Category Archives: Business Risk

Business Insurance, Business Risk, Health & Safety

Despite Safer Skies, Aviation Claims Rise: What’s Up With That?

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 Flying has never been safer.

You’re more likely to die from being attacked by a dog than in an airline accident (see chart).

Today’s aircraft contain more sophisticated electronics and materials than those flying in the 1960s. When they bump into each other or come down too hard, they cost more to repair.

And yet, according to a recent Allianz Global Corporate & Specialty (AGCS) report, the aviation sector’s insurance claims continue to grow in number and size.

The report – Aviation Risk 2020 – says 2017 was the first in at least 60 years of aviation in which there were no fatalities on a commercial airline. The year 2018, in which 15 fatal accidents occurred, ranks as the third safest year ever.

Of more than 29,000 recorded deaths between 1959 and 2017, the report says, fatalities between 2008 and 2017 accounted for less than 8 percent – despite the vast increase in the number of people and planes in the air since 1959.

So, what gives?

Safety is expensive

Some of the reasons for the increased claims are good ones: Safer aircraft cost more to repair and replace when there are problems.

The report analyzed 50,000 aviation claims from 2013 to 2018, worth $16.3 billion, and found “collision/crash incidents” accounted for 57 percent, or $9.3 billion. Now, this may sound bad, but the category includes things like hard landings, bird strikes, and “runway incidents.”

The AGCS analysis showed 470 runway incidents during the five-year period accounted for $883 million of damages.

Engine costs more than the plane

Today’s aircraft contain far more sophisticated electronics and materials than those flying in the 1960s. When they bump into each other or come down too hard, they cost more to repair.

“We recently handled a claim where a rental engine was required while the aircraft’s engine was repaired,” said Dave Watkins, regional head of general aviation, North America, at AGCS. “The value of the rental engine was more than the entire aircraft.”

When entire fleets have to be grounded – the report cites the 2013 grounding of the Boeing Dreamliner for lithium-ion battery problems and the more recent fatal crashes involving the Boeing 737 Max – costs can really soar. Boeing reportedly has set aside about $5 billion to cover costs related to the global grounding of the 737 Max.

Even after a fix is found, the task of retrofitting a fleet takes considerable time – and, in the aviation industry, time truly is money.

Liability awards take off

Compounding the claims associated with the costs of safer flight, the report says, liability awards have risen dramatically.

“With fewer major airline losses,” Watkins said, “attorneys are fighting over a much smaller pool and are putting more resources into fewer claims, pushing more aggressively for higher awards.”

Today’s aircraft carry hundreds of passengers at a time. With liability awards per passenger in the millions, a major aviation loss could easily result in a liability loss of $1 billion or more.

Business Risk, Terrorism Risk

A world without TRIA: premiums skyrocket following 9/11

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Below is an abstract from the I.I.I. database citing a Wall Street Journal article from October 8, 2001. It describes the sharp increase in insurance rates immediately following the terrorist attacks of 9/11 2001.

The abstract is part of our series covering the Terrorism Risk Insurance Act of 2002 (TRIA). The act made public and private sharing of insured losses from acts of terrorism in the United States possible.

I.I.I.’s report, A World Without TRIA: Incalculable Risk, describes the function of the federal  terrorism backstop.

Business Risk, Catastrophes, Cyber Risk, Emerging Risks, Terrorism Risk

Intent and ability distinguish cyberrisk from natural perils

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Cyberrisk is often compared with natural catastrophe-related threats, but a recent study by global reinsurer Guy Carpenter and analytics firm CyberCube suggests a better analogy is with terrorism.

“Probability is assessed in terms of intent and capability.”

The report – Looking Beyond the Clouds: A U.S. Cyber Insurance Industry Catastrophe Loss Study – quotes Andrew Kwon, lead cyber actuary for Zurich: “Extending the lessons learned from property cats to the cyber space is intuitive and logical, but cyber continues to be a unique force unto itself. A hurricane does not evolve to bypass defenses; an earthquake does not optimize itself for maximum damage.”

This passage resonated as I read it because a few hours earlier I’d been reading a FreightWaves article about risks posed to international shipping by digitalization and pondering the fact that the same technology that helps vessels anticipate and avoid adverse weather also subjects them – and the goods they transport – to a panoply of new risks.

The FreightWaves article quotes U.S. Navy Captain John M. Sanford – who now leads the U.S. Maritime Security Department within the National Maritime Intelligence Integration Office – describing how the NotPetya virus inflicted $10 billion of economic damage across the U.S. and Europe and hobbled company after company, including shipping giant Maersk, in 2017.

Sanford said Russian military intelligence was behind the hacker group that spread NotPetya to damage Ukraine’s economy. The virus raced beyond Ukraine to machines around the world, crippling companies and, according to an article in Wired, inflicting nine-figure costs where it struck.

“Maersk wasn’t a target,” Sanford said. “Just a bystander in a conflict between Ukraine and Russia.”

Collateral damage.

The FreightWaves article describes how supply chains, ports, and ships could be disrupted more intentionally through GPS and Electronic Chart Display and Information System (ECDIS) systems onboard ships, or even via a WiFi-connected printer: “Pirates working with hackers could potentially access a ship’s bridge controls remotely, take control of the rudder, and steer it toward a chosen location, avoiding the expense and danger of attacking a vessel on the high seas.”

The Carpenter/CyberCube report identifies parallels in the deployment of “kill chain” methodologies in both conventional and cyber terrorism: “Considering terrorism risk in terms of probability and consequence, probability is assessed in terms of intent and capability.”

As our work and personal lives become increasingly interconnected through e-commerce and smart thermostats and we look forward to self-driving cars and refrigerators that tell us when the milk is turning sour, these considerations might well give us pause.

Hurricanes, earthquakes, fires, and floods might be scary, but at least we never had to worry that they were out to get us.

 

Business Risk

Big, nasty claims in the casualty sector: no end in sight

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Getty images

On September 19 Advisen hosted its second annual Big, Nasty Claims Conference at the New York Law School. The discussion focused on the issues that are driving mass torts and class actions that have the potential to exceed $100 million.

In her opening remarks, Ellen Greiper, partner with Lewis Brisbois, said that seven to nine figure verdicts are becoming common, a statement echoed by many of the panelists. And in his keynote address, Sherman “Tiger” Joyce, president of the American Tort Reform Association cited the trend of courts becoming a vehicle for public change that started with the tobacco litigation in the 1990s and continues through today’s opioids liability litigation. He also noted that the sheer “critical mass” of claimants is driving astronomical verdicts, for example the Xarelto® blood thinner lawsuit had 25,000 claimants and resulted in a $775 million verdict.

He mentioned speaking with an insurer who was ready to settle an older, expired claim for $150,000. Then legislation came through, changing the statute of limitations – and the claim demand changed to $50 million. “It’s not going to stop here. It’s never a one-off when it comes to this type of activity. Toxic torts, there are any number of events this will migrate to. Be on the alert for the exposure,” he warned the audience. “It’s gotten to the point where it’s just exploding.”

Joyce also cited liberal expert evidence rules, and the bending of personal jurisdiction rules, especially in so-called judicial hellholes, leading the way to more and bigger casualty losses.

Jim Blinn, executive vice president, Client Solutions, Advisen and Jesse Paulson, managing director, U.S. Excess Casualty Leader, Marsh, led the session dealing with frequency and severity trends for losses larger than $100 million, including a growing number of verdicts that breach the $1 billion threshold. The audience got a glimpse into Advisen’s proprietary excess casualty loss database via a slide listing recent colossal verdicts. Topping the list were Monsanto’s Roundup, Johnson & Johnson’s Pinnacle hip replacements and opioids and PG&E’s Camp Fire related losses.

In a session dealing with the insurance industry’s response to large claims Kathy Reid, senior vice president of Berkshire Hathaway Specialty Insurance said that the more information the insurer has about a client the better — uncertainty causes price to increase. She said that while this is not the best time for insurers to come into the market some middle market casualty business can still be profitable.

So what types of Big Nasty Claims keep insurance executives up at night? Paul DeGiulio, senior vice president of General Casualty and Health Care Claims, Allied World, cited incidents causing multiple claims such as train wrecks or industrial explosions. Aging infrastructure and commercial auto (with rising fatalities on the road) are also areas of concern. And in premises liability, more businesses are being held liable when customers fall victim to crime in parking lots and garages.

 

 

Business Risk, Terrorism Risk

A world without TRIA: The formation of a federal terrorism insurance backstop

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On September 11, 2001 terrorists hijacked commercial airliners and flew them into the World Trade Center towers and the Pentagon. The attacks remain the deadliest and most expensive terrorist incidents in U.S. history, with insurance losses totaling about $47.0 billion in 2019 dollars, according to I.I.I. estimates.

In the wake of the attacks the U.S. Congress enacted the Terrorism Risk Insurance Act of 2002 (TRIA). The act creating a federal backstop for catastrophic terrorism losses that is designed to keep terrorism risk insurance available and affordable. It was renewed in 2005, 2007 and again in 2015. The act is set to expire on December 31, 2020.

Over the next months the Triple-I Blog will run stories featuring key participants in the terrorism risk insurance market and highlight news stories from our database from the periods immediately following 9/11 (before TRIA) and 2015 (when TRIA briefly lapsed).

Below is an abstract from the I.I.I. database citing a BestWeek article from October 1, 2001. The article refers to the fact that the heaviest insured losses were absorbed by foreign and domestic reinsurers, the insurers of insurance companies. Because of the lack of public data on, or modeling of, the scope and nature of the terrorism risk, reinsurers felt unable to accurately price for such risks and largely withdrew from the market for terrorism risk insurance in the months following September 11, 2001

For more on the importance of a federal terrorism backstop read the I.I.I. report, A World Without TRIA: Incalculable Risk.

Business Risk, Terrorism Risk

I.I.I. report contemplates a world without TRIA

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Terrorism, by design, is unpredictable, hugely destructive, and to date uninsurable through private market methods alone.

Few events demonstrate this better than the 9/11 attacks, in which terrorists hijacked commercial airliners and flew them into the World Trade Center towers and the Pentagon. The attacks remain the deadliest and most expensive terrorist incidents in U.S. history, with insurance losses totaling about $47.0 billion in 2019 dollars, according to I.I.I. estimates.

U.S. and international insurers were able to pay virtually all the claims from the 9/11 attacks and their aftermath. But insurers also made it clear that they could not, on their own, cover future losses caused intentionally by people acting strategically to attack select targets intentionally. In response to these concerns, the U.S. Congress enacted the Terrorism Risk Insurance Act of 2002 (TRIA), creating a federal backstop for catastrophic terrorism losses that is designed to keep terrorism risk insurance available and affordable. Renewed in 2005, 2007 and again in 2015, the act is set to expire on December 31, 2020.

Although the expiration is still more than a year away, U.S. commercial insurers are preparing for the possibility that the federal backstop might expire, and federal financial assistance is unavailable for a catastrophic terrorist event.

A new I.I.I. report, A World Without TRIA: Incalculable Risk, concludes that the terrorism insurance market is more robust than in the immediate aftermath of 9/11, but – similar to the situation in 2015 – does not appear to have the ability to bear all terrorism risk.

In this context, the report offers a historical overview of TRIA – why it exists and how it functions – to inform the discussion about the potential consequences should the program disappear. The report discusses:

  • Commercial terrorism risk insurance before the 9/1 1 attacks
  • How the attacks changed the terrorism risk insurance marketplace
  • The enactment of the federal Terrorism Risk Insurance Act and the program’s structure
  • What happened when the program briefly expired in 2015
  • How a failure to reauthorize the program in 2020 could affect terrorism risk insurance

Over the next months the Triple-I Blog will run stories featuring key participants in the terrorism risk insurance market and highlight news stories from our database from the periods immediately following 9/11 (before TRIA) and 2015 (when TRIA briefly lapsed). You can follow the topic here.

 

 

 

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.

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.

Business Risk

Rampaging animals and farm liability insurance

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(thankfully) placid cows

According to Deutsche Welle, an Austrian court has held a farmer liable after one of his cows killed a hiker walking through his farm. The article reported that the cow grew enraged at the hiker’s dog and charged at them. The farmer will have to pay over $200,000 in restitution for the horrible event to the deceased’s spouse and son.

I’m not well-versed on the nuances of Austrian liability law and insurance. But what if a similar (hopefully non-fatal) accident happened on a farm in the U.S. – how would insurance play a role?

Luckily, there’s a thing called “farm insurance.” It can get complicated, but often a farm insurance policy is just a hodgepodge of property and liability coverages – with a lot of customization in between for the unique needs of each farm.

Today, let’s just focus on the liability part. Imagine Farmer Joe’s cow, Betty, runs wild and breaks the leg of someone visiting his farm. What happens?

Paying for liability damages and medical expenses

The standard farm liability policy will cover damages if someone is hurt on the farm (subject to various limitations and exclusions, of course). So when Betty breaks someone’s leg, Farmer Joe’s insurance will help cover any damages he has to pay. The farm policy will also pay for some medical expenses, regardless of who is at fault for the injury. Medical expenses usually include first aid and other necessary services.

Feats of strength are not covered

Easy enough. But imagine another scenario: Farmer Joe is holding a cow race on his farm and has invited his neighbors to watch. Betty breaks loose from the race track and breaks his neighbor’s leg. In this case, Farmer Joe is probably not covered for any injuries arising out of races, strength contests, or stunts. Nor is he covered if someone got hurt while riding Betty for a fee.

Lots of policies, lots of options

There are many types of farms: dairy farms, cattle ranches, horse farms, poultry farms, agritourism farms. There are many different types of insurance coverages available for each unique situation. Here’s just a taste:

  • Horse farms and ranches (property and liability)
  • Commercial equine (liability for horse-breeding operations)
  • Equine (business coverage if a horse becomes ill or dies)
  • Livestock insurance (covers animals other than horses)
  • Crop insurance
  • Farrier (property and liability for people who shoe horses)
  • Riding instructor
  • Roadside farm stand and farmers’ market insurance
  • Agritourism (corn mazes, on-premises hay rides, petting zoos)

It’s always important to talk to an insurance agent about your coverage needs. You may not think that you have farm liability exposures, but if you live in a semi-rural or rural area and own livestock, it’s probably a good idea to double check.

You can read more about farm and ranch insurance here.

Business Risk, Catastrophes

I.I.I. Joint Industry Forum Panel: The P/C Industry has been doing well, but threats loom on the horizon

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Left to right: Bill Donnell, David Wessel, Jay Gelb, John Huff

By Lucian McMahon

The 2018 financial results for the property/casualty (P/C) industry were strong. According to Verisk Analytics, private P/C insurers in the U.S. reported a nine-month net underwriting gain of $4.7 billion. The industry combined ratio was 97.3 percent – down from 104.1 percent in 2017.

“It’s unusual to have an industry-wide underwriting profit,” said Jay Gelb, managing director at Barclay’s, speaking at a geopolitical risks panel at the 2019 I.I.I. Joint Industry Forum. “But 4Q 2018 is going to be worse.” The insured losses from Hurricane Michael and the disastrous California wildfires will make a dent on industry underwriting results. And in the last two years the total global industry catastrophe losses were about $230 billion, the highest level for any two-year period, Gelb noted.

While the industry did well in addressing these catastrophe losses, greater threats may be looming on the horizon for the P/C industry and the economy generally.

Panelist David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy and senior fellow at the Brookings Institution, listed a few.

In the short term, he expressed concern about the ongoing government shutdown. He also pointed out that, while incoming economic data are strong, the markets are expressing continuing pessimism, assuming higher weight on downside risk for 2019. In the long term, Wessel listed the continuing productivity growth slowdown and climate change as serious threats.

John Huff, president and CEO, Association of Bermuda Insurers & Reinsurers (ABIR), added the continuing challenges facing global insurance regulations, particularly in light of recent political events that seem to suggest a souring attitude towards global interconnectivity. Huff did express some optimism, however: “people want to stay at the table for international regulatory standards because business is global. They don’t want conflicting regulatory standards.”

Political uncertainty in the U.S. are also reasons for insurers to be concerned, per Huff. There has long been a push to “de-risk” government liabilities and move some of them into the private market, including the National Flood Insurance Program (NFIP), crop insurance, the Terrorism Risk and Insurance Act (TRIA), and earthquake insurance. How this will play out in the current political climate remains to be seen.

Gelb included flood and wildfire risks to the equation – both of which may increase in frequency and severity due to climate change.

Despite these possible threats, the panelists are keeping a mildly positive outlook for the future. “I think nothing is permanent, fortunately,” Wessel said regarding the current political and economic tensions.

If anything, this could be a time of opportunity for insurance leadership. Insurance has always led the way forward for economic growth. Said Wessel: “We’re in a moment when business leaders can be a more prominent voice to deal with tension […] The world is yearning for leadership.”