Risk & Business

With the Hartford announcing that it wants to go back to its P&C roots and relieve itself from the life,  health, and financial service business, one has to think, what do they know that we don't?  This headline started when one of the Hartford's big stock holders made the suggestion. It has to be thought that the Hartford may see a changing landscape and realize they need to make some adjustments. Let me speculate, is the new health and financial services federal laws that are starting to be implemented, putting some "chills" down the spine of insurers like the Hartford?  I have been thinking that these Federal programs are going to push more professionals out of the financial & health and into the P&C side of the business. There is no real room for brokers with the new health law. Well there is,  but no commission based sales. So maybe with the Hartford testing the waters of "majoring" in the P&C business again, the rest of the industry is...

Vincent Stanford's 7 billion ponzi scheme may cause class actions against third party vendors who did business with Stanford. Victims may pursue class actions and one of the possible targets is Willis. Apparently, the victims contest that Willis gave them a false sense of security by issuing insurance and risk services for Stanford. If these cases go forward it could change case law that defines a brokers relationship to third parties that a policyholder deals with. I will have to keep an eye on this one and report to you later. Until next time be careful out there and know your risks. K

Today a jury found Va. Tech liable for not acting and communicating quick enough during the tragic shooting rampage. This verdict will change risk management approaches on campus and in businesses across this country. The jury made it clear that entities will have to have a quick response and communication risk strategy to save others and prevent further loss and to avoid liability. There is no way to prevent  random acts of violence but this verdict will make it clear that risk managers will have to mitigate further loss by having a mechinism to alarm, protect, and secure others. Until next time be careful out there and know your risks. K

Each day I read another state has changed it's insurance regulations to make it friendly for captive formation. Larger businesses are using captives as part of their risk transfer program. The reason? Control !  Business owners want to control their destiny's and reducing the cost of risk is one what to gain some of that control. Commerical insurers pass on the costs of their administration and profit in the rates and premiums they charge. Business owners want to get a piece of that for themselves at the same time reduce their risk management costs. Direct access to reinsurers is also making it easier for businesses to bypass the traditional commercial insurance market and do it themselves. Captive insurance companies do demand expertise, committment, and discipline to avoid a insurance meltdown of not having enough reserves to pay claims. If structured right, a captive insurance company can significantly reduce the cost of risk for a business. If I am a traditional insurance ...

2011 closed with the majority of commercial insurers with combined ratios in the red and the story continues this year. Already weather disasters have insurers reeling. Loss ratios continue to climb and  we are not even through the first quarter. Talk of hardening rates also continues as insurers are starting to realize they are falling behind the curve. The economy is still however weak and getting a quick turnaround to appropriate rates may be harder than imagined. The scenario that is playing out could be unprecedented for insurance companies. Through out the history of the market,  insurance companies have pretty much gotten their way  however 2012 and going into 2013 may prove one for the record books. Stay tuned !  Until next time be careful out there and know your risks. K

A big PIP fraud case got busted today. The scheme involved doctors and lawyers and many other professional types. The investigators put in the indictment that the scheme milked insurers out of 250 million dollars. The depth of the fraud is amazing. I do not want to go into all the details in this blog, but I am always amazed at how these things get started. Until next time be careful out there and know your risks   K 

Recent surveys by the Big I (Independent Insurance Agents of America) shows the numbers of middle size agents is dropping rapidly. Agents with 10-20 employees used to be the majority in the country. Now, however, this group is becoming the minority.Why is this happening? there are many reasons but experts are saying it is the insurance company demands. In order to meet the production requirements agents have to grow to keep company contracts. This has resulted in the increasing number agents with 30-100 employees. The smaller agents are also thriving because they can act as boutique shops that specialize in custom service and attention. So how does this change the insurance landscape? It remains to be seen but certainly the customers demands will ultimately determine the make up of agencies. Until next time be careful out there and know you risks. K

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

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. Tho...

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

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 ...