown Insurance, also usually extends to air conditioners, heating, electrical, telephone, and computer systems.
  • Commercial Earthquake Insurance Is Sold Separately: Earthquake-caused property damage and business interruption is not covered under either a standard BOP or CMP policy. Businesses in earthquake-prone parts of the U.S. must consider a separate policy or an endorsement to an existing policy which specifically mentions earthquake-caused damage. Earthquake insurance carries a percentage deductible ranging from 10 percent to 15 percent.

There are some areas of a business that automatically include coverage for earthquakes.  Commercial auto provides coverage for loss or damage from temblors.  This can include damage from falling debris, fire, or other events.  Injury to employees at work because of an earthquake is also a covered loss under workers’ compensation insurance.

2) Develop a Business Recovery Plan: Businesses that are forced to close following a disaster run the risk of never being able to open their doors again. But by developing a business disaster recovery plan, they will be able to determine how their operations will be restored after a natural or operational disaster. Moreover, the Insurance Institute for Business & Home Safety (IBHS) offers a free, customizable toolkit to help businesses plan for any type of business interruption.

3) Take a Business Inventory: Creating a business inventory includes listing equipment, supplies, merchandise, and commercial vehicles. An inventory facilitates the filing of a business insurance claim.

Herein lies the fault:  Businessowners, by their very nature, are risk takers; trailblazers in their respective fields.  Risk-taking is a crucial component of launching and building a successful business, be it with capital investment, hiring employees or marketing strategies. But entrepreneurs who don’t purchase the right type and amount of coverage, including earthquake insurance, end up jeopardizing the enterprise they worked so hard to build, leaving themselves, and their business, on shaky ground.

Catastrophes, Earthquakes, Homeowners Insurance

Earthquakes: More links from Insurance Information Instititute

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We posted this look at insurance coverage and earthquakes earlier today. More important links about earthquakes and insurance: