Overcapitalized Insurance Co's , The Public is Not Happy

As commerical insurance rates rise the buying insurance public is not happy. The economy has not really improved much and now public groups are acusing insurance companies of profit gouging. The reason is the amount of capital the insurance industry has accumulated. Commercial insurance buyers are more aware of the capitalization of the industry. As rates increase they are asking why? "You have all that capital on the books so take on more risks and keep my premiums in line", this will most likley be the mantra of 2012.  The insurance industry reply to this will point the fingers at regulators and rating agencies as they force the accumulation of reserves to assure future claims paying. So we have an impasse, the buyers who don't understand increase rates with record surplus and the regulators that say sock away more or else....  Stay tuned.  Until next time be careful out there and know your risks. K

Juridical Risk? Watch for it in the MF Global Bankruptcy

The bankruptcy of MF Global is in process. Interestingly the Judge in the case could turn insurance on its ear. The executives from MF Global run by John Corzine, bought a D&O policy with about 190 million in coverage limits. The executives are the named insureds on the policy. The judge overseeing the case is indicating that the insurance money should go to the customers who lost millions due to bad executive decisions not the executives. It may seem like the right thing to do as many poor investors lost everything, but if this decision is made it could set a precedent for juridical risk that would be hard to manage. The insurance policy is a contract with consideration between the insurance company and the first named insureds. A ruling that the insurance company is to pay coverage limits direct to customers , breaks the contract. The executives bought the policy to cover them for bad director decisions that trigger legal action, which is the case for MF Global. Though it may be the right thing to do ethically and morally, changing an insurance contract terms and conditions,  post lost , is a scary scenario.  Keep you eye on this one folks.  Until next time be careful out there and know your risks. K

Insurance Companies will "knee jerk" rates

The 2011 combined ratio predictions came out today and it looks like the insurance industry lost money on underwriting, again!. The industry continues to defy basic underwriting principles to compete for growth. This strategy is usually "saved" by investment income and claim paying practices where cash out is always slower than cash in. In 2012 the industry is trying to raise rates a little to test the waters of the economy. My prediction is that most business owners and premium payers are just not going to be able to afford much in increases. If losses continue to mount, the industry will force its will and knee jerk rates back up 20-25% to make up profits. I know this because I have seen it before in 25 years of being in the business. When it will happen is still uncertain but my guess is sometime in 2013. We will see, but as a business owner you better squirrel away some premium money. Until next time be careful out there and know your risks. K

Low Income Insureds Rated Unfairly ?

A few years back I was part of a team of authors that wrote a book on credit scoring. The credit scoring model was realatively new and was getting a lot of attention. Our research showed that the alogirithms used were actuarially sound as low income folks with bad credit scores deserved higher rates. However this did not go over well with State regulators. Now, 5 years later , credit scoring is still being used to determine rates. Unfortunatly low income folks are still being adversely rated due to poor credit. Is this fair? just because the math shows higher rates are necessary, does the method discriminate? Is the credit score model putting low income drivers with excellent loss ratios into a basket of bad drivers? The debate is raging and will probably continue over the forseeable future. I thought by this time the argument would be decided, but it looks like time has only made it worse. Lets see what the next few years show. Until next time be careful out there and know your risks. K

HR Issues, A Risk Challange

Dealing with human beings on the job is a real challenge for a risk manager. The recent Federal laws and all the State laws that are in place to protect the employee from bad employer practices, has made risk managers work extra hard to comply. If you are a risk manager by profession you better know the rules and regs of HR. Until next time be careful out there and know your risks. K

Crop Insurance the Next Flood Program?

The Federal Crop insurance program had record payouts last year. Analyst state that the reasons are increasing weather disasters and the rising costs of getting crop in the ground. The issue at stake is how long can the program exist at record claims. As it is not making an underwriting profit and the cost of planting and growing keeps rising soon the program will become untenable. This resembles the flood program. The NFIP is in trouble and no real solutions have been brought to the table other than funding extensions. As the nation tries to cut its federal budgets,  the crop program could follow suit with frequent funding extensions and no real solutions to make the program work. Time will tell. Until next time be careful out there and know your risks.  K

Solvency II will hurt Captives

Solvency II creates a standard of capital requierments for insurance companies to make sure they are stable for future losses. However the law will stretch to captives and how captives are capitalized. If this will hurt the formation of captives will remain to be seen. Many analysts say it could. Captive managers are anxiously waiting to see how regulators will apply the Solvency II laws and how they will address captive organizations. Until next time be careful out there and know your risks. K

Risk Cultures Still Behind Risk Reality

In a recent survey of corporations with over 10,000 employees, internal risk management cultures have increased 42% from just a few years ago. i guess the 2008 financial crisis woke everyone up. Unfortunately there are still many businesses that have yet to establish a risk management culture. In addition those that have established one are still centering their strategies around financial or fiscal risk. This will reveal itself over time as short sighted. Many other modern day risks have developed which pose threats to business. Cyber risk, reputational risks and supply chain risks were not on the radar screen just a few short years ago but now are common topics of discussion and pose direct threats to businesses. The practice of risk management is realtively new for bsuiness owners. I would expect that it may take some time for businesses to embrace what may be the most important strategy a firm will need to survive modern day business. Until next time be careful out there and know your risks. K  

Cyber Insurance Growing in Importance

Risk managers across the country are looking at cyber insurance as a major add on to their insurance portfolios. Cyber crimes are growing and the use of cloud and wireless connections are growing which means businesses are targeted more and more. Cyber insurance does cover most of the liability and first party losses as a result of cyber crimes. As time goes on it will remain to be seen if the insurance product catches on more and more with small business owners. Yes it adds to the costs of their insurance protection but it may be a coverage that they can't do without.  Until next time be careful out there and know your risks. K

Why Insurance Regulation Will Eventually Change

Currently, states across this great country regulate insurance. For almost  a century, states have done a great job making sure consumers are protected and insurance companies are financially solvent. Now we are starting to see a push for more federal oversight of insurance. The new FIO (Federal Insurance Office) of the government is starting to elicit feedback from the industry on the current state regulation system. What this all means is that state regulation of insurance will change. Here are a two reasons why. State licensing is still a nightmare for agents/brokers and insurance companies. Currently in our agency, we have one full time person just handling the state licensing for the 30 states we are licensed in. The demand for ease of licensing will push a change in insurance regulation. Another reason is the demand from companies to be able to integrate their US products with overseas activities. Obviously the state system cannot handle insurance operations by US companies in other countries. Why is this a regulation issue? Well an insurance company could easily become financially susceptible from overseas operations and not be able to pay claims in the US. Change will certainly happen and how much the Feds are going to be involved will reveal itself as time moves on. Until next time be careful out there and know your risks. K