In sports terms, 2012 has been what one could call a rebuildingyear, as P&C carriers looked to recover from a disastrous 2011and a string of heavy losses. For many carriers, 2012 was a time tototally reappraise their roster of risks, which meant bothexploring new lines of business as well as shedding certain typesof perils or getting out of certain regions altogether.

And for the first 10 months, 2012 was shaping up to be a prettygood year. On the technology front, drivers seemed increasinglywilling to install telematics devices in their cars—which couldresult in lower premiums for them and much better risk selectionfor insurers. AIG continued to make headlines—many of them positivefor a change. Overall, rates started to reverse their longdecline.

In the halls of state capitols and Washington, 2012 producedsome mixed results. Florida— making a bid to no longer be aninsurance basket case—instituted some welcome reforms. And Congressbrought some much-needed certainty to the National Flood InsuranceProgram.

The biggest difference between 2012 and 2011 was the relativelybenign weather enjoyed by the industry. Until the end of October, adrought in the Midwest was one of the few natural catastrophes togenerate big news. But then Sandy struck, delivering a devastatingblow to the Northeast—and making sure that the top story of thisyear would once again be attributable to Mother Nature.

Here's our look at the Top 10 news events of 2012. See you in2013.

10. Telematics: An Idea Whose Time HasCome

Telematics moved further into the mainstream in 2012, with someof the largest Auto carriers—such as Allstate and StateFarm—aggressively pushing the concept to consumers with specialincentives for early adopters. A speaker at Insurance Telematics2012, a conference dedicated to the topic, predicted that by 2019,one-third of all U.S. vehicles will be underwritten based ontelematics.

Few, if any, emerging insurance technologies are as potentiallytransformative—and disruptive—as these devices that measure driverbehavior and vehicle usage. For carriers, taking a usage-basedapproach to underwriting will allow them to select and price riskswith an almost omniscient precision—and to better fight fraud. Forgood drivers, the technology promises handsome rewards in thepremium department. Progressive, a leader in the use of telematics,went so far this year as to offer its product, Snapshot, to driversit doesn't insure for a one-month trial—so they could see what kindof discount they could earn.

But the trend could be much less positive for midsize carriers.A telematics infrastructure is expensive to develop; and storingand parsing the constantly updated data, and developing numerousdifferent policy models in response, is enormously complex. Ifsmaller insurers can't invest in a telematics program—or findviable alternatives—they could be left with a lousy pool of risks.The good news is that tech vendors with a focus on the middlemarket are already developing other solutions, including ones builtaround GPS-equipped smartphones.

While much of the conversation around telematics has beenfocused on the impact on Personal Auto, it is positioned torevolutionize the Commercial side as well—especially sinceemployers can mandate its usage in their own fleets. Travelers, forexample, rolled out to its transportation clients this year itsIntelliDrive Fleet Safety Solutions product, which allows companiesto monitor how quickly a vehicle brakes and whether the vehicle'sdriver is speeding or operating outside of a predetermined route ortime.

—Bryant Rousseau

9. Outlook Sunny: Things Looking Up in the SunshineState

In November, several approved take-out companies received thego-ahead to remove an additional 65,990 policies from CitizensProperty Insurance Corp., Florida's bloated insurer of last resort.It was only the most recent in a series of positive changes in astate long known for having some of the biggest insurance problemsin the U.S.

That latest round of take-outs follows the removal of 310,000policies previously approved for depopulation by the state Officeof Insurance Regulation. As of October, 87,337 policies had beentaken off Citizens' books.

Southern Oak Insurance Co., United Property & CasualtyInsurance Co. and the recently licensed Heritage Property &Casualty Insurance Co. are among the companies that will take onthe removed policies—and are doing it without the financialincentives proposed by Citizens as part of a controversial plan toloan its surplus.

Policyholders of Citizens—which has become the state's largestprovider of Property insurance—have the option to remain with thestate-run insurer.

Florida in May also saw the signing of what the industry hascalled the “most significant Auto insurance law in decades”—HB 119,which aims to mend the state's broken no-fault personal injuryprotection (PIP) system—a system the insurance industry for yearshas said is plagued by abuse and fraud, costing Floridians morethan $1 billion annually.

HB 119 requires claimants to seek treatment from a hospital orphysician within 14 days of an accident. The bill bans treatmentsfrom acupuncture and massage facilities. The bill also limitsattorneys' fees, establishes stiff penalties for doctors who commitfraud, and requires that claimants submit to an examination underoath from insurers.

Florida Insurance Council Executive VP Samuel Miller says thenew law is the most substantial one in decades because it will“reduce fraud and eventually bring down Auto insurance rates.”

—Shawn Moynihan

8. Rebound King: After Repaying Its Debts, AIGRebrands, Continues Turnaround

The federal government has been repaid for its 2008 investmentin American International Group (AIG), and the Treasury no longerhas a majority ownership stake in the insurance giant.

In January that statement may have seemed unlikely to be heardby 2012's end, despite the progress made since AIG was bailed outin 2008 and required assistance that brought its bill from theTreasury and Federal Reserve to $182.3 billion.

But Bob Benmosche, who took over as AIG's CEO in August 2009,never had any doubts. “The people of AIG never lost faith, keptworking and are grateful for being given the chance to make good onthis goal,” he said when the company paid back the Treasury inSeptember of 2012.

This year began with the Federal Reserve Bank of New Yorkselling securities from the Maiden Lane II facility to CreditSuisse on Jan. 19. A subsequent sale in February repaid the entireoutstanding balance of the Fed's loan to the MLII facility. InAugust, the Fed made securities sales that closed out a companionfacility, Maiden Lane III.

As for the Treasury, a series of sales of the AIG stock it heldsince the 2008 bailout brought the Treasury's ownership stake inthe company down to 15.9 percent. The September sale was a landmarkfor AIG, as the Treasury shifted from majority to minorityownership.

All told, as of December the Treasury and the Federal Reservehave recovered a combined total of $194.7 billion (even more oncean over-allotment option resulting in the sale of an additional83.1 million AIG shares is factored in), representing a positivereturn of $12.4 billion to date on the original combined $182.3billion bailout from the Treasury and Fed.

In October, AIG unveiled a new logo (pictured at left) thatBenmosche says “reflects a rebuilt and forward-lookingAIG—contemporary, dynamic, transparent and revitalized.”

The following month, the company announced it was officiallyreverting to the AIG brand for its business units, dropping theChartis name for its P&C business and the SunAmerica name forits Life units.

—Phil Gusman

7. Hot New Coverage: Business Interruption, ContingentBusiness Interruption

Business Interruption (BI) and Contingent Business Interruption(CBI) coverage were hot topics at the start of 2012 as a result ofthe manufacturing and supply-chain debacles caused by the Japanearthquake and tsunami, as well as the flooding in Thailand.

Capacity didn't lessen following the Japan and Thailandcatastrophes. Up to $100 million in CBI coverage could be obtained,but carriers became more cautious and required more data to justifytheir taking of risk. Without the right information, companiescould count on higher rates and a tougher time building multiplelayers of insurance to reach desired limits.

At the end of the year, these insurance lines are back in thered-hot-topic category as the widespread power outages, floodingand infrastructure damage caused by Superstorm Sandy wreaked havocin the Northeast. In fact, modelers and experts say BI losses fromSandy could make up a large portion of overall insured losses fromthe storm—which could trail only 2005's Hurricane Katrina as thecostliest hurricane in U.S. history.

As is expected to be the case with Sandy, BI losses followingKatrina dwarfed Property losses. Allianz says BI and CBI accountfor as much as 70 percent of overall catastrophe losses in thecorporate-insurance segment.

No one can yet put a price tag on BI or CBI losses from Sandy,but it appears as though losses could actually be less thanexpected because of the hard lessons learned from catastrophes in2011. Carriers had been asking for more detailed information thanever about their clients' supply chains and contingency plans: Ifcompanies didn't have the info and plans, they put them together.Industry experts say that the result appears, at least initially,to have lessened losses after Sandy—especially among largecompanies. They were up and running sooner.

—Chad Hemenway

6. That's Life: The Hartford Shifts Full Focusto P&C

Hartford Insurance Group finally heeded the words of hedge-fundmanager John Paulson, who owns an 8.4 percent stake in the company,by exiting its Life business as a way to revive shareholdervalue.

Paulson had argued that reorganizing The Hartford to focus onits P&C operations would raise the company's value to $32 pershare.

The Hartford's 2011 net income fell 61 percent to $662 millionfrom the prior year, and individual-annuity earnings were down by10 percent.

Hartford Chairman & CEO Liam E. McGee said that thereorganization will reduce the company's sensitivity tocapital-market flux, lower cost of capital, bring in higher equityreturns and increase financial flexibility.

The company stopped selling annuities and took a relatedafter-tax charge of $15-$20 million in the second quarter of 2012;the move is expected to reduce annual operating expenses by $100million starting next year.

—Anya Khalamayzer

5. D.C. Dispatch: NFIP, NRRA and 2012 Election's Impacton P&C Carriers

After enduring 17 temporary extensions going back to September2008—and a few lapses—the National Flood Insurance Program (NFIP)finally received some long-term certainty in 2012.

In June, Congress passed a five-yearNFIP extension with reforms to the program. Those reforms includeallowing the Federal Emergency Management Agency to raise rates bya maximum of 20 percent annually, compared to 10 percentpreviously; mandating that rates for second homes, properties withrepetitive flood claims and commercial properties will go up 20percent over the next five years; and reiterating FEMA's authorityto buy private reinsurance to back the NFIP. President Obama signedthe extension in July.

While the NFIP's fate was a topic of great concern (andsubsequent relief) in 2012, little closure was achieved on anotherindustry issue: states' agreement on the tax-sharing component ofthe Nonadmitted and Reinsurance Reform Act (NRRA).

Among other provisions, the NRRA establishes the insured's homestate as the only state with jurisdiction over multistatesurplus-lines transactions—and the only state that can require atax to be paid by the broker. Under the system, it was intendedthat the insured's home state then share the premium taxes with theother states in which the risk is written.

The problem is, ever since the NRRA passed in 2010 as part ofthe Dodd-Frank Act, the states have been unable to agree on asystem for sharing the premium taxes.

This year began with two rival plans for achieving this goal:the Nonadmitted Insurance Multistate Agreement (NIMA), supported bythe National Association of Insurance Commissioners, and theSurplus Lines Multistate Compliance Compact (SLIMPACT), supportedby some industry groups. SLIMPACT, as of yet, is not operational.NIMA began operation in July, but only five states and Puerto Ricohave signed on.

In the choice between NIMA and SLIMPACT, the majority of stateshave chosen neither, opting instead to comply with the NRRA byhaving the home state retain 100 percent of the taxes. As of today,35 states, accounting for nearly 75 percent of nationwide premiums,have not adopted a compact or agreement for tax-sharing purposesand are retaining 100 percent of the taxes.

Another issue that had the potential to shake up the industrywas the 2012 election: Republican-nominee Mitt Romney had vowed torepeal Dodd-Frank. What would that have meant for the FederalInsurance Office, the NRRA, federal oversight of systemicallysignificant insurers by the Financial Stability Oversight Counciland federal oversight of insurers that operate thrifts? We willnever know, as Romney was defeated by President Obama.

—Phil Gusman

4. Dry County: Crop Insurers Respond toNational Drought

The summer of 2012 turned up the heat for the U.S. farmindustry—so much so, in fact, that record-breaking droughts causedindemnity payouts of more than $2.6 billion in 12 major corn- andsoybean-producing states and raised concerns about climatechange.

Insurer Alterra Capital Holdings reported a $22.5 millionthird-quarter loss related to crop damage from the U.S. drought;Zurich Insurance Group said that its Q3 net profits declined by$400 million, partially due to the dry weather; and Ace's Cropinsurance segment lost $97 million over the first three quarters of2012.

Taxpayers could be ponying up for the nearly $15 billion inlosses from nine-year lows in soybean and corn yields across thecountry.

Currently, Crop insurance is subsidized through the UnitedStates Department of Agriculture (USDA), which shares risk withprivate companies—an agreement regulated by the StandardReinsurance Agreement. The USDA pays 62 cents for each dollar offarmers' premiums, which totaled $11 billion this year.

The program faces its first loss in a decade, meaning that the15 companies selling Crop insurance—including Wells Fargo, QBE,Ace, American Financial Group and Endurance—will also be facinglosses greater than the premiums they collected, says modeler AIRWorldwide.

Surprisingly, despite the physical losses suffered by theagricultural industry and the economic losses suffered by itsinsurers, net farm income was forecast to rise 4 percent from lastyear to $122 billion in 2012.

—Anya Khalamayzer

3. 'Direct' Threat? Commercial Insureds Showing MoreInterest in Buying Coverage Online Straight fromCarriers

While the trend is still definitely more of a trickle than aflood, buyers of business insurance did turn in increasing numbersto direct distribution channels in 2012, bypassing agents andbrokers in the process.

“We've seen growth [in our direct channel] in the first half of2012 at triple the levels of weekly sales during the same timeperiod last year,” said Kevin Kerridge in a cover story on thetopic in an August issue of NU. Kerridge, the director ofsmall-business insurance for Hiscox, added that the insurer'sdirect channel is growing at 10 times the rate of its brokerchannel.

Hiscox, which has been offering a commercial option since theend of 2010, presently targets only very smallprofessional-services firms such as marketing consultants, healthand beauty providers, and realtors—with most firms recording lessthan $150,000 in annual revenues and having three or feweremployees.

Is the early success of Hiscox an ominous sign for agents andbrokers? The pain that the direct sale of personal-lines coverageshas inflicted on producers is well known. A recent report from theIndependent Insurance Agents & Brokers of America, for example,found that 1 in every 6 dollars in Personal Auto premiums comesthrough the direct-response channel.

Commercial direct sales today are a long, long way from this16-percent market share, and agents and brokers, for the most part,remain largely convinced that the complexities of most commercialaccounts will keep producers an essential part of theinsurance-buying cycle far into the future.

But as NU reported in the issue just prior to this one, theopinions expressed in a focus group of small-business owners,conducted by Deloitte's Center for Financial Services, might wantto make agents reconsider whether they can take this commercialbusiness for granted in the future. The business owners “weredefinitely open to the idea of buying insurance without anintermediary,” Deloitte reports—especially if some of thecommission cost savings for carriers are passed on into theirpockets.

—Bryant Rousseau

2. Harder, Hardening, 'Harft': Pricing Up in SomeSegments, But No Hard Market—Yet

NU kicked off 2012 with a cover story declaring a definitive endto the soft market—but in January no one was quite ready to callthe pricing environment hard just yet. Instead, terms such as“transitioning,” “turning” and even “harft” were used at that timeto describe what was happening to rates, terms andconditions.

As the year went on, some did use the “H” word: In May, aftertwo quarters of price increases, the CEO of the Council of Insurance Agents and Brokers said it was “reasonable to say thatthe market has made a hard turn.”

While rates continued a steady increase in most (but by no meansall) lines of insurance throughout the year, many observers pointedout that market conditions in 2012 actually were quite unique, evenunprecedented. In traditional hard markets, the pricing swings andtightening of terms occur rapidly—the classic hockey stick, whencharted graphically.

But thanks (among other factors) to still-ample capacity even inthe wake of the monstrous losses of 2011, increases were happeningat a steady, leisurely pace, not a sprint (with advances in pricingfor Cat Exposed Property, Workers' Comp and Homeowners' occurring alittle more quickly). The shift of certain risks to the E&Smarket was characterized as “orderly” rather than the mad dash thattypically happened in previous hard markets.

This “new normal” or “not your father's hard market” drewgenerally favorable responses from all sectors of the industry.Carriers were at least moderately satisfied with the general upwarddirection of rates; brokers were glad they didn't need to braceclients for significant spikes after years of bringing them flat ordeclining rates during the soft market; and even buyers were readyto concede a moderate bump in pricing was probably a positivedevelopment for the long-term health of theindustry.

Ultimately, any discussion of rates in 2012 had to take placeline by line, location by location and account by account.And this highly granular approach to pricing, aided and abetted bythe ever-more-sophisticated use of data, may be the most noteworthytrend from 2012—and one likely to be with us for a long time tocome.

—Chad Hemenway

1. Superstorm Sandy Spoils a (Mostly) Good Year forP&C Carriers

By early October, the sky was clearing for P&C carriers.Most insurers had rebounded from the huge losses sustained in 2011,and barring any major catastrophes, it looked like smooth sailingfor the remainder of the year.

Then along came Sandy. And as losses continueto mount after nearly two months since it struck the East Coastwith deadly force, the superstorm may prove to be one of thecostliest severe-weather events in U.S. history.

Packing strong winds, Sandy made landfall in New Jersey on Oct.29 and blasted its way up the Northeastern U.S., forcingevacuations, flooding entire towns, destroying homes andbusinesses, and shutting down power systems. Allstate (whoseOctober losses would top more than $1 billion, primarily due toSandy) and State Farm, two carriers with the greatest exposurethroughout the Northeast, fielded tens of thousands of calls in thedays following the disaster.

Much of Manhattan remained in darkness for nearly a week inSandy's wake from the power outages, and the New York City subwaysystem was crippled for days, flooded by the storm surge that alsolaid waste to much of the New Jersey Shore and Atlantic City.Entire towns were wiped out, and it will be years before some shorecommunities are able to rebound.

To add insult to P&C insurers' losses, the critical decisionmade by the National Weather Service to classify Sandy as a“post-tropical cyclone” when it swept onto the Jersey coastline ledstate insurance regulators in Connecticut, Delaware, Maryland,Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island,Vermont, West Virginia and the District of Columbia to declare thathurricane deductibles were not in fact triggered—and therefore,carriers could not count on hundreds of millions in deductibles,despite the massive losses they sustained.

This led industry figures such as Jimi Grande, senior vicepresident of federal and political affairs for the NationalAssociation of Mutual Insurance Companies, to speak out against theregulators' rulings. “The uncertainty created as politicians orbureaucrats simply change the rules makes providing coverage moredifficult and expensive for everyone,” he told NU.

Although it will be some time before anything close to a finaltally is made as massive Business Interruption losses continue toadd to the total, catastrophe modelers such as Risk ManagementSolutions currently estimate the damage at $20-$25 billion. KarenClark, regarded as the mother of the catastrophe-modeling industry,estimates that insured wind losses alone caused by Sandy will be$12 billion.

Additionally, in order to cover thousands upon thousands ofSandy-related claims, the National Flood Insurance Program'sborrowing authority may need to be raised to as high as $30billion.

Still, Fitch Ratings says insurers can easily handle thelosses—and then some. A report by the ratings agency says that in ahypothetical scenario, a $10 billion insured industry loss isexpected to produce an industry combined ratio of 102.9. Thatnumber rises to 107.3 under a $40 billion loss scenario. The reportalso says Sandy is not likely to change market underwritingcapacity and “tip the balance to a hard Property market,” but thegeneral uptick in pricing is expected to continue.

A separate analysis by Standard & Poor's says industrylosses from Sandy would need to reach $50 billion in order tomaterially erode reinsurers' capital base.

That's good news for the five companies expected to be mostheavily impacted by Sandy claims: State Farm, Allstate, LibertyMutual, Travelers and Chubb. On the commercial side, largecommercial insurers such as FM Global and Ace should also beimpacted.

And while Sandy may not prove to be a capital event for theinsurance industry, many executives say the superstorm will alterthe industry's perception of risk in the Northeast.

“When this is all said and done, I don't think any of us aregoing to feel that people were as well insured as they could havebeen,” said XL Group CEO Michael S. McGavick during a Q3 earningsconference call, noting also that several elected officials haveadmitted the affected regions were not prepared for such a severeweather event.

“I think [companies] will step back and say, 'This is now twoyears in a row [that the Northeast has been hit by a storm],'” addsNationwide CFO Mark Thresher. “They are going to think about theirconcentrations in this region.”

—Shawn Moynihan