April 24.2012

A Look at Pricing Trends in the Insurance and Reinsurance Industries

by David Smith

Despite the financial and economic turmoil of the last several years – both nationally and globally – the insurance market has remained remarkably stable.  There have been surprisingly few insurance company failures, and premiums have remained at worst flat, and in most cases have seen year on year decreases.

As explained in a prior article I wrote, the soft market was largely the result of long term excess capacity in the market place – meaning insurers had to compete hard against each other to get clients’ business.  Another factor was the reinsurance market – the mechanism by which insurance companies insure the risks they take on and spread risk to a much wider pool.  For a number of years reinsurers have enjoyed relatively easy years, and have seen relatively few major catastrophic losses.

However, 2011 was a particularly bad year, especially for property losses.  One measure of insurance and reinsurance companies’ business sustainability is known as the Combined Ratio.  In simple terms, this is the ratio of money paid out (losses, commissions, underwriting expenses, etc.) to money taken in (premiums).  Insurance companies try to keep this below 100% – meaning they pay out less than they take in.  In practice, they also earn investment income, which means that even with a combined ratio a few points in excess of 100% they are not necessarily losing money.  In 2009, a basket of the largest global reinsurers had an overall weighted combined ratio of 93.5%.  In 2010, it was 95.4%.  These numbers meant reinsurers were, as a group, very profitable.  However, in 2011 that number shot up to 107.2%.  Several reinsurers had a combined ratio in the 115 – 120% range, and two were above 130%.

There were a number of reasons for this.  It is important though to realize that the reinsurance business is a much more global one than the primary insurance market.  In 2011, the US suffered a very bad early hurricane season, with insured losses estimated at $13 billion.  The New Zealand earthquake is estimated to cost reinsurers around $11 billion while the Japan earthquake and tsunami are likely to end up costing reinsurers approximately $30 billion.  Late in the year were the Thailand flood events, estimated at $15 billion.  All in all, global insured catastrophic losses in 2011 are estimated at $100 billion – more than twice the losses in 2010.  In fact, 2011 was the second worst year for insured cat losses in history. 

Compounding these losses was the fact that investment income is also at historically low rates, and has been for several years now.  As noted earlier, insurers and reinsurers use investment income to cover underwriting and operating losses as part of their business plan.

While reinsurers had, generally speaking, plenty of cash in hand and could withstand a bad year, the outlook is unfortunately not good.  The third prong of this poor outlook is the European crisis, which shows no signs of abating.  The longer range financial forecasts for Europe are almost universally bleak, and the European Debt Crisis could impact reinsurance in the US in several ways.  First, there is the heightened credit risk associated with possible fiscal downgrades of European reinsurers.  There is also a significant risk of increased regulatory and rating agency involvement – which will translate to higher transactional costs and tighter regulation on investments – lowering returns even further.  The ongoing severe recession in Europe is also resulting in reduced demand and thus lower premiums, which could result in lower capacity as well.  In other words, a downwards spiral.  These European woes will almost certainly affect the US market for reinsurance, and that is likely to adversely affect the primary insurance market as insurers find reinsurance more costly and more difficult to obtain.

Medium term projections predict losses from catastrophic weather-related events to continue to increase as a result of climate change.  Reinsurers, wary of another bad year, will therefore limit exposures and increase premiums – particularly in the large scale property insurance market. 

Buyers of insurance, particularly those with large property risks in areas susceptible to weather-related exposures, will find the prices increasing and availability tightening over the next couple of years.  Reinsurance rates are forecast to increase anything up to 15% even for such insureds who have not had large losses.  Reinsurance on policies for insureds who have suffered losses could go up even more.  Those increases won’t translate directly to similar increases in primary insurance, particularly for insureds with smaller exposures, since they will be spread out across the markets and the effect will be diluted.  But overall, prices of property insurance in particular are starting to drift higher, especially for large risks.  And that trend is likely to continue.

Pressures on pricing are lower in the casualty (liability) market (including E&O and D&O), with the sluggish world economy continuing to hold back rate increases.  Carriers continue to compete against each other for business, but are paying more attention to risk management and underwriting concerns.  Reinsurance rates should not increase much, if at all, and this will translate to primary premiums staying pretty much flat.

In conclusion, insurance buyers and risk managers should not expect much change this year, unless they have large property risks in geographic locations prone to potentially catastrophic weather-related events.  But especially if the reinsurers have another bad year, the low premium party may be coming to an end.

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Posted in General Liability Policies, Property Insurance, Risk Management

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March 26.2012

Tendering Your Claim

by David Bruns

You never get a second chance to make a first impression.

This adage is never more true than when tendering a claim to your client's liability insurer. When the claim is tendered correctly, you can minimize delay, avoid disputes and establish a healthy working relationship with the insurer. Here are four simple guidelines for tendering a claim.

Click here for the complete article previously published in The Recorder written by Farella's partner Erica Villanueva.

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Posted in General Liability Policies

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February 08.2012

Developments in Insurance Law

by Kathryn Oliver

The Litigation Section of the State Bar has just published their California Litigation Review, a review of cases decided in 2010. It includes an article by Farella attorneys John Green and Kathryn Oliver on recent developments in insurance law. As they discuss, the year 2010 produced a number of important California insurance cases, primarily the Ameron decision issued by the California Supreme Court. 

Download California Litigation Review_Insurance law developments - PDF

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Posted in General Liability Policies

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November 15.2011

LexisNexis Insurance Law Community Names Top Insurance Blogs for 2011

by David Bruns

We’re thrilled to announce that the Policyholder Perspective blog was selected as one of the Top Insurance Blogs for 2011 by the LexisNexis Insurance Law Community (ILC).  Here’s a link to the announcement.  Thank you to our readers, the LexisNexis staff and its Insurance Law Community Advisory Board.

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Posted in News

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October 21.2011

Duty to Defend is Determined Based on the Facts, not the Causes of Action, Alleged in the Complaint

by Eric Tausend

In Career Systems Development Corp. v. American Home Assurance Co., No. C 10-2679 BZ, 2011 U.S. Dist. LEXIS 103999 (N.D. Cal. Sept. 14, 2011), Magistrate Judge Zimmerman granted an insured summary judgment finding that the insurer had a duty to defend based on the facts pled in the underlying litigation.  This opinion is a reminder to policyholders that, under California law, an insurer’s duty to defend is determined based on the facts alleged in the complaint, not the causes of action that the plaintiff has chosen to plead.  In other words, for a duty to defend to exist, underlying complaints need not specifically allege a covered cause of action, so long as the facts alleged within the complaint could give rise to a potentially covered claim. 

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Posted in General Liability Policies

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September 21.2011

Vote Policyholder Perspective as a Top Insurance Blog for 2011

by David Bruns

The blog team at Farella is delighted to announced that the Policyholder Perspective blog has been included in the initial list of nominees for the LexisNexis Insurance Law Community’s Top 50 Insurance Blogs for 2011 campaign.  The Policyholder Perspective blog is dedicated to providing comments and insights on issues of importance to anyone interested in commercial insurance coverage.  We hope that you will support our efforts to be interesting and informative by voting now.  The ILC is accepting votes and comments now through September 30, 2011.  Click here to add a comment about the Policyholder Perspective blog.

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Posted in News

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September 20.2011

Investigation Costs May Be Covered By D&O Policy

by Amanda Hairston

The Second Circuit recently issued a decision in MBIA Inc. v. Fed. Ins. Co., 2011 U.S. App. LEXIS 13402 (2d Cir., July 1, 2011), finding coverage for investigative costs associated with: 1) a subpoena issued by the New York Attorney General; 2) a formal order issue by the SEC; and 3) related derivative actions.  

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Posted in D & O

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September 09.2011

Insurance Issues in Bankruptcy Proceedings

by David Bruns

Farella bankruptcy expert, Gary Kaplan, will discuss key issues that you need to know about insurance in bankruptcy proceedings, with a focus on:

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Posted in Speaking Engagements

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August 10.2011

Court of Appeal Finds no Coverage for the Unintended Consequences of an Intended Act

by Eric Tausend

The California Court of Appeal recently held in, State Farm General Insurance Co. v. Frake, that the term “accident” applies to the unintended acts of the insured, but not to the unintended consequences of the insured’s intentional acts. 

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August 08.2011

Kaiser Cement v. ICSOP: Court of Appeal Grapples with Horizontal Exhaustion and Stacking

by Kathryn Oliver

A recent decision by the California Court of Appeal for the Second District grappled with the concepts of “horizontal exhaustion” and “stacking” of policy limits in the context of an insured attempting to tap excess policies in a case involving continuous losses spanning multiple policy periods. Kaiser Cement and Gypsum Corp. v. Insurance Co. of the State of Pennsylvania, 2011 Cal.App.LEXIS 686 (filed June 3, 2011), involved an increasingly familiar factual scenario in which thousands of bodily injury claims were brought against Kaiser arising out of asbestos products manufacturing activities in ten different Kaiser facilities operated from 1944 until the 1980s.

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Posted in General Liability Policies

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