In sports terms, 2012 has been what one could call a rebuilding year, as P&C carriers looked to recover from a disastrous 2011 and a string of heavy losses. For many carriers, 2012 was a time to totally reappraise their roster of risks, which meant both exploring new lines of business as well as shedding certain types of perils or getting out of certain regions altogether.
And for the first 10 months, 2012 was shaping up to be a pretty good year. On the technology front, drivers seemed increasingly willing to install telematics devices in their cars—which could result in lower premiums for them and much better risk selection for insurers. AIG continued to make headlines—many of them positive for a change. Overall, rates started to reverse their long decline.
In the halls of state capitols and Washington, 2012 produced some mixed results. Florida— making a bid to no longer be an insurance basket case—instituted some welcome reforms. And Congress brought some much-needed certainty to the National Flood Insurance Program.
The biggest difference between 2012 and 2011 was the relatively benign weather enjoyed by the industry. Until the end of October, a drought in the Midwest was one of the few natural catastrophes to generate big news. But then Sandy struck, delivering a devastating blow to the Northeast—and making sure that the top story of this year would once again be attributable to Mother Nature.
Here’s our look at the Top 10 news events of 2012. See you in 2013.
10. Telematics: An Idea Whose Time Has Come
Telematics moved further into the mainstream in 2012, with some of the largest Auto carriers—such as Allstate and State Farm—aggressively pushing the concept to consumers with special incentives for early adopters. A speaker at Insurance Telematics 2012, a conference dedicated to the topic, predicted that by 2019, one-third of all U.S. vehicles will be underwritten based on telematics.
Few, if any, emerging insurance technologies are as potentially transformative—and disruptive—as these devices that measure driver behavior and vehicle usage. For carriers, taking a usage-based approach to underwriting will allow them to select and price risks with an almost omniscient precision—and to better fight fraud. For good drivers, the technology promises handsome rewards in the premium department. Progressive, a leader in the use of telematics, went so far this year as to offer its product, Snapshot, to drivers it doesn’t insure for a one-month trial—so they could see what kind of discount they could earn.
But the trend could be much less positive for midsize carriers. A telematics infrastructure is expensive to develop; and storing and parsing the constantly updated data, and developing numerous different policy models in response, is enormously complex. If smaller insurers can’t invest in a telematics program—or find viable alternatives—they could be left with a lousy pool of risks. The good news is that tech vendors with a focus on the middle market are already developing other solutions, including ones built around GPS-equipped smartphones.
While much of the conversation around telematics has been focused on the impact on Personal Auto, it is positioned to revolutionize the Commercial side as well—especially since employers can mandate its usage in their own fleets. Travelers, for example, rolled out to its transportation clients this year its IntelliDrive Fleet Safety Solutions product, which allows companies to monitor how quickly a vehicle brakes and whether the vehicle’s driver is speeding or operating outside of a predetermined route or time.
9. Outlook Sunny: Things Looking Up in the Sunshine State
In November, several approved take-out companies received the go-ahead to remove an additional 65,990 policies from Citizens Property Insurance Corp., Florida’s bloated insurer of last resort. It was only the most recent in a series of positive changes in a state long known for having some of the biggest insurance problems in the U.S.
That latest round of take-outs follows the removal of 310,000 policies previously approved for depopulation by the state Office of Insurance Regulation. As of October, 87,337 policies had been taken off Citizens’ books.
Southern Oak Insurance Co., United Property & Casualty Insurance Co. and the recently licensed Heritage Property & Casualty Insurance Co. are among the companies that will take on the removed policies—and are doing it without the financial incentives proposed by Citizens as part of a controversial plan to loan its surplus.
Policyholders of Citizens—which has become the state’s largest provider of Property insurance—have the option to remain with the state-run insurer.
Florida in May also saw the signing of what the industry has called the “most significant Auto insurance law in decades”—HB 119, which aims to mend the state’s broken no-fault personal injury protection (PIP) system—a system the insurance industry for years has said is plagued by abuse and fraud, costing Floridians more than $1 billion annually.
HB 119 requires claimants to seek treatment from a hospital or physician within 14 days of an accident. The bill bans treatments from acupuncture and massage facilities. The bill also limits attorneys’ fees, establishes stiff penalties for doctors who commit fraud, and requires that claimants submit to an examination under oath from insurers.
Florida Insurance Council Executive VP Samuel Miller says the new law is the most substantial one in decades because it will “reduce fraud and eventually bring down Auto insurance rates.”
8. Rebound King: After Repaying Its Debts, AIG Rebrands, Continues Turnaround
The federal government has been repaid for its 2008 investment in American International Group (AIG), and the Treasury no longer has a majority ownership stake in the insurance giant.
In January that statement may have seemed unlikely to be heard by 2012’s end, despite the progress made since AIG was bailed out in 2008 and required assistance that brought its bill from the Treasury 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, kept working and are grateful for being given the chance to make good on this goal,” he said when the company paid back the Treasury in September of 2012.
This year began with the Federal Reserve Bank of New York selling securities from the Maiden Lane II facility to Credit Suisse on Jan. 19. A subsequent sale in February repaid the entire outstanding balance of the Fed’s loan to the MLII facility. In August, the Fed made securities sales that closed out a companion facility, Maiden Lane III.
As for the Treasury, a series of sales of the AIG stock it held since the 2008 bailout brought the Treasury’s ownership stake in the company down to 15.9 percent. The September sale was a landmark for AIG, as the Treasury shifted from majority to minority ownership.
All told, as of December the Treasury and the Federal Reserve have recovered a combined total of $194.7 billion (even more once an over-allotment option resulting in the sale of an additional 83.1 million AIG shares is factored in), representing a positive return of $12.4 billion to date on the original combined $182.3 billion bailout from the Treasury and Fed.
In October, AIG unveiled a new logo (pictured at left) that Benmosche says “reflects a rebuilt and forward-looking AIG—contemporary, dynamic, transparent and revitalized.”
The following month, the company announced it was officially reverting to the AIG brand for its business units, dropping the Chartis name for its P&C business and the SunAmerica name for its Life units.
7. Hot New Coverage: Business Interruption, Contingent Business Interruption
Business Interruption (BI) and Contingent Business Interruption (CBI) coverage were hot topics at the start of 2012 as a result of the manufacturing and supply-chain debacles caused by the Japan earthquake and tsunami, as well as the flooding in Thailand.
Capacity didn’t lessen following the Japan and Thailand catastrophes. Up to $100 million in CBI coverage could be obtained, but carriers became more cautious and required more data to justify their taking of risk. Without the right information, companies could count on higher rates and a tougher time building multiple layers of insurance to reach desired limits.
At the end of the year, these insurance lines are back in the red-hot-topic category as the widespread power outages, flooding and infrastructure damage caused by Superstorm Sandy wreaked havoc in the Northeast. In fact, modelers and experts say BI losses from Sandy could make up a large portion of overall insured losses from the storm—which could trail only 2005’s Hurricane Katrina as the costliest hurricane in U.S. history.
As is expected to be the case with Sandy, BI losses following Katrina dwarfed Property losses. Allianz says BI and CBI account for as much as 70 percent of overall catastrophe losses in the corporate-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 than expected because of the hard lessons learned from catastrophes in 2011. Carriers had been asking for more detailed information than ever about their clients’ supply chains and contingency plans: If companies 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 large companies. They were up and running sooner.
6. That’s Life: The Hartford Shifts Full Focus to P&C
Hartford Insurance Group finally heeded the words of hedge-fund manager John Paulson, who owns an 8.4 percent stake in the company, by exiting its Life business as a way to revive shareholder value.
Paulson had argued that reorganizing The Hartford to focus on its P&C operations would raise the company’s value to $32 per share.
The Hartford’s 2011 net income fell 61 percent to $662 million from the prior year, and individual-annuity earnings were down by 10 percent.
Hartford Chairman & CEO Liam E. McGee said that the reorganization will reduce the company’s sensitivity to capital-market flux, lower cost of capital, bring in higher equity returns and increase financial flexibility.
The company stopped selling annuities and took a related after-tax charge of $15-$20 million in the second quarter of 2012; the move is expected to reduce annual operating expenses by $100 million starting next year.
5. D.C. Dispatch: NFIP, NRRA and 2012 Election’s Impact on P&C Carriers
After enduring 17 temporary extensions going back to September 2008—and a few lapses—the National Flood Insurance Program (NFIP) finally received some long-term certainty in 2012.
In June, Congress passed a five-year NFIP extension with reforms to the program. Those reforms include allowing the Federal Emergency Management Agency to raise rates by a maximum of 20 percent annually, compared to 10 percent previously; mandating that rates for second homes, properties with repetitive flood claims and commercial properties will go up 20 percent over the next five years; and reiterating FEMA’s authority to buy private reinsurance to back the NFIP. President Obama signed the extension in July.
While the NFIP’s fate was a topic of great concern (and subsequent relief) in 2012, little closure was achieved on another industry issue: states’ agreement on the tax-sharing component of the Nonadmitted and Reinsurance Reform Act (NRRA).
Among other provisions, the NRRA establishes the insured’s home state as the only state with jurisdiction over multistate surplus-lines transactions—and the only state that can require a tax to be paid by the broker. Under the system, it was intended that the insured’s home state then share the premium taxes with the other states in which the risk is written.
The problem is, ever since the NRRA passed in 2010 as part of the Dodd-Frank Act, the states have been unable to agree on a system for sharing the premium taxes.
This year began with two rival plans for achieving this goal: the Nonadmitted Insurance Multistate Agreement (NIMA), supported by the National Association of Insurance Commissioners, and the Surplus Lines Multistate Compliance Compact (SLIMPACT), supported by some industry groups. SLIMPACT, as of yet, is not operational. NIMA began operation in July, but only five states and Puerto Rico have signed on.
In the choice between NIMA and SLIMPACT, the majority of states have chosen neither, opting instead to comply with the NRRA by having 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 purposes and are retaining 100 percent of the taxes.
Another issue that had the potential to shake up the industry was the 2012 election: Republican-nominee Mitt Romney had vowed to repeal Dodd-Frank. What would that have meant for the Federal Insurance Office, the NRRA, federal oversight of systemically significant insurers by the Financial Stability Oversight Council and federal oversight of insurers that operate thrifts? We will never know, as Romney was defeated by President Obama.
4. Dry County: Crop Insurers Respond to National Drought
The summer of 2012 turned up the heat for the U.S. farm industry—so much so, in fact, that record-breaking droughts caused indemnity payouts of more than $2.6 billion in 12 major corn- and soybean-producing states and raised concerns about climate change.
Insurer Alterra Capital Holdings reported a $22.5 million third-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 Crop insurance segment lost $97 million over the first three quarters of 2012.
Taxpayers could be ponying up for the nearly $15 billion in losses from nine-year lows in soybean and corn yields across the country.
Currently, Crop insurance is subsidized through the United States Department of Agriculture (USDA), which shares risk with private companies—an agreement regulated by the Standard Reinsurance Agreement. The USDA pays 62 cents for each dollar of farmers’ premiums, which totaled $11 billion this year.
The program faces its first loss in a decade, meaning that the 15 companies selling Crop insurance—including Wells Fargo, QBE, Ace, American Financial Group and Endurance—will also be facing losses greater than the premiums they collected, says modeler AIR Worldwide.
Surprisingly, despite the physical losses suffered by the agricultural industry and the economic losses suffered by its insurers, net farm income was forecast to rise 4 percent from last year to $122 billion in 2012.
3. ‘Direct’ Threat? Commercial Insureds Showing More Interest in Buying Coverage Online Straight from Carriers
While the trend is still definitely more of a trickle than a flood, buyers of business insurance did turn in increasing numbers to direct distribution channels in 2012, bypassing agents and brokers in the process.
“We’ve seen growth [in our direct channel] in the first half of 2012 at triple the levels of weekly sales during the same time period last year,” said Kevin Kerridge in a cover story on the topic in an August issue of NU. Kerridge, the director of small-business insurance for Hiscox, added that the insurer’s direct channel is growing at 10 times the rate of its broker channel.
Hiscox, which has been offering a commercial option since the end of 2010, presently targets only very small professional-services firms such as marketing consultants, health and beauty providers, and realtors—with most firms recording less than $150,000 in annual revenues and having three or fewer employees.
Is the early success of Hiscox an ominous sign for agents and brokers? The pain that the direct sale of personal-lines coverages has inflicted on producers is well known. A recent report from the Independent Insurance Agents & Brokers of America, for example, found that 1 in every 6 dollars in Personal Auto premiums comes through the direct-response channel.
Commercial direct sales today are a long, long way from this 16-percent market share, and agents and brokers, for the most part, remain largely convinced that the complexities of most commercial accounts will keep producers an essential part of the insurance-buying cycle far into the future.
But as NU reported in the issue just prior to this one, the opinions expressed in a focus group of small-business owners, conducted by Deloitte’s Center for Financial Services, might want to make agents reconsider whether they can take this commercial business for granted in the future. The business owners “were definitely open to the idea of buying insurance without an intermediary,” Deloitte reports—especially if some of the commission cost savings for carriers are passed on into their pockets.
2. Harder, Hardening, ‘Harft’: Pricing Up in Some Segments, But No Hard Market—Yet
NU kicked off 2012 with a cover story declaring a definitive end to the soft market—but in January no one was quite ready to call the pricing environment hard just yet. Instead, terms such as “transitioning,” “turning” and even “harft” were used at that time to describe what was happening to rates, terms and conditions.
As the year went on, some did use the “H” word: In May, after two quarters of price increases, the CEO of the Council of Insurance Agents and Brokers said it was “reasonable to say that the market has made a hard turn.”
While rates continued a steady increase in most (but by no means all) lines of insurance throughout the year, many observers pointed out that market conditions in 2012 actually were quite unique, even unprecedented. In traditional hard markets, the pricing swings and tightening of terms occur rapidly—the classic hockey stick, when charted graphically.
But thanks (among other factors) to still-ample capacity even in the wake of the monstrous losses of 2011, increases were happening at a steady, leisurely pace, not a sprint (with advances in pricing for Cat Exposed Property, Workers’ Comp and Homeowners’ occurring a little more quickly). The shift of certain risks to the E&S market was characterized as “orderly” rather than the mad dash that typically happened in previous hard markets.
This “new normal” or “not your father’s hard market” drew generally favorable responses from all sectors of the industry. Carriers were at least moderately satisfied with the general upward direction of rates; brokers were glad they didn’t need to brace clients for significant spikes after years of bringing them flat or declining rates during the soft market; and even buyers were ready to concede a moderate bump in pricing was probably a positive development for the long-term health of the industry.
Ultimately, any discussion of rates in 2012 had to take place line by line, location by location and account by account. And this highly granular approach to pricing, aided and abetted by the ever-more-sophisticated use of data, may be the most noteworthy trend from 2012—and one likely to be with us for a long time to come.
1. Superstorm Sandy Spoils a (Mostly) Good Year for P&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 sailing for the remainder of the year.
Then along came Sandy. And as losses continue to mount after nearly two months since it struck the East Coast with deadly force, the superstorm may prove to be one of the costliest 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., forcing evacuations, flooding entire towns, destroying homes and businesses, and shutting down power systems. Allstate (whose October losses would top more than $1 billion, primarily due to Sandy) and State Farm, two carriers with the greatest exposure throughout the Northeast, fielded tens of thousands of calls in the days following the disaster.
Much of Manhattan remained in darkness for nearly a week in Sandy’s wake from the power outages, and the New York City subway system was crippled for days, flooded by the storm surge that also laid waste to much of the New Jersey Shore and Atlantic City. Entire towns were wiped out, and it will be years before some shore communities are able to rebound.
To add insult to P&C insurers’ losses, the critical decision made by the National Weather Service to classify Sandy as a “post-tropical cyclone” when it swept onto the Jersey coastline led state insurance regulators in Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, West Virginia and the District of Columbia to declare that hurricane 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 vice president of federal and political affairs for the National Association of Mutual Insurance Companies, to speak out against the regulators’ rulings. “The uncertainty created as politicians or bureaucrats simply change the rules makes providing coverage more difficult and expensive for everyone,” he told NU.
Although it will be some time before anything close to a final tally is made as massive Business Interruption losses continue to add to the total, catastrophe modelers such as Risk Management Solutions currently estimate the damage at $20-$25 billion. Karen Clark, 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 of Sandy-related claims, the National Flood Insurance Program’s borrowing authority may need to be raised to as high as $30 billion.
Still, Fitch Ratings says insurers can easily handle the losses—and then some. A report by the ratings agency says that in a hypothetical scenario, a $10 billion insured industry loss is expected to produce an industry combined ratio of 102.9. That number rises to 107.3 under a $40 billion loss scenario. The report also says Sandy is not likely to change market underwriting capacity and “tip the balance to a hard Property market,” but the general uptick in pricing is expected to continue.
A separate analysis by Standard & Poor’s says industry losses from Sandy would need to reach $50 billion in order to materially erode reinsurers’ capital base.
That’s good news for the five companies expected to be most heavily impacted by Sandy claims: State Farm, Allstate, Liberty Mutual, Travelers and Chubb. On the commercial side, large commercial insurers such as FM Global and Ace should also be impacted.
And while Sandy may not prove to be a capital event for the insurance industry, many executives say the superstorm will alter the industry’s perception of risk in the Northeast.
“When this is all said and done, I don’t think any of us are going to feel that people were as well insured as they could have been,” said XL Group CEO Michael S. McGavick during a Q3 earnings conference call, noting also that several elected officials have admitted the affected regions were not prepared for such a severe weather event.
“I think [companies] will step back and say, ‘This is now two years in a row [that the Northeast has been hit by a storm],’” adds Nationwide CFO Mark Thresher. “They are going to think about their concentrations in this region.”