Risk & Business

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....

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

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 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

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 bus...

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

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 c...

With the Affordable Care Act (Obama Care) making it a mandate that health companies include commissions in the medical loss ratio (MLR), brokers find themselves in a troubling predicament. If this is not reversed many companies, in not all health companies, will stop paying commissions. This has already started to happen in big premium cases. This trend also puts a tremor down the spine of P&C agents. I can see big stock companies getting rid of commissions on big premium cases. Large comp policies already have commissions at 3% or less with many companies. The MLR issue is still being argued in Washington and could be overturned or, the trend of not paying commissions in health insurance could continue and over time leak into the P&C industry.  Until next time be careful out there and know your risks. K

In a recent report, 25% of flood claims from hurricane Irene are still not processed and small businesses are suffering. The NFIP is responsible for paying the claims and private insurers are responsible for processing them. Fingers are being pointed at the NFIP because they have yet to fund the claims. Private insurers who process them are not putting their own money to settle the claims. This is another burden on small businesses and shows the inefficiency of the Federally run program. This also gives us in the insurance industry cause for worry as many of our clients are covered by the NFIP. As agents we sell flood insurance to our customers because our job is to protect our clients assets. Our concern however is that the NFIP is like a low rated insurance company who cannot pay claims. Mutiple claims from multiple weather events could force the risk back on agents who have sold the policies. We can only hope that the Fed will finally fix the NFIP and make sure that claims are paid ...

Commerical Airplanes have "black boxes"  to tell the company how pilots are flying and also help put together the story after a misfortunate crash. This technology is now being moved into automobiles and the insurance companies are taking advantage of it. Using the monthly reports that the black boxes send to the companies, car insurance policy holders are charged premiums based on driving habits of the owner. Is this right? Many people think that this is an invasion of privacy, while many others welcome this technology. If you are a great driver who has been safe and accident free, the black box will help you pay less in insurance premiums. On the other side of this equation, is the driver that runs red lights and continually drives over the speed limit, could be faced with increasing monthly premiums. Will this make people better drivers because their habits are immediatel rewarded or penalized by the "black box"? It remains to be seen how this will change things ...

Insurance companies are paying claims from accidents caused by distracted driving. This has put a lot of pressure on legislatures to pass laws preventing the use of cell phones while driving. But is this short sighted? It may be. Look at all the gadgets cars have these days to cause distractions. GPS units, IPod units, video screens, climate control computers etc... just to name a few. No one is discussing all these items as far as distractions to drivers. I have a GPS unit in my car and sometimes the unit can be a very distracting. So how is the insurance industry going to deal with this emerging risk. I think you will see continued pressure by the industry for states to pass laws regarding cell phone and eventually start discussing the other "gadgets" in cars. Maybe the real answer is cars that protect the drivers when they are distracted. Hey there are cars that can wake up a driver who is dozing off, then cars can  help with distractions.  Hey car manufacturers can yo...

Insurance companies have been using to much success, three pricing models over the last few years. These highly sophisticated computer algorithms have kept pricing soft during the recession. This has been good news for buyers of commercial insurance. For 2012 and 2013 insurance companies are using the three models, Catastrophe, Predictive, & Economic to set rates, and most are predicting higher pricing. There is a catch however and that is capital. Most insurance companies have tons of it and this is creating a interesting scenario for company CEO's. Do they follow the models or do they make rate decisions based on capital reserves?. This is uncharted territory for insurance companies and how it plays out in the pricing cycle over the next few years will be interesting to observe. I have read some analysts predicitng  "mini" cycles of hard and soft rates over the next decade. This could be due to the accuracy of modeling, or capital surplus. Any way you slic...

Accord changed the certificates in 2010 and most agents have put the new certs in play. The new certs however are causing agents and brokers a whole lot of extra work and frustrating clients. In the old days agents were amending certs to satisfy their clients contractual demands. Most of the time the request for the certs and the policy changes came after the client had already signed the contracts and needed the cert to get paid. Now most state jurisdictions do not allow agents to change certs by law and telling clients they are out of luck has not been easy, To help get their clients in contractual compliance agents are going the extra mile to find ways to get around the cert issue. sending actual policies and manuscript endorsements from insurers has become more routine. Talking with the owners who let out the contracts and convincing them to modify the agreements to comply with ISO insurance policies is also becoming a job agents are doing on a day to day bases. Until everyone ...

Unfortunately for small business owners insurance rates will go up in 2012. Why? Quite frankly insurance companies are losing money. Now they have been losing money on underwriting for sometime now, but have always managed to keep in the black because of investments and reserve releases to pad the bottom line. However these two "tools" to make income have not been good the last two quarters. Also bad underwriting is getting worse. Insurance company execs have to face the facts that they can no longer turn away from their core business , underwriting, and force rates up to adequately cover losses. Small business owners are stuck in a bad postion also. They have enjoyed the low rates but depended on the industry not to "knee jerk" them into major rate increases. Well , just how fast rates will climb remains to be seen, but either way change is here. Until next time be careful out there and know your risks.  K

With the abuse scandal brewing at Penn State, other risks will surface that could negatively affect the college. First reputational risk will develop. The institution has had a blemish free run and now the reputation could be tarnished. This will dove tail into financial risk as donations to the school and or enrollment may drop. This could affect the bond rating of the college as the money dries up, which then moves the risk right into the board room. The D&O lawsuits could be overwhelming. I am not saying this is what is going to happen but it gives one a perspective on how risk is related. Until next time be careful out there and know your risks. K

The state of New York signed a bill into law that deregulates P&C premiums for insureds with greater than 15 million in sales and greater than 25K in premium. This move is an effort to spur more competitive rate environment for commercial insurance. Most States have a entry point in premium and or sales for deregulation of commerical pricing. This move, though good for consumers, may work against stabilization of markets. There is a fine line in competitive rate promulgation and market stability mainly due to the fact that claims have to be paid. Underwriting to a profit is no longer the norm in insurance carriers. Most carriers depend on the financial markets to make money. History shows that carriers will follow each other into a lowest rate game in order to get business. However each new account is way underpriced and eventually the claims come home to roost. This means that a few insurers will go out of business and that is bad for consumers. I can remember back i...

The National Safety Counsel is predicting the need for qualified Occupational and Safety professionals is increasing. This trend is expected to continue for the next decade. However there is a problem. The amount of qualified candidates is decreasing. The reason: more Universities and Colleges have cut programs in this area due to funding restrictions. Also the current demand is low because of the recession. This is giving a false sense of lack of interest in the field. However, as the economy rebounds, more employers will be looking to fill jobs for safety and occupational health. This will put the current crop of young graduates in the drivers seat in a few years. However the decreasing trend could create a void in the marketplace and put a strain on employers and their insurance carriers. I am a firm believer that these professionals help keep the insurance industry in business because of risk mitigation. Studies show that employers with in house safety personel have l...

The flood insurance program (NFIP) is at another funding deadline and Congress has to vote to extend it. This short windows of time for a valid flood program is not making it any easier to sell the coverage to consumers. Most customers know that the program is really poorly run and funded and only buy the coverage when they are forced to by the bank. To make matters worse the claim payments and settlements have not been stellar. I went to a regional meeting of a large Northeast insurer and they said after hurricane Irene only 60% of the flood claims have been settled. This is appalling. So this is a call out to Congress to get it right this time. The nation needs the flood program to be on solid footing to grow the economy. The private sector is not prepared to take it over.  Let's hope this Congress does what it needs to do to fix the broken NFIP. Until next time be careful out there and know your risks. K

I have been in the business selling commercial insurance for almost 27 years. I can count on one hand how many earthquake policies I have sold over that time period. Quite frankly, business owners just did not think it was worth spending the money on such a small chance of risk. However the earth has been shaking quite regularly in places just not use to seeing earthquakes. In my office in Delaware we had walls shake when the Richmond Virginia epicenter quake hit the northeast. I hope that more business owners will want to purchase the insurance as I think the earth will continue to shake for whatever mother nature's reason. Untill next time be careful out there and know your risks. K

The loss of business income due to the Occupy WallStreet protesters is testing insurance policies. The coverage form most likely will not cover the loss of income of stores and businesses impacted by the occupiers. The coverage needs to be triggered by damage or loss of use to tangible property. The fact that the large numbers of protesters are  keeping patrons away doesn't trigger the policy coverage. Some businesses have had to shut down because of it. Even if the business owners had contingent business interuption coverage the form would probably not pay the loss due to lack of damage. The riots in England tested this covergae also, however most businesses were able to collect on their insurance because the property had been vandalized or destroyed. It is said that the occupiers are trying to rally against big corporate business and banks. Unfortunately they are hurting the one institution that this country has counted on for decades to produce a US economy, and that is sma...