Higher Exposures and Shrinking Risk Appetite

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Edited December 22nd, 2023 by Kyle Langan

Exposure Growth and Global Reinsurance Capital: 2022 Results

After Hurricane Ian, traditional and alternative capital declined by around 20-25% at 2022’s close, compared to 2021’s close. [1] After adjusting for the interest rate impact of mark-to-market losses on fixed income securities, Swiss Re estimated a “decline in capital of around 5%. [2] However, exposures – proxied by GDP – continue to rise fast. [3] This has created a gap between supply and demand.” [4] Exposure refers to the “state of being subject to loss because of some hazard or contingency.” [5]

With these conditions, what is the impact on the insurance market?

“Higher exposures and shrinking risk appetite typically result in rising prices, higher retentions and tighter terms and conditions.” [6] The prospect of still-elevated catastrophe losses and constrained capacity come as geopolitical, economic and environmental uncertainties remain omnipresent.” [7] Analysts may downgrade financial ratings, like Scottsdale Insurance Company, which A.M. Best lowered to ‘A’ on December 7, 2023. [8]

Tail risk from infectious diseases should remain a risk management priority; a lurking systemic cyber event with destructive potential is another tail exposure to monitor. [9]

Capital (GAAP Reporting)

2021 = 116.3

2022 = 96.6

Decrease = 17%

Capital (Solvency Reporting)

2021 = 113

2022 = 108.1

Decrease = 4.3%

Exposure (~GDP)

2021 = 112.2

2022 = 122.1

Increase = 8.8%

Source: AM Best, Swiss Re Institute

References

[1-4]; [6-7] Continued high losses from natural catastrophes in 2022: Swiss re. Continued high losses from natural catastrophes in 2022 | Swiss Re. (2023, November 14). https://www.swissre.com/institute/research/sigma-research/sigma-2023-01/5-charts-losses-natural-catastrophes.html

[5] Exposure. IRMI. (n.d.). https://www.irmi.com/term/insurance-definitions/exposure#:~:text=Exposure%20refers%20to%20the%20state,of%20some%20hazard%20or%20contingency.

[8] Scottsdale Insurance Company – Ratings.ambest.com. (2023, December). https://ratings.ambest.com/disclosurepdf.aspx?ambnum=3292

[9] Cirillo, P., & Taleb, N. N. (2020, May 25). Tail risk of contagious diseases. Nature News. https://www.nature.com/articles/s41567-020-0921-x

Why Older Driver Safety Awareness Week Matters

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December 4-8, 2023 is Older Driver Safety Awareness Week. It serves as a critical reminder of the importance of road safety for our aging population (NHTSA).

With longer life expectancies, older adults are more likely to continue driving into their 70s, 80s and beyond. Recognizing challenges such as slower reaction times and medical conditions is crucial to ensuring road safety (NHTSA).

Factors like increased vehicle ownership increase the difficulty to navigate complex traffic situations (NHTSA). Decisions about your ability to drive should never be based on age alone; however, changes in vision, physical fitness and reflexes may cause safety concerns. By accurately assessing age-related changes, you can adjust your driving habits to remain safe on the road (NHTSA).

Resources:

Driving Safely While Aging Gracefully is a resource developed by the USAA Educational Foundation, AARP and NHTSA to help you recognize warning signs and pick up useful tips on what you can do to remain a safe driver.

How to adapt a motor vehicle to accommodate the unique needs of an older driver and discussing it with your loved one.

 Find out whether your state defines “Older Drivers” at a certain age, and what that means for driver’s license renewal and restrictions, including tests: KEY PROVISIONS OF STATE LAWS PERTAINING TO DRIVER LICENSING REQUIREMENTS 

 how medical conditions can impact your ability to drive safely

References

Keeping our older drivers safe on the road. NHTSA. (n.d.-a). https://www.nhtsa.gov/older-drivers/keeping-our-older-drivers-safe-road

Older drivers. NHTSA. (n.d.). https://www.nhtsa.gov/road-safety/older-drivers

 

Strategies for Employment Practices Risk Mitigation

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Edited November 30th, 2023 by Kyle Langan

Accommodation and avoidance of adversarial relationships

In the event of a complaint filed against an employer alleging wrongful termination, what are employers’ options to finance this loss? The matter may resolve at mediation, where a settlement is negotiated.  Still, wrongful termination is difficult to resolve in low financial ranges, with many above $120,000.  Improper documentation can act as a hazard for employers. A contemporaneous method of documentation and compliance, along with adversarial avoidance are best practices for employment practices risk mitigation. Accommodation is a key strength for avoiding litigated claims, for which the “average jury award is about $250,000; if a case settles, the judgment averages $75,000. And the cost of defense averages about $120,000 per claim. If a business loses its case, it must also pay for the claimant’s legal fees – averaging $200,000” (the Hartford). Luckily, Employment Practices Liability Insurance exists for employers to strategically transfer this risk to an insurance carrier.

Scenarios:

  • Elk Grove, California: Chevy dealership settled a religious discrimination lawsuit against an employee. The dealership failed to accommodate the employee, who was instead harassed, disciplined, and discharged. The settlement = $158,000 loss for the employer (US EEOC, 2013).
  • Tulsa, Oklahoma: a woman won an age discrimination dispute after she was fired, and the CEO characterized her as old and ugly. The settlement = $140,000 loss for the employer (US EEOC, 2013).

If an event caused a suit like one of these to arrive, how would a company finance it? What are the best ways to avoid them arriving in the first place? For help, the author can be reached at kylel@conreyins.com.

References

EPL Insurance: Risks and Exposures scenarios | the Hartford. (n.d.). https://www.thehartford.com/business-insurance/strategy/epli/risks-exposures-scenarios

Kanbar property management to pay $140,000 to settle Eeoc Age Discrimination Lawsuit. US EEOC. (2013, September 6). https://www.eeoc.gov/newsroom/kanbar-property-management-pay-140000-settle-eeoc-age-discrimination-lawsuit

Maita Chevrolet settles EEOC Religious Discrimination Suit. US EEOC. (2013, September 27). https://www.eeoc.gov/newsroom/maita-chevrolet-settles-eeoc-religious-discrimination-suit

Employment Practices Liability Risk: New Outcome

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Curious to learn new data about the possible outcomes within an entity’s employer-employee relationship? What happens when an employee sues for wrongful termination, and what is your entity’s plan to finance the defense against an allegation like this?

Risk domain: Employment Practices Liability

Winner: Citibank

Loser: Employee

Following a hearing in September, Employment Judge Caroline Illing ruled in favor of the employer, saying the employee failed to “make a full and frank disclosure” (Croft, 2023). Regarding an expense report may have been submitted in error, the judge said “I am satisfied that a dismissal in relation to the misrepresentation allegation alone would fall within the band of a reasonable response by a reasonable employer” (Croft, 2023).

References

Croft, J. (2023, October 16). Citibank analyst dismissed for lying about meals expenses claim under €100 limit. Financial Times. https://www.ft.com/content/a7934111-fd57-4bbd-bd39-6c295236175d

What is digital risk and why should you care?

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Published November 10th, 2023 by Kyle Langan

Connectivity in the world brings digital risks manifested by the use of technology. [1]  Risk takers should consider more than just the implementation of technology. Bruce Carnegie-Brown, Lloyd’s chairman says “the global interconnectedness of cyber means it is too substantial a risk for one sector to face alone and therefore we must continue to share knowledge, expertise and innovative ideas across government, industry and the insurance market to ensure we build society’s resilience against the potential scale of this risk” [2].

What is resilience?

Resilience means having features in place for the preparation, prevention, protection, and response after an accident or disaster [3]. For example, the U.S. relies on the National Security Council to instill ideas and actions of resilience in their national strategy for a crisis scenario; the U.S. is advanced terms of economy and insurance penetration, meaning there is capital in the U.S. to fund response and recovery to a disaster. [4] Conversely, a society with low income, that lacks public bodies and infrastructure, will struggle to achieve crisis management and damage limitation. [5] In a highly resilient society, the shocks of disasters are less severe, there are more preventive measures in place, and all key functions are up and running again after a short time [6].

Data, within organizations reporting a lack of resilience:

“44% are at the point of assessing digital risk with quantitative and/or qualitative metrics

19% are still defining digital risk

12% do not manage digital risk.” [7]

Preparation, prevention, protection, and response are important for creating a high level of resilience. For digital risk, it seems more preparation is needed.

Please reach out to Conrey’s risk manager, Kyle Langan (kylel@conreyins.com) to help proactively strategize on the components of resilience before you experience a loss.

Source: https://www.auditboard.com/resources/ebook/digital-risk-report-2023/

 

References

[1, 7-8] Wheeler, J. (n.d.). Digital Risk Report 2023. AuditBoard. https://www.auditboard.com/resources/ebook/digital-risk-report-2023/

[2] Lloyd’s Systemic Risk Scenario reveals global economy exposed to $3.5trn from major cyber attack. Homepage – Lloyd’s. (2023, October 18). https://www.lloyds.com/about-lloyds/media-centre/press-releases/lloyds-systemic-risk-scenario-reveals-global-economy-exposed-to-3.5trn-from-major-cyber-attack

[3-6] Resilience – More than just a buzzword . MunichRe TOPICS GEO 2016 . (2016). https://www.munichre.com/en/insights.html

Are You Prepared for Water Damage Inside your Home or Commercial Property? Risk Data and Questions

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Published on October 19th, 2023 by Kyle Langan

What is the sentiment surrounding non-weather-related water damage from incidents like sudden and accidental leaks?

In a sample study, 61% of consumers never heard of an automatic water shutoff device, “despite how effective they can be at reducing water damage” (Hanover, 2023).

“One of the most common residential claims is from water” (Epps, 2004).  Risk is present because of high frequency. The source of water must be determined during the claim adjustment because not all causes are covered (Epps, 2004).

“A common source of damage is water from a plumbing, heating, air-conditioning system, or household appliance” (Epps, 2004). Perils may include burst water heaters, burst pipes, or broken water lines to a washing machine. “If there is policy coverage, it usually covers the damages caused by the water but does not pay to repair the damaged or broken water line or appliance. If a broken or leaking water line is inside a wall or ceiling or under a slab foundation, there may be coverage to access the water line but again no coverage to repair the water line itself” (Epps, 2004).

  • When is the last time your property’s plumbing system got upgraded?
  • Do you have a water sensor?
  • Are you familiar with an automatic water shutoff device?

Some convincing data points to take action and prepare (sourced from one of our partner carriers):

  • Plumbing leak = 7x more likely than a fire in a home
  • Water damage = 6x more common than burglaries (Hanover, 2023).

Please reach out to our risk manager, Kyle Langan (kylel@conreyins.com) to help proactively educate on the risks of non-weather-related water damage and find devices to install in homes or commercial properties to help cover contingencies.

References

2023 Home Water Damage Prevention Report. 2023 Home Water Damage Prevention Report | The Hanover Insurance Group. (n.d.). https://www.hanover.com/2023-home-water-damage-prevention-report?utm_source=release&utm_medium=PR&utm_campaign=Water%2BMitigation

Epps, G. (2004, July 1). Residential water claims. IRMI. https://www.irmi.com/articles/expert-commentary/residential-water-claims

Celebrating National Recovery Month 2023

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National Recovery Month 2023

National Recovery Month (Recovery Month) is a national observance held every September to educate Americans that substance use treatment and mental health services can enable those with a mental and/or substance use disorder to live a healthy and rewarding life.

Since 1989, Recovery Month has been held to promote and support new treatment and recovery practices, the nation’s vibrant and proud recovery community, and the dedication of service providers and communities who make recovery in all its forms possible.

Recovery Month has adopted the theme of “Every Person. Every Family. Every Community.” as its permanent tagline, indicating that every person can overcome the trials and tribulations associated with the ups and downs of life.

As an affiliate member of National Association of Addiction Treatment Providers (NAATP), we want to echo the belief that mental health and Substance Use Disorder (SUD) treatment IS health care. In the United States last year, more than 106,000 persons died from drug-involved overdoses. This is an important cause to celebrate because SUD affects families all over the world.

When is the Right Time to Mitigate Cyber Risk?

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Published September 8th, 2023 by Kyle Langan

Organizations should consider hedging cyber tail risk with insurance. Traditional General Liability insurance contracts do not protect entities from cyber events. Conversely, an effective way to manage this risk is purchasing a specific contract with an agreed payout for covered causes of loss. At the close of 2023 Q2, data shows a correctional decline in the cost to mitigate cyber risk with insurance (Tokio Marine). Meanwhile, “ransomware appears to have returned to levels observed in 2020 and 2021 and concerns about cyberwar and systemic cyber events are at an all-time high” (Tokio Marine). This divergence indicates the balance of 2023 provides a timely opportunity for cyber risk mitigation. Widespread events can and will happen, while more sophisticated attacks develop (Tokio Marine). This is why many risk managers describe cyber events as the most dynamic or fastest emerging domain of risk.

Quarterly Cyber Rate Change

(Source: Marsh Global Insurance Market Index, Council of Insurance Agents and Brokers)

References

2023 Cyber Report. Tokio Marine HCC. https://tmhcc.com/cyber

Council of Insurance Agents and Brokers P/C Market Survey Q1 2021 to Q1 2023. The Council of Insurance Agents & Brokers. (2023, August 11). https://www.ciab.com/market-intel/pc-market-index-survey/

Global Insurance Market index 2023: Global Insurance Market index. Marsh. https://www.marsh.com/us/services/international-placement-services/insights/global_insurance_market_index.html

Total Cost of Risk for a Treatment Provider

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Article published by Kyle Langan August 25th, 2023

Executive Summary:

For financial health and longevity, it is vital to understand the costs of risk and their impact on surplus or profitability. This article provides analysis on cash flow for a treatment provider. It may point out factors that typically go unmeasured at times of stress.

Learn How to Measure:

Risks are inherent in an entity’s operations, and risk brings cost.

Total Cost of Risk is money spent managing risks and incurring losses. It is the sum of all aspects of operations that relate to risk. [1] Costs usually include buying insurance. Policy types and claims history determine these costs. Other costs include retentions, uninsured losses, administrative work, risk control, and indirect costs. [2]

Losses set back cash flow, but with the right protection, most direct losses are covered by insurance. Indirect costs are unbudgeted expenses of events caused by business interruption or disruption. An indirect loss cost factor, specific to industry group and risk category, can help with the calculation. [3] With these indirect costs calculated, strategic opportunities arise to minimize Total Cost of Risk.

Example:

A litigated medical malpractice loss will incur significant costs, thereby increasing Total Cost of Risk for a treatment provider. This results from the losses in the settlement/judgement and attorney fees (direct costs). Separate, there are business disruptions, time for data gathering, strategy formation, and human capital expenditures (all indirect costs).

Scenario: Addiction Treatment Provider Faces Medical Malpractice Allegation

$50,000 = Cost of insurance purchased by Treatment Provider (Premiums, Taxes, Fees)

$250,000 = Medical Malpractice Loss

Insurance company provides a $250,000 payout and protection for the covered cause of loss as defined in the treatment provider’s human services professional liability policy.

$10,000 = Self-insured retention

Insurance company collects $10,000 from the treatment provider after the loss concludes, as it was the entity’s agreed portion of the loss, per the insurance contract.

Indirect Costs

An indirect loss cost factor measures wasted time, energy, and resources spent on a claim process and recovery from the loss. [4] Indirect losses erode cash flow.

A factor of 0.50 equals indirect losses totaling an additional $125,000

250,000 * (0.50) = 125,000

In conclusion, the Treatment Provider faces $125,000 of indirect costs, $240,000 in losses covered by insurance, and a $10,000 deductible.

$125,000 is the portion that may go unaccounted for on financial statements, unless it is quantified by the treatment provider’s risk manager or CFO.

Total Cost of Risk:

Indirect Costs = $125,000

Insurance Premium = $50,000

Self-insured retention = $10,000

Total Cost of Risk for the Treatment Provider this year = $185,000

This also illustrates the importance of insurance. Without the protection, Total Cost of Risk is $240,000 higher, totaling $425,000, plus interest expense, if the company used debt to finance the loss.

 

References

[1]

Cost of risk. Cost of Risk | Insurance Glossary Definition | IRMI.com. (n.d.). Retrieved February 28, 2022, from https://www.irmi.com/term/insurance-definitions/cost-of-risk

[2] — [4]

Data-driven client outcomes for the insurance industry. TCORCalc. (2019, July 28). Retrieved February 28, 2022, from https://tcorcalc.com/

Cyber Risk Financing: Boom or Bust?

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How would the cyber insurance market react to a catastrophic loss? If rare events play a disproportionately large role in determining the properties of the cyber market, one of these events could send capital providers “running for the hills” (Ayers, 2023). In its report, “Cyber Risk: On the Edge of Insurability,” Conning specifically mentions the potential of this as the next black swan event.

“Conning envisions several possible paths for the cyber industry, including one where pricing gains in recent years and improved claims experience successfully attract more capital from both traditional sources and new players; and another where a catastrophic loss occurs,” shaking out capital providers and “reversing recent progress” (Ayers, 2023).

 

References

Ayers, E. (2023, July 18). A “surprising” cyber cat could stymie future market growth: Conning. Zywave | Advisen Cyber Front Page News. https://www.advisen.com/tools/fpnproc/fpns/articles_new_35/P/519407870.html?rid=519407870&list_id=35

Taleb, N. N. (2020). Statistical consequences of fat tails: Real world preasymptotics, epistemology, and applications: Papers and commentary. STEM Academic Press.

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