Insurance & Risk Management Update: November 2011

Transcription

1 Insurance & Risk Management Update: November 2011 Jeffrey A. Lind, CPCU, CIC Clark Insurance November 17, 2011

2 Topics Current state of the insurance marketplace Property & Liability Flood Risk Hurricane Irene Follow-Up Workers Compensation NCCI Proposed Experience Modification Factor Changes Water/Wastewater Industry Network Security/Privacy Liability

3 Property & Casualty Insurance Market 2011 US Property & Casualty industry net income in the first half of 2011 decreased 67% as compared to the same period in Driving forces: Competitive market conditions Low investment returns Catastrophe Losses in 2011 Current market conditions can best be described as stable, but not hardening. Source: AM Best

4 Will 2012 Bring a Turn in the Commercial Insurance Market? Insurance Information Institute President Robert Hartwig believes that many of the factors that need to be in place for a property and casualty market turn aren t currently there at least not enough to cause a sharp turn toward a hard market. Source: AM Best

5 Will 2012 Bring a Turn in the Commercial Insurance Market? Hartwig says four criteria must be met for a market turn: sustained underwriting losses material decline in surplus and capacity a tightening reinsurance market renewing underwriting and pricing discipline Source: AM Best

6 Reinsurance Update Property-catastrophe reinsurance rates were reported to have increased approximately 10% for July 1 renewals, with similar increases (possibly slightly higher) expected for January 1 renewals. Causes: 2011 Catastrophe Losses Changes in Catastrophe Models Used by Advisory Companies Source: National Underwriter

7 Property & Casualty Industry Outlook 2012 will likely bring increases in the 5-10% range on property insurance renewals. For other lines of insurance, minor rate increases are likely, however a return to underwriting discipline could impact organizations with above-average loss experience more significantly.

8 Feedback from Public Entity Insurance Carriers All indicated that property rate increases are likely due to rising reinsurance costs. Some believe that regional carriers and state risk pools that suffered the impact of hurricane, flood & tornado activity in New England and upstate New York could be impacted significantly. All indicated that liability lines of insurance are likely to remain stable (2-3%) and may seek minor increases in deductibles/retentions on public officials liability/employment practices liability renewals.

9 Flood Risk Hurricane Irene Follow-Up Heavy flooding, such as the flooding associated with Hurricane Irene, should prompt organizations to review flood insurance protection.

10 Flood Risk Hurricane Irene Follow-Up The Vermont League of Cities and Towns carried coverage with a $9,000,000 limit per member, and it appears public entities were well protected against flood risk. Source: VLCT News, October 2011

11 Flood Risk Hurricane Irene Follow-Up When reviewing flood insurance provided by association programs, it is important to evaluate whether the limits are: Separate Limit Per Member vs. Shared Limit Per Occurrence Limit vs. Annual Aggregate Limit Changes in property-catastrophe reinsurance could result in changes in 1) premiums charged for flooding risks 2) limits offered for flood insurance.

12 Workers Compensation Industry Challenges Competitive pricing, leading to rate reductions in most areas Weak economy Slow economic recovery Weak investment income Growing medical costs

13 Workers Compensation A.M. Best says results for the workers comp line deteriorated sharply in The calendar-year combined ratio increased nearly 7 points to 118.1, up from in 2009 and the highest level since 2000, when the combined ratio was

14 Workers Compensation

15 Workers Compensation Through Sept. 15, 2011, negative rating actions outpaced positive rating actions in the workers comp segment by more than a 2-to-1 margin. National Council on Compensation Insurance s preliminary analysis of states where it provides ratemaking services found that the frequency of lost-time claims increased on an adjusted basis by 3 percent in Source: AM Best

16 Workers Compensation Net-premium written for the Workers Compensation line fell for the fifth-consecutive year in 2010, declining 3.6 percent to $34.1 billion from $35.3 billion in However, A.M. Best notes in Best s Special Report, there is reason for hope: Employment and payrolls have stabilized, and premium growth in 2011 looks to be positive for the first time since 2005.

17 Workers Compensation Outlook Flat to modest increases for organizations with favorable claims experience. Larger increases for organizations with less favorable claims experience.

18 Workers Compensation: NCCI Proposed Experience Rating Changes NCCI is proposing an increase to the primary/excess split point from its current value of $5,000.

19 What is a Split Point? In the promulgation of an experience rating modification, a split rating approach is used to reflect both the frequency and severity of losses. Currently, the split of actual incurred losses used in the experience rating calculation is applied as follows: The amount of the loss up to $5,000 is known as the primary loss, which reflects frequency The amount of the loss in excess of $5,000 is known as the excess loss, which reflects severity Under this split rating method, actual primary losses are given full weight in the experience rating formula, while actual excess losses only receive partial weight.

20 Why is this change being proposed? The last split point update occurred two decades ago, and since that time, the average cost of a claim has tripled. Because of this, the portion of each claim that flows into the experience rating formula at full value (primary loss amount) is much smaller than what it used to be 20 years ago.

21 Proposed Transition Plan The proposed transition plan is: Year 1: The split point will initially be increased to $10,000, to become effective with each state s approved rate/loss cost filing on or after January 1, 2013 Year 2: A state s next effective year filing will further increase the split point to $13,500 Year 3: A state s third effective filing year will further increase the split point to $15,000 plus two years of inflation adjustment (rounded to the nearest $500)

22 Impact on Individual Employers The impact to individual employers will vary according to how many claims they have that exceed $5,000. If none of their claims exceed $5,000, they will generally see a decrease in their experience rating modification. This is because no additional actual losses will flow into their modification under the higher split point.

23 Impact on Individual Employers Conversely, if an employer has claims that exceed $5,000, they will generally see a increase in their experience rating modification. This is because additional primary losses will flow into their modification under the higher split point.

24 Cyber Insurance: Necessary Coverage? Key Questions What will you do if your system is hacked and your data or customer information is extracted? How will you alert your customer base or employees (past & present) that their information was stolen from your company? How will you pay for the costs associated with notifications and identity protection services required by law? Will the Maine Tort Claims Act protect your organization against liability arising out of data breaches?

25 Information Security Trends: Incidents by Breach Type - Last Year Hacking 12% Web 9% Virus 2% Lost/Stolen Laptop 15% Lost/Stolen Tape 2% Fraud 11% Other 12% Lost/Stolen Media 4% Document Disposal 9% Lost/Stolen Drive 6% 4% Lost/Stolen Document 7% Stolen Computer 6% Snail Mail 6% Unknown 7% Source: Dataloss DB

26 Water District Breach Examples January 18, 2010 City of Oakridge, Oakridge, Oregon Unintended Disclosure A list of the names, addresses and Social Security numbers of employees of the City of Oakridge was sent out with monthly water bills. The town has about 1,400 households. The city has signed up all employees for a credit monitoring service. The city does not know how many people received the list of employee information in a newsletter included with their water bill. Information Source: Dataloss DB

27 Water District Breach Examples February 13, 2008 Los Angeles Department of Water and Power, Los Angeles, California Physical Loss A computer was stolen from a contractor on February 11, Compromised information included name, Social Security number, date of birth, employee identification number, salary, work location, deferred compensation balances, insurance plan coverage and health care benefits selection for all active employees who were members of the DWP Retirement Plan during 2006 and Nineteen organizations were affected by the breach. Information Source: Security Breach Letter

28 Water District Breach Examples July 7, 2006 City of Hattiesburg, Hattiesburg, Mississippi Stationary Device Video surveillance cameras caught 2 intruders stealing hard drives from 18 computers June 23. Data files contained names, addresses, and SSNs of current and former city employees and registered voters as well as bank account information for employees paid through direct deposit and water system customers who paid bills electronically. Information Source: Dataloss DB

29 Limitations in Existing Policies More often than not, cyber risks fall outside the realm of standard insurance policies. Most standard insurance policies were developed before the evolution of cyber risks. Insurers are attempting to limit their liability for cyber risks as they do not want to expose themselves to risks they do not intend to cover. Upon review, companies are finding that, while their cyber risks are expanding, the coverage available for these exposures under standard policies is shrinking, or nonexistent.

30 Theft of Tangible Assets Computer Fraud coverage insures against theft of money, securities, or property by utilizing a computer to transfer covered property from the insured's premises or bank to another person or place. Coverage is widely available as part of a combination crime policy at a relatively low premium cost. Computer fraud by employees is handled by Employee Theft coverage.

31 Loss of Intangible Property Loss of an organization s data could be a damaging event for an organization from an: Operational perspective Financial perspective Liability perspective due to requirements to produce Electronically Stored Information in litigation. Many organizations carry coverage for loss of data as part of Electronic Data Processing (EDP) coverage.

32 Limitations of EDP Coverage EDP coverage does not always cover data loss and extra expenses associated with a cyber-crime event, such as virus/hacking or employee sabotage. Most EDP policies exclude: Accidental Damage or Destruction, Administrative or Operational Mistakes. EDP policies do not always extend to off-site service providers and dependent locations.

33 Theft of Customer Data Theft of customer data can result in severe first party and third party liability losses. Examples of first party losses: Communication expenses Breach Notification Costs Public Relations Expenses Credit Monitoring Expenses (estimated at $204 per affected individual) Forensic Costs Loss of Income & Extra Expenses

34 Third Party Liability Third party exposures include: Network Security Media Liability From Content of Website and Electronic Publications Privacy Liability Customer Information Employee Information (past & present)

35 Third Party Liability Sources of Liability Common Law Liability for Insecurely Holding Data Information Security Risks Based on Regulation Governmental Actions and Enforcement Fines and Penalties

36 Risk Management Options Avoid the risk completely Reduce risk through loss control techniques Transfer via non-insurance transfer, such as with contracts and license agreements Transfer the residual risk using an insurance product Retain/accept the risk (self-insure)

37 Cyber-Risk Policies Offered for several years, however new carriers are entering the market, offering competitive premiums and enhanced coverage. Policies are generally modular in format and can be tailored based on the needs of an organization.

38 Cyber Policies Available Coverages Loss of Digital Assets Non-Physical Business Interruption and Extra Expense Cyber Extortion Threat Security Event Costs Network Security and Privacy Liability Coverage Employee Privacy Liability Coverage Electronic Media Liability Coverage Cyber Terrorism Coverage

39 Cyber-Risk Policies - Cost Premium can vary widely in cost from $500-$1,000 up to tens of thousands of dollars a year depending on coverage features. Limit Retention Coverage Selected The market for cyber risks remains soft whether it will continue to soften is difficult to predict. Generally, market capacity has exceeded demand as new carriers continue to enter the market.

40 Information Security Risk Management: Next Steps Identify cyber risks Qualify and rank them Assess controls and countermeasures in place Identify risk improvement procedures Repeat the process regularly and monitor progress

41 Questions? Thank you for your time!