In such an eventful year, with dozens of compelling stories as strong contenders, determining the Top 10 of 2011 was no easy task. But, after a lot of labor—and internal debate—we feel the final list we’ve put together successfully captures the essential news of the past 12 months.
Of the hundred or so specific insurance lines we’ve written about since January, two really stood out in 2011: One is a major component of the commercial business, and it had a rough year with some worrisome trends. The other line is relatively new to the scene, but it made a strong bid this year to situate itself as a key part of any risk-management portfolio.
Speaking of risk managers, one concept that helps elevate their position in the corporate hierarchy continues to catch on in board rooms and C-suites across the nation.
And as it has been for the past decade—and likely will be for at least the next 10 years—technology was a critical coverage area all year, as vendors introduced powerful new products—and early adopters in the insurance field embraced them. Another old, reliable source of stories was the nation’s capital, with industry-impacting events seeming to emerge fromWashingtonby the hour.
Three individual companies created enough of a stir in 2011 to merit their own place on the list: One was hotly pursued as an acquisition target by a number of well-known suitors; one made a change to its core product that sent out shockwaves that affected everyone from reinsurers to risk managers; and the third is an industry giant (and household name) that generated big headlines throughout the year.
Our top two stories? You’ll have to click through the slideshow to see, but these two topics so dominated the year’s conversation that you might already have a good idea.
Click next to begin the slideshow.
#10 Workers’ Comp Injury Claims on the Rise for First Time Since 1997
Times are tough for the American worker, whether at the office or on the assembly line—and conditions are at least equally challenged for those underwriters that offer workers’ compensation insurance to the country’s employers.
This year’s “State of the Line” study from the National Council on Compensation Insurance (NCCI) paints a gloomy picture, with perhaps the most surprising and disturbing statistic: the nationwide lost-time claim frequency increased 3 percent—the first increase since 1997.
Net-written premium for workers’ comp private carriers declined 1.3 percent in 2010, according to the NCCI report, and the line produced a 1 percent pre-tax operating loss—the first such loss since 2002. The workers’ comp line is one of the largest in the U.S. property-and-casualty industry and among the largest commercial lines. It makes up nearly 8 percent of total industry premium volume and accounted for about 16 percent of all commercial-lines premium in 2010, according to A.M. Best.
Results for the workers’ comp line deteriorated sharply in 2010, A.M. Best noted. The calendar-year combined ratio increased nearly seven points to 118.1—the highest level since 2000, when the combined ratio was 121. The line’s results have worsened each consecutive year since 2006, when the combined ratio was 98.5.
One of the biggest challenges facing workers’ comp is rising medical costs, which represent almost 60 percent of the benefit dollar—even higher in some states. The average cost of medical costs is rising at about 6 percent per year, NCCI reports.
Current economic conditions are also a factor in the line’s performance, with claims—fraudulent or not—often seeing a spike in recessionary times.
The fact that the American workforce in general is growing older—and more obese—only adds to the WC challenges faced by both employers and carriers.
Despite this rather dismal state of WC affairs, NU was able to find some bright spots amid all these dark data clouds. The three winners of our Excellence in Workers’ Comp Risk Management awards (August 22/29 issue), for example, were each able to develop unique approaches to their programs that yielded substantial savings. Kennametal Inc., through a focus on loss prevention, the claims-administration process, effective return-to-work tactics and a corporate culture of safety, reduced its WC costs from $2.8 million in fiscal year 2008 to $1 million in fiscal year 2011—and, bucking the trend, it cut its number of claims from 293 to 125 over the same period.
Mobile apps from indie agents. Real-time processing—not only of personal-lines business, but also of midsize commercial accounts. Social media as a marketing essential. Cloud computing. The past 12 months saw a number of game-changing tech trends that are rapidly altering how agents and brokers do business.
Though these latest tools have hardly achieved 100-percent penetration, they have become the norm for a growing roster of producers. Real-time technology use, for example, is definitely on the rise—and for agents competing for personal business against direct carriers, such instant quoting capability is a do-or-die issue.
A recent survey released by the Real Time/Download Campaign said that of the 3,100 insurance agents and brokers surveyed, the number of agents using real-time tech is up six points to 63 percent of agency-management-system users for personal lines. Stu Durland, the Real Time/Download campaign’s co-chair, calls this an encouraging sign—and one “critical to the future viability of the independent agency system.”
On the commercial side of the real-time issue, the LexisNexis Insurance Exchange, which aims to simplify submissions of midmarket commercial-lines risks to multiple carriers, gained some real traction in 2011. The Exchange, backed by the Council of Insurance Agents & Brokers and Marketcore, saw the number of weekly submissions increase to an average of 1,000 per week and more than 2,000 individual users.
And while the large carriers and their captive agents have had mobile apps for a few years now, 2011 saw Main Street producers starting to create their own to offer better customer service to their clients—who now expect to be able to execute routine financial transactions on their smartphones.
Additionally, in a largely overcast year—where revenue reductions had agencies looking for ways to cut costs and boost productivity—many began counting on cloud-computing solutions as a means to both eliminate some IT expenses and increase access to data by employees.
On the social-media front, personal-lines agents using Facebook and Twitter have begun to realize some tangible, if small, benefits as they establish a presence where a growing number of their clients and prospects are spending more time.
#8 ERM, SRM Gaining Ground with Risk Managers; Reinsurers Leading the Way
Enterpriserisk management continued to move more toward the mainstream in Corporate America this year, with its implementation being driven by anxious boards and by CEOs more acutely aware than ever of the need to understand and mitigate existential threats.
This increasing stature of the concept, especially at Fortune 1000 firms, is good news for risk managers: It means greater recognition of the strategic contributions they can make, and ERM’s growing acceptance should open up more opportunities for risk managers to consult with a company’s top decision-makers.
In our own insurance industry, ratings agencies are helping push the practice of ERM further up the C-suite “Must Do” list.
In fact, reinsurance giants are not only leading the charge on ERM within the insurance sector—they are so advanced that they can serve as models for almost any company considering a program.
“Reinsurers are sophisticated when it comes to developing ERM systems, and it’s a cultural phenomenon at these companies,” says Peter Dickey, assistant vice president of A.M. Best’s reinsurance ratings division. “It’s accepted from the board to the lowest person, and they make sure that message gets through to everyone.”
While many small to midsize companies in the U.S. believe there is something to be gained through ERM practices, they are still moving slowly toward building an infrastructure for it, says Stefan Holzberger, A.M. Best’s vice president of rating criteria and regulatory-policy development.
One element of ERM, and an emerging discipline in 2011, is strategic risk management (SRM), which was defined and recognized by the Risk and Insurance Management Society at its annual conference this May.
SRM, a central component of ERM, focuses on the biggest and most likely risks to shareholder value. This process helps risk managers identify and assess those issues that could most severely impair an organization’s ability to execute its business strategies.
#7 Bold-Faced Buyers Battle to Acquire Transatlantic
Ending a five-month, multiparty bidding war—with Warren Buffett as one of the belligerents—investment holding company Alleghany Corp. recently reached a deal whereby reinsurer Transatlantic would become its independent subsidiary in a $3.4 billion deal.
The battle for Transatlantic began on June 12 when the company and Swiss-based Allied World Assurance Co. Holdings announced a $3.2 billion merger deal that executives said would create a global specialty insurer and reinsurer operating in 18 countries on six continents. But one month later, Bermuda-based Validus Holdings Ltd., led by CEO Edward J. Noonan, made an unsolicited, competing $3.5 billion offer of its own to acquire Transatlantic. The companies sparred throughout July, with Transatlantic filing a lawsuit in Delaware alleging that Validus had made false and misleading statements to Transatlantic’s stockholders through tender-offer materials.
In August, yet another player entered the game as Berkshire Hathaway’s National Indemnity Co. put in a competing bid. Validus then filed suit against Transatlantic and the board, arguing that the board had not given sufficient reason for refusing to consider Validus’ offer.
Days before a scheduled Sept. 20 vote on their planned merger, Transatlantic and Allied World announced they had ended their attempted deal. Transatlantic was left to consider bids from Validus, National Indemnity and an “undisclosed third party.” Ultimately, in November, Alleghany and Transatlantic announced their transaction, which is expected to be finalized during 2012’s first quarter.
#6 Cyber Liability Emerges as Key Coverage for Digital Age
While the words “sexy” and “insurance” seldom appear in the same sentence, cyber liability changed that in 2011.
Speaking about coverage for data-breach risk, Jake Kouns, senior director of technology and a data-privacy underwriting expert at property-and-casualty insurance holding company Markel, said in October, “It’s the new, sexy insurance. There are 30 carriers now writing it.”
The reason for this inrush of underwriters, of course, is that the digital storage and transfer of data is a critical part of doing business today for a huge—and constantly growing—swath of industry sectors. Insurance companies, banks, asset managers, retailers and, as Sony reminded us this spring, even game makers—they all handle private financial data.
And it’s not just hackers, viruses and phishing emails that put data at risk. Security breaches can just as easily be caused by lost or misplaced files or even mishandled waste. A breach that results in a client’s data being stolen and used in a damaging way can lead to substantial third-party liability claims—and government penalties.
A report from Lloyd's and technology company HP earlier this year warned that businesses becoming more reliant on technology will face more complex and damaging digital attacks as sophisticated criminals quickly adapt their methods to steal from, disrupt and spy on businesses.
Larger companies have been attuned to the risks of data-poaching and Web-site shutdowns for a while now—and many have stopped inquiring about coverages and have actually started buying policies. Why cyber liability could prove to be a major new business opportunity for agents, brokers and carriers is that the risks of expensive data breaches very much extend to small and midsize businesses as well.
Indeed, it is companies outside the Fortune 1000 that could find it very difficult to recover from a data breach without the right insurance, says Kouns, who also serves as chairman/CEO of the Open Security Foundation—a nonprofit public organization that seeks to help businesses minimize their information-security risks.
While cyber coverage has moved from an afterthought to a front-burner issue for many risk managers this year, the types of coverages being offered are still all over the map. Policies can cover everything from helping reconstitute data to the public-relations expenses needed to repair a damaged reputation.
Prices, too, are evolving—and are perhaps still too low. “Right now you can get a policy with a $1 million limit for $1,500 in premium,” notes Kouns. “That is worrisome. It’s too cheap. Companies will buy the coverage and think they don’t need to do anything to secure their systems.”
Even though cyber risk is everyone’s problem, the Zurich-sponsored survey “A New Era in Information Security and Cyber Liability Risk Management” in October showed that IT personnel are the ones who are generally considered (by 73.2 of the respondents) to be responsible for protecting against such threats. Only 13.2 percent believed it is the risk-management/insurance department’s responsibility.
#5 In D.C., a Busy 2011 Saw Number of Major Moves That Will Shape P&C Future
Politicians, bureaucrats and industry associations kept our D.C. bureau chief, Arthur D. Postal, plenty busy in 2011. Here are his encapsulated reports on the quartet of congressional stories that mattered most this past year—and which will continue to be newsmakers in 2012.
NRRA: Law to Modernize Surplus-Lines Regulation Hits Implementation Hurdles
In 2011, the insurance industry accomplished its goal of modernizing surplus-lines regulation when federal legislation—the Nonadmitted and Reinsurance Reform Act (NRRA)—went into effect July 22, establishing the insured’s home state as the only one with jurisdiction over multistate surplus-lines transactions—and therefore the only one that can require a tax be paid by the broker.
But sizable roadblocks remain toward establishing a uniform system for disbursing premiums owed to states where the actual risk exists. While most of the industry would prefer theKentuckyallocation system, there is no consensus among the states about an allocation mechanism, nor any means of pressuring states toward adoption of a uniform system.
The how—and when—of NRRA implementation will remain a top story in 2012.
FIO—Dodd-Frank Offspring—Sparks Some Concern About Increasing Federal Oversight
In May, the Federal Insurance Office established under the Dodd-Frank Act (DFA) became operational, with Michael McRaith, the former insurance commissioner ofIllinois, as its first director.
McRaith is in the process of forming a staff, which will provide information about the insurance industry to the Financial Stability Oversight Council and the Treasury secretary. He has also formed an advisory council of state insurance regulators and industry officials to advise him on various issues the industry is facing.
There are two key concerns to watch out for: One is how FIO and the entire Treasury Department works with the states, the Office of the U.S. Trade Representative and Congress on international solvency and reciprocal trade issues.
The second is the reaction of Congress and the states to FIO’s pending report on how insurance regulation can be modernized and improved. The report is mandated by the DFA and is due in late January.
Any suggestion for a stronger federal role is likely to increase tension among states, state regulators and their supporters in Congress.
NFIP: Permanently Temporary?
The National Flood Insurance Program since Sept. 30, 2008 has been operating on a series of temporary reauthorizations of a law passed in 2003. In an attempt to find a more permanent solution, bills have been passed by the full House and the Senate Banking Committee extending the program until Sept. 30, 2016.
Both bills call for greater private-sector involvement in the program and fewer subsidies for a program already more than $18 billion in debt and with little likelihood that it can generate the revenues to repay it.
However, it’s unclear when the Senate will take up the version passed by its banking panel in September. The Senate passed a short-term reauthorization until May 30, 2012, but the House has not acted on it yet as of this writing.
At press time, Congress had a Dec. 16 deadline to either pass a five-year extension or work out another short-term reauthorization.
House Republicans are also rolling a longer-term extension into a controversial bill that would extend some tax cuts and offset them with budget cuts, but industry observers are not optimistic the bill would get through the Senate. Additionally, President Obama has threatened to veto it.
Commission Mission: MLR Exemption
Insurance agents, both in property and casualty and life, are seeking an exemption of their commissions from the medical loss ratio (MLR) provision of the Patient Protection and Affordable Care Act. The Department of Health and Human Services, led by Kathleen Sebelius, has refused to provide such an exemption, and legislation has been pending in the House for six months without floor action.
Given that there is strong opposition to an exemption from the Democratic majority in the Senate, agents appear to face an uphill climb for relief, despite their pleas that they play a key role in the health-care process and that they have lost significant revenues as a result of the MLR provision.
#4 AIG: Industry Giant Generates Host of Headlines in Roller-Coaster Year
While dozens of insurance companies made big news in 2011, none could come close to matching the sheer quantity of headlines grabbed by AIG—the recipient of an $182 billion government bailout and an industry giant whose Chartis division is one of the key P&C players.
The roller-coaster year started strong when in January AIG CEO Robert Benmosche declared that despite its financial challenges, the beleaguered multinational insurance corporation could “see the finish line” as it continued to pay down its debt to the Federal Reserve and raised money from private investors.
The comeback continued with more good news in February when AIG reported strong earnings of $11.2 billion for the fourth quarter of 2010.
But that same month saw some bad news as well: The company announced it would record a $4.1 billion charge for 4Q 2010 to bolster loss reserves for Chartis. The decision was made after the company’s year-end review of loss reserves.
In March, Chartis shook itself up with a reorganization of the structure of its management team, with Peter Hancock replacing Kristian Moor as CEO (Moor would become vice chairman).
Hancock, who designed the bailed-out company’s recapitalization plan, earned a slot on the cover of NU’s Sept. 19 issue when he gave his first in-depth interview about his vision for the company.
In August, Benmosche appeared on CNBC and declared “mission accomplished”—or something close to it. AIG posted 2Q net income of $1.8 billion (compared to a net loss of $2.7 billion for the second quarter a year before), and he announced AIG had “turned the corner, and our crisis is over.
“We’re independent of government support,” he added during the 2Q earnings call. “It’s all been collateralized. And we’re done.”
Currently, the U.S. Treasury, as part of the recapitalization plan, owns about 77 percent of AIG, but the company has no outstanding debt to the government.
But by 3Q, AIG had reported a loss of $4.1 billion (the company’s worst since 2009), driven by declines in equity markets, widening credit spreads and lower interest rates.
Still, AIG remains at least a 780-pound, if not 800-pound, P&C gorilla. While the company slipped to the sixth position in NU’s annual ranking of the Top 100 insurance groups by net-premium written (from fourth the year before and second in 2007), Chartis, despite the hurdles faced by its parent company, has found a way to maintain market-leadership positions in multiple lines.
#3 RMS Cat Model Revision Ignites a Windstorm
One of the biggest gusts of change that blew through the industry in 2011: The revisions that catastrophe-modeler Risk Management Solutions made to its U.S. Hurricane Model.
Loss results for portfolios that RMS analyzed, based on the revisions, increased from 20 percent to as much as 100 percent.
“We didn’t want to be an event,” says Ryan Ogaard, senior vice president of model management for RMS. “But these were big changes. We understand that.”
The updates to the model, incorporated into RMS Version 11.0 and based on a deep analysis of billions of dollars in claims and reams of other data, increase wind-related loss estimates for noncoastal areas and even inland states.
The changes—which actually have lowered some risk estimates for coastal areas in Florida and elsewhere—prompted one reinsurance brokerage executive to observe: “Basically, this makes Ohio a coastal state.”
As the changes have filtered through risk portfolios, the impact on reinsurance rates for property exposures has been significant, especially for those with significant risk concentrations in Texas and the Gulf States.
Pina Albo, president of the reinsurance division for Munich Reinsurance America, says June and July rates went up in the 10-plus percent range for large U.S. property renewals—a bump she believes was due in no small part to RMS Version 11.0.
Numerous other insurance executives also have mentioned the model changes during quarterly earnings calls and various conferences, citing it as an important part of the equation (which includes higher catastrophe losses, lower investment gains and a decrease in favorable prior-year reserve releases) that is leading to both rate increases and a likely turn in the soft market.
It was a busy year for RMS: The modeler also updated its wind model in Europe. Ogaard says RMS “hasn’t heard too much” about the European adjustments, but the company is still explaining nuances of Version 11.0, including its medium-term rates for hurricane occurrence and new storm-surge projections that could result in flood losses, even on a wind policy.
“It was harder than we expected for the industry to understand these aspects,” says Ogaard. “The baseline aspects of the model are largely put to bed, but we are still talking about these specific issues.”
Ogaard says RMS has no definite plans to make any changes to Version 11.0.
“You can’t tone [the findings] down [simply] because they are hard to deal with,” he says. “We have to stay true to our mission to give the best possible view of risk.”
To further enable the industry’s use of RMS’ new data, the modeler plans to develop tools around the model to “open the black box” and make it “easier to dig into.
“We seek to be more transparent than ever and allow our clients to fully get the benefits of our products,” Ogaard adds.
#2 The P&C Pricing Picture: Rates Edge Up in Year of Staggered, Unsteady Transition
Two steps forward, one step back: For every couple of events that augured a definitive swing to a hard market this year—a major catastrophe here, increasing combined ratios there—some other factor contributed to helping keep prices soft, whether it was fear over the eurozone debt crisis or underwriters willing to heavily discount new business.
But while the pace of change has been staggered and unsteady—and is still by no means universal across all lines—there is little doubt that the market has undergone a significant transition in 2011.
In January, market conditions could be summed up as mostly soft, with pockets of flattening prices. By September/October, the consensus was the overall market had finally hit bottom. And by November, the pricing picture could be described as upward bound, if barely so, for the first time in eons—or at least since 2005.
In the pages of NU and on our PropertyCasualty360.com Web site, we wrote this year literally hundreds of articles—daily, sometimes hourly—on the soft/flat/(maybe) hardening market, as analysts, CEOs, the occasional soothsayer and others offered their assessments of the current state of the market and gave their predictions about when (or if) the market would turn, and what would cause it.
But perhaps nothing better conveys what happened on the pricing front in 2011 than the MarketScout pricing barometers we publish each month. As they show, it wasn’t a swift shift—but climb prices did, from an average decrease of 5 percent last December to the latest report: a 1 percent gain in November.
#1 A Disastrous 2011 Sees Epic Losses Across the Globe
If one could use only a single word to sum up 2011, “catastrophes” best captures what this year was all about.
January started on a soggy note with large pockets of Australia under water, as floods caused insured losses of up to $3 billion. Just the next month, the Southern Hemisphere suffered again, as New Zealand saw a 6.3 earthquake that toppled buildings in Christchurch and led to claims north of $10 billion (part of a nightmarish, 12-month stretch where Kiwis experienced multiple quakes, including one in September of 2010 and another one in June of this year).
Then, for a few unforgettable weeks in the late winter and spring—from the massive Japanese earthquake and devastating tsunami that followed through the spate of tornadoes that ravaged the U.S. in April and May—it seemed like a major disaster struck every other day.
Indeed, the first half of the year wound up being one for the record books. Global reinsurer Munich Re counted 355 significant loss events in quarters one and two—which caused an all-time high of $265 billion in economic losses. In the U.S. alone, 100 events led to more than $18 billion in insured losses.
The second half, fortunately, did not see a Katrina-like event, but Mother Nature hardly let us off the hook. While Florida once again escaped the hurricane season unscathed, Irene underscored the degree of damage that can occur deep inland as it pounded, of all places,Vermont, and ultimately could lead to $4.3 billion of insured property losses.
And the first half’s floods, quakes and tornadoes were joined by summer wildfires in Texas—and then a freak October snowstorm in the Northeast, severe enough that Moody’s labeled it a “major capital event” for insurers.
The conversation around the importance of supply-chain insurance that the Japanese quake helped spark only intensified when fall floodwaters inundated much of Thailand—including nearly 10,000 factories that play a critical role in supplying parts to the automotive and computer industries.
The collective toll on underwriters was terrible. First-half net income for U.S. property-and-casualty insurers, for example, plummeted 67 percent compared to the same period in 2010. The second quarter was particularly brutal for domestic carriers with a heavy concentration in personal lines, as the twisters in Alabama, Arkansas, Oklahoma and, most memorably, Joplin, Mo., flattened homes and crushed cars.
Allstate experienced more than $2.3 billion in catastrophe losses from 30 events in that April-June timeframe. Liberty Mutual also topped the billion-dollar mark in 2Q, with $1.3 billion in catastrophe losses. By September 23, home-and-auto giant State Farm had processed just under one million claims—970,000—for the year and had paid policyholders $5 billion.
Not surprisingly, the cumulative hit of all these catastrophes did cause an overall hardening for property exposures—with Australia, New Zealand and Japan seeing prices increase by double-digit percentages.
And while none of the events in the singular were enough to end the soft market, the aggregate effect of the losses does have the market poised for a general hardening as we enter 2012.