policies information marine INSIDE structures What makes ... · KATRINA’S AFTERMATH 4 FALL 2005 VIEWPOINT owner-occupied dwellings in New Orleans--81,000 of 84,000 in Orleans Parish--had

Valuing structuresfor farm

policiesPersonal linesunderwriting

informationWhat makesan inland

marine“class”?Bill Stripp

ALSOINSIDE

c o n t e n t sViewpoint | Vol. 30, No. 2 | Fall 2005

From the editor

Some people have a gift for being a friend to everyone. Bill Stripp is one ofthose people.

Bill will retire from AAIS in December after 20 years as our headof technical services. He leaves an organization that is technological-ly transformed from when he came in 1986 (see article on page 16).

But, even more than his accomplishments on the job, people notethat Bill was—and remains—a great friend to anyone associated withAAIS, whether it be customers, employees, vendors, or regulators.

You’d think that 20 years dealing with the headaches of automation and regulation would turn one sour, but I cannot recall a conversation with Billwhen he was not smiling and laughing. I’ve never seen him angry. Never.

Bill seems happiest in the presence of other people, and it was reflective of Bill that he cited his personal relationships with AAIS customers as the most satisfying aspect of his entire career in data processing.

The future of AAIS automation lies now in the capable hands of David Linton,our new director of information services, who has a wealth of experience inelectronic forms management and e-commerce applications.

As we reported in the last Viewpoint, Dave worked for three different systemsfirms after receiving his degree in computer science, business, and social sciencefrom Michigan State University. He currently teaches a course on e-commercemanagement at the Illinois Institute of Technology.

We wish Bill and Dave all the best in their future endeavors.

Joseph S. Harrington, CPCU

2 Wind or Water?Voices call for a restructuring of coverage

6 Hurricane Katrina: A Market-Turning Event?By Lisa Howard, GE Insurance Solutions

10 Reinsurance Supply and Demand in a Post-Katrina WorldBy Thomas A. Hulst, General Reinsurance Corporation

14 Harvesting valueCarriers seeking to improve valuation in farm lines

18 Giving credit where credit is dueNew sources of underwriting information can expand market opportunities

20 A question of classWhat constitutes an inland marine “class,”and why isn’t the number of classes growing?

22 AAIS News

Published by the

American Association

of Insurance Services

OFFICERS

Kenneth Stover, CPCUChairman

James Sullivan, CPCUVice Chairman

Paul A. Baiocchi, CPCU, ARMPresident

William E. StrippVice President, Technical Services

Deborah L. Summerlin, CPCU, ARPVice President, Insurance Lines

Joyce M. TigninoVice President, Marketing

and Industry Relations

Robert GuevaraVice President, Inland Marine

EDITORIAL

Joseph Harrington, CPCU, ARPEditor

Christi DeBrockDesign

All material copyrighted by AAIS 2005

AAIS welcomes requests to reproduceViewpoint articles in other publications.For details please contactJoseph Harrington at [email protected].

For advertising information call Christi DeBrock at 800/564-AAIS.

OUR LOCATION

1745 S. Naperville RoadWheaton, IL 60187-8132

Toll free: 800/564-AAISE-mail: [email protected]: www.AAISonline.com

Wind or Water Photos Courtesy of U.S. Army

Articles in Viewpoint provide general discussion about topics in property/casualtyinsurance and AAIS products and services.

The content of the articles is not intended to provide definitive information regarding useof AAIS products and services, and in no way alters, supplants, or supersedes what is written in AAIS policy forms, manuals, bulletins, or other forms of information provided aspart of our advisory services. Nor does the content of Viewpoint articles indicate any officialAAIS position on insurance or other issues, unless specifically noted.

K AT R I N A’ S A F T E R M AT H

2 FALL 2005 VIEWPOINT

PERSONAL LINES

Wind or Water?

windstorm and flood damage has been well-recognized fordecades, and that the provisions Hood was contesting had beenapproved by his state’s insurance department.

Public officials from both major political parties distancedthemselves from Hood’s suit, warning that any attempt torewrite contracts retrospectively would damage Mississippi’sbusiness climate. At press time, no rulings had been made.

Call for changeStill, there is a growing chorus of people calling for funda-

mental change in how common policy forms address what theaverage consumer experiences as “storm damage.”

“One may want to rethink whether flood insurance could beincorporated into a homeowner’s policy along with other natu-ral hazards with some type of federal reinsurance to cover cata-strophic losses,” says Howard Kunreuther, co-director of theRisk Management and Decision Processes Center at theWharton School of the University of Pennsylvania.

Kunreuther, one of the nation’s leading experts on insuranceand natural disasters, says that incorporating flood coverageinto homeowners policies would “avoid the wind-water contro-versies that occur after a hurricane.”

That controversy was painfully in evidence at Mississippihearings where legislators heard complaints about lack of cov-erage for water losses from citizens who lived outside of estab-lished flood plains, and thus were not required to purchaseflood insurance.

The scale and scope of the losses from Katrina added impe-tus to a call for a uniform national disaster insurance policyadvocated by insurance commissioners from several largestates.

Commissioners from California, Florida, and New York arescheduled to meet in mid-November with representatives of theNational Association of Insurance Commissioners (NAIC) todiscuss development of a “single methodology” for addressingregional catastrophic perils on a nationwide basis.

“The current insurance structure is a failed model,” saidFlorida Commissioner Kevin McCarty. “Citizens deserve acomprehensive insurance policy that covers all perils.”

“The disaster insurance system in the U.S. is broken. It’stime we fixed it,” writes Liz Pulliam Weston, personal financialcolumnist for “Money Central” on the msn.com network.

Like McCarty, Pulliam Weston advocates that “disaster cov-erage--insuring against quakes, floods, hurricanes, wildfires andmaybe even terrorism--would be part of every homeowner’s

Has the American system for insuring against hurricanelosses failed?

A lot of knowledgeable people think so, even if they don’tagree with Jim Hood.

Hood is the Mississippi attorney general who filed suitagainst several major insurers claiming that standard floodexclusions were ambiguous and contrary to public policy andthat carriers should pay for all losses to insured propertiesarising from Hurricane Katrina.

Hood’s suit was immediately dismissed as political grand-standing with little chance of success by insurance industryspokespersons. They argued that the distinction between

Voices call for a restructuringof coverage

premium, with the amount charged depending on the policy-holders’ expected risk.”

Across regionsThat general refrain was echoed by Florida Gov. Jeb Bush,

who reportedly endorsed proposals for comprehensive nationaldisaster insurance in remarks at a meeting in Tallahassee.

“It is appropriate to share the risk across the country,” hesaid, in comments reported by the Miami Herald. "There isn't aplace in the country that is immune to being affected by aflood, wildfire, or storm.”

Gov. Bush subsequently endorsed a bill in Congress thatwould direct the U.S. Treasury to auction reinsurance contractsthat would cover losses arising from earthquakes, hurricanes,and typhoons.

Also, the “single methodology” being explored by someinsurance commissioners explicitly includes terrorism as a perilto be covered, an apparent enticement for inland states to sup-port a program that addresses natural hazards primarily affect-ing the coasts.

As those initiatives suggest, there is great emphasis amongproponents of national disaster insurance to address perilsaffecting different areas of the country, in hopes of spreading

risks and costs, as well as sustaining political support, acrossregions.

“Clearly, a national strategy is required in which the govern-ment, the insurance industry and the private sector collaborateto provide a more secure, reliable and affordable safety net fordisaster victims," wrote Gregory Serio, former superintendentof insurance in New York, in a column in the NationalUnderwriter.

Insiders, tooCriticism of the current insurance mechanism is not limited

to those outside the insurance industry.Markham McKnight, president and COO of Wright &

Percy Insurance, Baton Rouge, La., recently told a U.S. Housesubcommittee that even a prudent insurance buyer is not fullyprotected when he or she purchases coverage under the

National Flood Insurance Program (NFIP).In a subsequent interview, McKnight cited two problems

with the current system of providing wind coverage through aprivate insurer or state pool and flood coverage through theNFIP.

“There is no dovetailing of the coverages provided underthe different policies,” he said, “and there is no dispute resolu-tion mechanism” when the property insurer and the NFIP donot agree on the cause of a loss.

The NFIP’s residential property policies provide no cover-age for extra living expenses or loss of access due to order by acivil authority, he notes, and its commercial policies provide nocoverage for business income or extra expenses.

“A consumer could buy all the insurance available, get hitby a storm, and still get caught without coverage,” he said.

McKnight proposes that national advisory organizationsdraft flood coverage endorsements that would add flood as aninsured peril under standard homeowners and commercialproperty policies, but that the flood exposure be reinsured bythe NFIP.

Claims should be settled on the basis of “reverse interplay,”McKnight adds.

“Interplay”refers to thepractice ofinsurers’depositingclaims payments with a court in situations where they areunsure who should receive payments. “Reverse interplay”would have policyholders reimbursed promptly, with the prop-erty insurer and NFIP left to hash out their shares afterward.

Still a problemBefore junking the current system, however, policymakers

need to understand where the real shortcomings were afterKatrina hit.

It may surprise readers to learn that the vast majority of

FALL 2005 VIEWPOINT 3

“Citizens deserve a comprehensive insurance policy thatcovers all perils.”

— Kevin McCarty, Florida commissioner



owner-occupied dwellings in New Orleans--81,000 of 84,000 inOrleans Parish--had flood insurance, according to EdwardPasterick, senior advisor for the Federal EmergencyManagement Agency (FEMA).

This suggests that mortgage lenders have been successful inenforcing requirements that any mortgaged property located ina flood plain be insured for flood. (Relatively few commercialproperties in New Orleans had NFIP policies, Pasterick adds,but an undetermined amount had private flood coverage.)

Any problem in New Orleans itself, says Pasterick, lay withrenters who, for the most part, did not have any insurance at all,and may not have been better off if they did.

Technically, a renter forced to evacuate due to a civil orderin the wake of the flood would have had no coverage at all forextra living expenses either from a standard tenant’s policy orfrom a federal flood policy.

The former provides coverage only for loss of use arisingfrom civil orders related to damage by insured perils, and thelatter provides no living expense coverage at all.

In most cases, recovery for personal property damagewould have been slim compensation for the trauma and cost ofdislocation. For evacuees who had been living on upper floors,there may have been no direct damage to personal propertybeyond some spoiled food; hence, no recovery at all.

Without involvement of a mortgage lender, there’s no “trig-ger point” to induce renters to purchase wind or flood coverage,says McKnight. Given the limitations on the coverage avail-able, it is easy to see why people of limited means would forgopurchasing it.

Outside the linesThe biggest challenge to the current system for covering

wind and water losses will not arise from the propertyless people within the flood zones of the Gulf, but from property

owners outside those zones.Pasterick estimates that only 15% of properties had flood

insurance in five counties of Alabama and Mississippi affectedby flooding caused by Hurricane Katrina.

That situation led to the unusual initiative of U.S. Rep.Gene Taylor (D-Miss.) who introduced a bill that would allowproperty owners outside designated flood plains to purchasefederal flood coverage retroactively. His proposal would requireapplicants to pay a premium equivalent to the last 10 years’premiums, plus a 5% penalty, and commit to remain in the pro-gram for years to come.

Pasterick fears such a measure would reinforce the tendencyof people in disaster-prone areas to avoid tough choicesbecause they believe the federal government will always cometo their aid in some way.

McKnight believes the Taylor approach may be a necessaryone-time expedient to avoid further burdens on the insuranceindustry, however.

As recovery proceeds, “expect public debate on the role pri-vate insurance plays in disaster recovery,” reads a white paperdeveloped by Tillinghast-Towers Perrin, the international actu-arial and reinsurance firm (www.towersperrin.com/tillinghast).

Among the questions Tillinghast says will be debated isthis: “Is mandatory integration of flood and earthquake cover-age into homeowners policies needed?”

“A consumer could buy all the insurance available, gethit by a storm, and still get caught without coverage.”

— Markham McKnight, president and COO, Wright & Percy Insurance, Baton Rouge, La.

San Andreas Fault, Carrizo Plain, CA

Andrew Castaldi, Natural Hazards Team Expert, Swiss Re

Expertise you can build on.

“When the 1906 earthquake destroyed much of San Francisco, we were there, helping to rebuild it,” says Andrew Castaldi. Swiss Re insures top insurance companies and major corporations in America and throughout the world. As a leader in our field, we are committed to understanding the social and economic impact of natural and man-made hazards. Combining long-standing expertise and financial strength, Swiss Re is ideally positioned to provide your company with tailored solutions to mitigate your exposure and protect your balance sheet – strengthening your ability to absorb shocks of any kind. www.swissre.com

HurricaneKatrina: A Market-Turning Event?

This is the second in Viewpoint’s series of guest essays sub-

mitted by organizations that are associate members of AAIS.

For information on associate membership, contact Rick Maka,

director of marketing, at [email protected] or by calling

800/564-AAIS.

The one-two punch of Hurricanes Katrina and Rita arepoignant reminders of nature’s power and the high level of

risk the insurance industry faces when writing catastrophicflood, windstorm and earthquake exposures.

It is widely recognized that losses from Katrina could be ashigh as US$60 billion,1 which would make it the largest-everinsured loss - even greater than the September 11 terroristattacks. Further, early estimates put Rita’s losses as high as $7billion.2

The impact of these hurricanes is one of the many factorsthat will change the dynamics of the marketplace.

Katrina and Rita come on the heels of last year’s recordwindstorm claims of approximately US$38 billion - principallyfrom hurricanes and typhoons in the United States, theCaribbean and Japan. In 2005, five air crashes, typhoons in thePacific, summer storms in Canada and losses from northernEurope’s storm Erwin in January have compounded industrychallenges.

Despite the claims experience and the enormous past andfuture exposures, insurance and reinsurance property rates con-tinued to be under pressure in the first half of 2005. Did thissimply represent a correction from rate levels that rose afterSeptember 11 or does this indicate the industry is jumpingheadlong into yet another self-destructive soft market?

Or could there be another possibility for the industry?Perhaps there are other forces that are influencing the industryto take a more disciplined road?

Overview

As in any market, the law of supply and demand drives the insurance industry’s cycles. When the industry has excess

capital, there are strong urges to deploy it. Rates begin drop-ping, technical pricing is often forsaken, terms and conditionsweaken and companies enter into lines they otherwise wouldnot. The refrain is a familiar one.

There have been ominous signs that insurers and reinsurersmight again be swayed by the power of these forces. In the firstquarter of 2005, surplus (pre-Katrina) was at an all-time high -

G U E S T E S S A Y

by Lisa HowardCommunications ManagerGE Insurance Solutions,Overland Park, Kansas




reaching US$401.8 billion3 for the U.S. property and casualtyindustry. At the same time - after several lackluster years -investment income is once again increasing.

Further, there are other worrying indicators: althoughreturns generally have been increasing, market rates have beenturning downward in varying degrees.

The most significant rate softening in the United Stateshas occurred in large P/C commercial accounts. During thesecond quarter, rates for large commercial customers droppedon average by 12 percent, according to data compiled fromthe Council of Insurance Agents and Brokers and LehmanBrothers Global Equity Research. As underwriters are attract-ed by the large premiums provid-ed by commercial accounts, theyoften are an early indicator of asoftening market. During thesame quarter, premiums declinedfor all accounts by an average of9.7%.

But price is not the only fac-tor in a softening market. Whileindustry commentators like tofocus on declining rates, of evengreater importance is thatdeductibles are decreasing and terms and conditions arebecoming broader - particularly in the primary market.

When primary carriers accept weaker terms and condi-tions, it is not always transparent to their treaty reinsurers -but it can be a significant factor in the increase in loss ratios.

Do all these factors add up to a market that is heading intoanother period when premiums are pursued at the expense ofprofits, financial stability and, in many cases, solvency? Thehistorical behavior of the industry would indicate irresistible,unshakeable market forces at work.

Are boom-and-bust cycles a fact of life like death andtaxes? Will a lengthy soft market always be followed bysevere industry losses, ratings downgrades and the inevitable“correction” when rates shoot upward?

Or are there other forces at work?

New chemicals in the brew

Market forces indeed are strong, particularly for the insur-ance industry. And certainly there will always be rate

cycles, as long as there is a market economy. However, thereare some new factors that could ensure that underwriting rigor

will be maintained, thereby smoothing the highest rate peaksand lowest rate troughs. They range from psychology, to busi-ness realities, to regulation.• Hurricanes Katrina and Rita. Hurricane Katrina may

prove to be the most expensive catastrophe ever - naturalor manmade. Not only could Katrina potentially haveunprecedented insured losses, but Risk ManagementSolutions (RMS) has estimated that its economic costsmay be greater than US$125 billion. Hurricane Andrew,which blew across southern Florida in 1992, cost theinsurance industry US$21.5 billion (in 2004 dollars),while the September 11 terrorist attacks are expected to

top US$31 billion.4

RMS has also estimated that insured losses for Rita willrange between $4 billion and $7 bil-lion.5

The psychological influencesof such large events are strong -especially when heading into arenewal season. With a rebuild-ing effort that will take months, itis difficult for underwriters to

forget about the exposures that are possible in this busi-ness. Indeed, Hurricanes Katrina and Rita have created anew understanding of what is possible with catastrophicexposures. As a result, insurance and reinsurance buying islikely to be affected in the coming renewals, with buyersseeking greater protections.

In addition, there is real likelihood that reinsurers willshoulder a good portion of Katrina’s losses, which willfocus their minds in the coming renewals - even if theindustry is carrying excess capital and surplus.

The primary market absorbed most of the losses fromHurricanes Charley, Ivan, Frances and Jeanne, which hitFlorida in 2004. As four separate events, claims did notreach as many catastrophe layers.

• Katrina’s tail. Although the low end of Katrina’s losses atthis printing are estimated at US$40 billion,6 there is astrong possibility they could rise to higher levels. Not onlywill business interruption losses increase the longer flood-ing remains, but there is also the issue of a phenomenonknown as “demand surge.” With demand surge, insuredlosses creep upward due to the increased price of

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“As Katrina created a coastalflooding deluge, assessment ofdamage could take weeks or

months, while reconstruction maytake months, even years. As aresult, Katrina will have a ‘tail’”



construction materials and labor following large losses suchas Katrina and Rita. As Katrina created a coastal floodingdeluge, assessment of damage could take weeks or months,while reconstruction may take months, even years.

As a result, Katrina will have a “tail”, making it harderto initially gauge loss estimates and - more than likely -adding to the financial burden on the insurance industry.The situation for Rita will be similar, albeit on a smallerscale.

• The financial factors. The industry now places much moreemphasis on underwriting profits than in the past, wheninvestment income helped supplant lackluster results. Thisis no longer possible to any significant degree because ofthe lower investment income. In 1987, a 10-year Treasurybond provided a return of 10%, while current rates run at4.15%.7

Consequently, the industry has shifted from a 17%return on equity (ROE) in 1987 to an 11% ROE in 2004,despite the hard market rates of the past several years.8

And there is another, more immediate financial factor toconsider: while Hurricanes Katrina and Rita will put a dentin the industry’s surplus and earnings, many companiescontinue to operate with very strong balance sheets.However, the hurricane season is not over yet. More lossesfrom other major hurricanes could begin to affect ratingsand the industry’s capital position.

• Modeling. Models have created a scientific basis for pricingdecisions. By using tools that permit strong underwritingdiscipline and a better understanding of loss costs, under-writers have a scientific basis to say, “yes,” for the rightprice and right risk.

As a result, modeling can act as a behavior modifier forrogue underwriting throughout the industry.

While models are good tools that can help stabilize theemotional drivers of a softening market, they have somelimitations. This lesson became clear after last year’s fourFlorida hurricanes; some insurers with smaller portfoliosand localized losses had higher claims than their modelspredicted. As a result, underwriters need to employ othertools to help them manage their aggregates.

• Rating agencies. Some analysts and observers believe rat-ing agencies have become insurance industry quasi-regula-tors. The threat of a ratings downgrade applies pressure onthe industry to maintain operating performance and capital

levels, which might help companies avoid carelessness inunderwriting decisions.

• Regulatory factors. The investigations into finite reinsur-ance arrangements and broker practices have helped createan environment where increasing transparency and regulato-ry clarity have emphasized strong business fundamentals.This has put a renewed emphasis on making money the oldfashioned way - through underwriting profits.

Bad results from aggressive competition in a soft mar-ket quickly will become apparent to shareholders, employ-ees and customers.

• The SOX effect. Sarbanes-Oxley (SOX) and its Europeansisters have also played a significant role in making trans-parency a business norm. Few companies can now justifylosses from insurance products that have slipped belowtechnical margins.

• Job security. A host of insurance and reinsurance CEOshave left office after the last soft market. The new genera-tion of CEOs has a fresh perspective and stated commit-ment to enforce underwriting discipline during a softeningmarket.

• Tort costs. The industry is still shouldering the burden ofcasualty business written during the soft market of 1997-2001. Since 2001 the P/C industry has had to bolsterreserves by US$54 billion.9 This is a constant reminder tothose new CEOs and others who survived the recent corpo-rate purges that casualty risks were underpriced at a heavycost.

Litigiousness is not just an American phenomenon; it isincreasing throughout the world. The latest estimates fromTillinghast-Towers Perrin show that U.S. tort costs couldrise in 2006 to US$297 billion annually, which is 2.3% ofthe U.S. gross domestic product.10

While casualty models exist, they are usually created byindividual companies, so there is little market standardiza-tion similar to those provided by property models, whichare used by the entire industry. As a result, casualty pricingis much more challenging, given the vagaries of courtawards and emerging risks.

Best of all possible worlds

The combination of Hurricane Katrina and the other ele-ments in the mix of our current business environment send

clear signals for underwriting discipline and rigor. Good

Continued on page 25

ReinsuranceSupply andDemand in aPost-KatrinaWorld

This is the third in Viewpoint’s series of guest essays

submitted by organizations that are associate members of AAIS.

For information on associate membership, contact Rick Maka,

director of marketing, at [email protected] or by calling

800/564-AAIS.

While Hurricane Katrina is likely the most costly U.S.catastrophe in history, much uncertainty remains about

its ultimate impact on the insurance industry. One focus ofuncertainty is reinsurance capacity and pricing for additional2005 per risk and catastrophe protection and for 2006 renewals.How will reinsurers respond after Hurricanes Katrina and Rita?

Katrina is a stress test on the reinsurance industry, just as itis on insurers, regulators, loss adjusters and policyholders.Reinsurers expect to shoulder roughly half of the $30 billion to$60 billion of insured loss estimated to date, compared to lessthan one-third of the $23 billion of insured loss from the 2004Florida storms.1 In addition, there is the possibility that politicalpressure and lawsuits could cause flood and other excluded per-ils to be treated as covered perils, potentially adding up to $44billion to the losses moving through the insurance market.2

Reinsurers enter the renewal season with a large known lossand uncertainty about an equally large coverage controversy.

When uncertainty enters the insurance marketplace, it oftenexits in the form of tighter capacity, higher rates and morerestrictive terms. This is an outgrowth of the laws of supply anddemand--when demand is up and supply is down, the marketexacts a higher price for the same coverage. We believe Katrinaand Rita will have an impact on both supply and demand in thereinsurance market in 2005 and 2006.

The demand side: Rethinking exposures and reinsurance protection

Hurricane Katrina has challenged insurers’ assessments ofrisk much like Hurricane Andrew did in 1992. In Andrew,

losses exceeded the expectations of insurers and reinsurers by asignificant margin. Similarly, as losses from Katrina continue togrow, insurers are experiencing losses that in many casesexceed their “worst-case” scenarios developed through the useof catastrophe models. Katrina reminds us that cat models arejust that--models. Like all models they have weaknesses andrequire a healthy dose of judgment. We believe there are three

G U E S T E S S A Y

by Thomas A. Hulst

Vice President

Gen Re, Stamford, Conn.



major ripple effects from Katrina that may influence demandfor catastrophe reinsurance protection: a recalibration of catas-trophe models, a recognition that we may be in a period ofincreased frequency and severity of hurricanes, and anincreased focus on controlling aggregate catastrophe expo-sures, driven by both internal prudence and external forces,such as rating agencies.

Cat model deficiencies: Just as models were adjustedafter Hurricane Isabel and the 2004 Florida Hurricanes, wecan anticipate adjustments to the models and interpretation ofmodel output after Katrina. Exposures like demand surge,mold remediation, insurance tovalue, and additional livingexpense are incorporated in prob-abilistic loss models, but many ofthese known loss componentswere underestimated. Demandsurge is usually expected to add10% to 20% to the loss, but theactual inflation rate for labor andmaterials in the Gulf may be clos-er to 40%, given the scope andthe timing of the loss. Anotherexample is that additional livingexpense payments have beenaccelerated and higher than mod-eled due to regulatory pressures and the scale of damage.Katrina highlights the unknown as well as underestimatedexposures from extreme events. Political pressures, lawsuits,and coverage disputes tend to increase ultimate losses. Floodlosses (and many other types of damage) are not part of thehurricane model but could contribute a significant share ofloss.

As a result, insurers are now looking beyond modelassumptions to the characteristics of a loss and adjusting theirworst-case estimates. The model produces a footprint that theinsurer can use to identify areas of high exposure accumula-tions from major events. Now insurers are overlaying addi-tional loss factors for a more complete picture of their worst-case exposure. They may adjust for the unique geography ofthe event (areas below sea level), the legal environment (courtrulings on coverage), secondary events (levees failing, land-slides) and other factors that drive loss but are not in any mod-els. Model answers are not final answers.

Insurers can and should make provision for underestimat-

ed and unknown losses in their own estimates of probablemaximum loss. With a more accurate picture of exposure,they can make more informed reinsurance decisions. Oursense is that a trend toward a more conservative PML estimatewill generate demand for more, rather than less, reinsurance(as well as adjustments to coastal underwriting guidelines),but for the right reasons.

Higher frequency and severity: Whether the result of cli-mate change, a multi-decadal cycle related to Atlantic sea-sur-face temperatures, or something else entirely, we appear to be

in a period of higher cyclonic activity.Since 1995, the average number of Atlantichurricanes has increased to approximatelyseven per year, compared to an average ofabout 4.5 per year from 1970-1995.3 Thereis no scientific consensus as to whether thistrend will continue, but good reason forconcern that it will. Cat models use long-term averages to estimate annual exposures,but if periods of loss frequency and severityvary significantly over multi-year cycles,long-term averages may not be good pre-dictors of loss probabilities in the shorterterm. If in fact we are in a period ofincreased frequency relative to the long-

term average, the loss probabilities associated with a 1-in-100year event may actually be a much more likely scenario in theshort run.

Even though the signals of hurricane frequency trend canbe concealed by normal climate variability, there is wide-spread acceptance of the loss severity trend: rising coastalproperty values and population density drive up loss severityfrom hurricane events. Insured coastal values have roughlydoubled in the past decade, and coastal population densitycontinues to grow. Partially due to this demographic shift, sixof the ten largest insured losses from hurricanes (in constantdollars) have occurred in the last 15 months. Put another way,more events meet our previous definition of an extreme event.One result is that insurers need higher reinsurance limits forthe worst case and more reinstatements to address the possi-bility of higher frequency.

Aggregate management and prudence: Prudent man-agement teams are rethinking exposures to catastrophic lossand how to best manage them. The use of reinsurance is a

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“Since 1995, the averagenumber of Atlantic hurricanes

has increased to approximately seven per year, compared to

an average of about 4.5 per year from 1970-1995.”


large component of this reevaluation process. Some insurerswill have exhausted all of their catastrophe reinsurance protec-tion, exposing them to all adverse loss development. As Katrinalosses rise, insurers assume a larger share of the total loss sim-ply because many insurers will be “out the top” of their protec-tion.5 When this happens, insurers bear the full brunt of lossdevelopment and cannot contain their costs. Katrina alsodemonstrates correlation risk, in that insurer aggregates mayinclude types of loss not thought connected with hurricaneevents. More to the point, management cannot assure owners ofwhat that their ultimate costs will be.

Boards of directors may take a more active role in examin-ing gross and net exposure to catastrophes. Where large dollarsare at risk, boardsmay question reinsur-ance quantity as wellas quality, e.g., thecollectibility of rein-surance. Their duty ofcare compels theexposure inquiry.Senior executivesmay also be moreinvolved in runningmodels and testingresults, functions pre-viously delegated tooutside advisers orbrokers. In a world ofheightened corporateresponsibility, Katrinaputs catastrophe management on the agenda. In this setting, thelikely result is conservatism, or demands for higher limits,more reinstatements and highly-rated (A or above) reinsurers.

The supply side: Rethinking exposures and capital commitment

Every observation about demand applies to reinsurancecompanies, too. Reinsurers use models and have managers

and boards scrutinizing gross and net exposure. Their newperception of risk will shape their willingness to commitcapacity to the reinsurance market. The Katrina stress test has afew distinct effects on reinsurance supply. The observationsbelow are based on statements by reinsurance company

managements to the press and client input from industryconferences. The reactions are global and not specific to anycompany, but they ripple through the entire reinsurance marketin which all companies operate.

Higher PMLs and lower capacity: The estimated reinsur-ance share of Katrina, 50% or approximately $25 billion, ismore than one-third the policyholder surplus for the U.S. rein-surance industry. Property catastrophe loss from Katrina is notspread evenly across the industry so several reinsurers are dis-proportionately affected. Since this same segment would besources of 2006 renewal protection, it is fair to say that renewalcapacity will be less than it was a year ago.

Reduced capacity will not be limited to the reinsurers heavilyimpacted byKatrina. All reinsur-ers with propertybusiness are review-ing PMLs undernew worst-case sce-narios before decid-ing how muchcapacity to committo the renewal mar-ket. Some reinsurersuse cat models andthen apply correla-tion factors todevelop their ownprobable maximumloss estimates. Amore conservative

approach is to add up all reinsurance limits on contracts withcatastrophe exposures in a particular zone. Whatever method isadopted, we expect that reinsurers will be more thoughtful andprobably more conservative in deploying capacity.

Reduced retrocessional support: Retrocessional marketsprovide reinsurance support to other reinsurers. They serveworldwide reinsurance capacity needs by redirecting capital tothe companies and geographic markets promising the greatestreturns. Since sizable Katrina losses will impact this market, weexpect that retrocessions will be more costly, and harder to findat any cost. New capital in the market may ease the shortfall,but prices will still be calibrated with post-Katrina assumptionsand higher risk calculations. At least for 2006 renewals, newcapital is not likely to slow the upward price trend.

In a tight retrocessional market (and any reinsurance or



Six of the 10 most expensive hurri-

canes in U.S. history occurred in

the past 15 months: Katrina,

Charley, Ivan, Francess, Jeanne

and Rita

Top Ten Most Costly Hurricanes at 2005


Harvesting valueCarriers seeking to improvevaluation in farm lines

Is the valuation revolution coming to farm insurance?For several years now, residential and commercial property

insurance specialists have been employing new automated sys-tems to refine their calculations of the value of insured structures.

The old process of calculating replacement cost by squarefootage only is being replaced by systems that account for uniquestructural features, local building markets, and other factors.

It has become commonplace to hear of companies revaluingtheir entire residential and commercial books of business. Forthe most part, revaluation has meant more premium andimproved levels of insurance to value.

Changes in valuation have been slow to come to farm lines,however, because of unique features of the farm insurance mar-ket that have been repeatedly cited in Viewpoint:

• The number of farms in the U.S. decreased for more than80 years (before leveling off in the past decade), while thenumber of residences and commercial structures has steadi-ly increased.

• The remaining farms are generally distinct, with morediverse exposures than most homes and businesses.

• Premium volume for farm insurance, a little more than $2billion per year, is well below that for residential and com-mercial property, which approach $60 billion combined.

Because of these factors, automation in farm lines has gen-erally lagged behind that in personal or commercial lines.

Unique structuresYet another factor complicates efforts to automate farm val-

uation. While the construction of residential and commercialincreasingly involves common, “cookie cutter” techniques andcomponents, farms are often collections of unique structures.

On farms, it is common to encounter old buildings that havebeen expanded or altered multiple times, along with specializednew production facilities.

“The greatest challenges to effective farm valuation are themany different types of buildings a farm can have, and themany different types of fixtures in those buildings,” says ToddRissel, chairman and CEO of e2Value, Inc., Stamford, Conn.,developer of a new Web-based farm and ranch valuation appli-cation.

“A residential risk typically has one simple dwelling, andcommercial risks have a few buildings at most,” says MarkZook, vice president of underwriting for Mennonite Mutual Ins.Co., Orrville, Ohio.

“Farms, especially large farms, can have many structures,”Zook says. “Farm structures can vary greatly in condition forthe same risks. The main barn is continuously added on to, soyou can have a truly unique shape and construction.”

ACV settlement“Because farm structures are often unique, many of them

are valued for their actual cash value rather than replacementcost,” says Sherry Taylor, director of farm lines for SECURAInsurance, Appleton, Wis.

“Depreciation then becomes a major factor to consider,” shesays. “It is a fluid variable not always understood by cus-tomers.”

For example, says Taylor, “a farmer often has a number ofoutbuildings, all in varying stages of repair or obsolescence.

FARM & AG

Most farmers maintain their dwellings and functional buildings,but may not invest in an unused building so it can qualify forreplacement cost coverage.”

Also, according to Taylor, many farmers have buildings theywould not want to replace in the event of a total loss, so theyonly want coverage for debris removal.

“But, the insurance company must account for partiallosses,” she notes.

New systemSECURA is currently using e2Value’s Farm and Ranch

Estimator valuation system, and Mennonite Mutual plans tohave it available to agents through the company’s Web site inJanuary 2006.

“This will enable our agents to calculate farm buildingswith a standardization and ease that has not existed,” saysZook. “With Mennonite providing the tools for agents to calcu-late values correctly, we should see a continuous increase infarm property values.”

To create the application, e2Value had to acquire databasesof construction and installation information on a wide range ofstructures and fixtures, according to Rissel.

The service features replacement cost data for major com-ponents of construction-walls, roofs, plumbing, and HVAC--aswell as agricultural structures and fixtures, such as corn cribs,silos, slurry tanks, generators, scales, and specialized equip-ment for livestock.

The serviceallows users to include more than one structure in a valuation,and incorporates use of e2Value’s “Homestead” residential val-uation program for valuing a farm residence on the insuredpremises.

Users have the option to calculate the replacement cost oractual cash value of a structure, and both methods can be usedto value different structures on the same farm or ranch. TheACV option establishes a value for a structure based on its age,condition, type of roof, type of exterior, and current use.


“Farm structures can vary greatly in condition for the same risks. The main barn

is continuously added on to, so you can have a truly unique shape and construction.”

— Mark Zook, vice president of underwriting, Mennonite Mutual Ins. Co., Orrville, Ohio

Insurers that use the AAISFarmowners or Farm Properties programsnow have access to the Farm and RanchEstimator, a farm property valuationsystem (see main story) , through theAAISdirect Internet service.

At no extra charge, AAIS Farmownersand Farm Properties affiliates now have alink from their AAISdirect home page intothe application, developed by e2Value,Inc., Stamford, Conn.

E2Value specializes in developingWeb-based applications for insurers tocalculate desired levels of insurance tovalue for residential commercial, and farm

structures. For a description of its farmvaluation application, see the main storyor go to www.e2value.com.

“Other [farm valuation] methods we’veused did not have the breadth of selectionof building types that e2Value offers,”says Sherry Taylor, director of farm linesfor SECURA Insurance, Appleton, Wis.,which uses the Farm and RanchEstimator. “We expect e2Value to providea more consistent method of valuationacross our book of business.”

“By providing access to the Farm andRanch Estimator at no additional charge,AAIS is demonstrating its commitment to

providing our affiliates with the best toolsfor writing farm coverage,” says JoyceTignino, AAIS vice president of marketingand industry relations.

For information on affiliating with AAISfor use of its Farmowners or FarmProperties programs, or on usingAAISdirect, contact Rick Maka, director ofmarketing, at [email protected] orby calling 800/564-AAIS.

AAIS provides access to e2Value’s farm valuation service through AAISdirect


Since coming to AAIS in 1986, Bill has overseen thetransformation and expansion of AAIS’s electronic servic-es. Among other things, Bill has been instrumental in threemajor initiatives:• The development of rating software for AAIS pro-

grams;

• The creation of a networked environment that allowedelectronic transmission and sharing of files amongAAIS staff members and customers; and

• The creation of the AAISdirect web-based platform forproviding desktop access to forms, manuals, and bul-letins.

AAIS was Bill’s fourth employer in a 37-year career indata processing, but it stands out in his mind as the organi-zation “where you really got to know your customers.”

“At AAIS, I’ve had the most contact with customers ofany place I’ve worked,” he says.

Apart from his day-to-day interactions with customers,Bill and his wife, June, have been integral participants inthe AAIS Annual Conference, where Bill has coordinatedgolf events and June has volunteered to coordinate spouseevents.

In the mid-1990s, Bill also participated in numerousmeetings of the statistical committee of the NationalAssociation of Insurance Commissioners. At the time, con-sumer activists and their political allies were challengingthe propriety of advisory organization activities.

Bill recalls that the direct threat to advisory organiza-tions passed with the November 1994 elections thatbrought about a Republican takeover of Congress and theelection of numerous Republican governors and insurancecommissioners.

Yet, the scrutiny given to statistical collection andratemaking functions had a long-term impact.

“Before all that, the level of review given statistical datawas not even close to what it is now,” he says.

Early yearsBill grew up in Naperville, Ill., not far from AAIS’s

current building, at a time when that community was still asmall factory town of 7,000 people about 20 miles west ofdowntown Chicago. Since his childhood, Naperville hasgrown rapidly into a city of 130,000 on Chicago’s suburbanperiphery.

Bill earned a bachelor’s degree in management fromNorthern Illinois University, DeKalb, in January 1966 andimmediately enlisted in the U.S. Army. He spent his twoyears in the service as a clerk for an armored unit in south-ern Germany.

“It’s where I refined my love of beer,” says Bill, whonow brews his own as a hobby.

He recalls fondly how he and June would travel everyweekend in the year and a half he spent in the old WestGermany. “Sometimes we had a destination, sometimesnot.” Bill and June look forward to traveling again in central Europe.

Upon returning to the U.S. in 1968, Bill took a positionat an electronics manufacturer in Crystal Lake, Ill., wherehe and June have lived for 37 years, and where they raisedtheir two children: Bill, Jr. (35) and Laura (29).

His first job after the army introduced Bill to data pro-cessing, and he later worked for North American Philips, aconglomerate based in Skokie, Ill, and the Wurlitzer Co.,DeKalb, the once well-known maker of pianos, organs, andjukeboxes.

None of those organizations gave Bill the satisfactionhe’s experienced at AAIS, however.

“Working with our customers has always been a joy,”he says.

“We have some of the nicest customers out there to work with, and we’ve taken the time to build long-term relationships.”


Bill Stripp retiring after 20 years of service with AAIS

William “Bill” Stripp, AAIS vice president of technical services,will retire at the end of December 2005 after 20 years of service

to the organization and its members.


PERSONAL LINES

completing a “proof of concept” demonstration for a “patternrecognition system” designed to use non-traditional underwrit-ing information to score individuals as insurance risks.

The Chicago-based Urban Insurance Partners Institute(www.uipi.org) is project manager for the effort to create a sys-tem that will search databases of legal and financial transac-tions to seek patterns that suggest individuals may be attractiveinsurance risks. The project is supported by the Center forFinancial Services Innovation (www.cfsinnovation.com)

New informationAt the core of both initiatives is the accumulation of data on

economic behavior not previously used in underwriting loansand insurance.

“There’s a rapid ramp-up in non-traditional data,” saysSuzanne Reade, UIPI president.

Until recently, companies had little, if any, information onthe buying patterns of lower income people who did not usetraditional credit.

In recent years, however, firms have built databases of infor-mation on payments for rent, utilities, and other householdexpenditures, plus information on previously untracked use of“subprime” lending markets.

PRBC, Annapolis, Md. (www.prbc.com), has developed a“Bill Payment ScoreSM” (PBSSM) that, like a credit score, assignspoints depending on the type and number of bill paymentaccounts a consumer has, and the consumer’s record of payingthem.

“With our service, if people don’t have traditional credit,they can still show they are fiscally responsible,” says MichaelNathans, PRBC’s founder and CEO.

“For many people who don’t have a traditional credit histo-ry, it’s a substitute for one,” he says. “For people who have hadcredit problems in the past, it’s a way to show they’ve turnedthe corner.”

Additional information is also being provided through rela-tively new forms of payment used by “unbanked” people, suchas stored value cards.

With a stored value card, a cardholder purchases the cardand then deposits money into it. It then functions like a debitcard, allowing the holder to draw upon the deposited amount.

A stored value card gives the holder access to the “plastic”that is now essential for renting cars or hotel rooms or carryingout many other transactions.

Stored value cards also integrate individuals who once paidbills on a cash-only basis into the electronic payments system,where their payment behavior can be tracked.

Giving creditwhere credit is dueNew sources of underwriting information canexpand market opportunities

The use of automated scoring is now being applied to peoplewho have been left out, and that may mean new, profitable opportu-nities for property/casualty insurers who write personal lines.

At press time, an application called LIFT® (the “LossImprovement forecasting Tool”) is being used by a regionalcarrier to help assess risks posed by people who do not havecredit scores, and a national carrier is scheduled to launch apilot program using LIFT®.

LIFT® provides a supplement to credit-based insurance scor-ing that utilizes an applicant’s record of writing checks andusing subprime credit to identify fiscally responsible individu-als likely to be good insurance risks.

“We’ve shown that this data is beneficial to consumers whodon’t use credit,” says Bill Wilson, chief operating office ofConvergence Data, Chicago (www.getlift.com), the companythat developed LIFT®.

“For companies, we can help them segment people theyhave no other information on.”

As the LIFT pilot is underway, another Chicago firm will be


Build your ownAccumulation of bill payment information is still in its rela-

tive infancy, however, and many vendors--particularly land-lords--do not regularly report payments to a bureau like PRBC.Therefore, many individuals will not have a complete or ade-quate profile on themselves.

In such cases, consumers can take the initiative to establishtheir own bill-paying score, says Nathans. In contrast to the tradi-tional credit bureaus, PRBC allows consumers to report their ownpayments, which are then verified through third party services.

There’s a cost to manual verification, says Nathans--$18 forverifying rent payments and $8 for verifying other types ofpayments--but mortgage lenders frequently pay those charges.

PRBC’s bill payment score was recently incorporated intoLIFT®, the new scoring model specifically designed for person-al lines insurance underwriting.

LIFT® also incorporates data from TeleCheck, the world’sleading check verification company, and Teletrack, a databaseof records from merchants and creditors, including rental com-panies, cable television franchises, personal finance companies,and subprime lenders.

“The results of TeleCheck’s transaction evaluation processcorrelates directly to insurance risk,” reads the ConvergenceData Web site. “As would be expected, individuals with no badchecks and good risk profiles have lower loss ratios than thosewith the presence of bad checks.”

“Every data test so far has proven that this data is predictive[of insurance loss ratios],” says Wilson.

Finding patternsPRBC and LIFT® pride themselves on being supplements to

traditional credit bureaus in offering consumer scoring based onmodels that use new types of data.

Yet, while their criteria is non-traditional, their methodologyis similar to that of the standard credit bureaus, in that an indi-vidual’s payment history is measured and scored against a pre-determined scale.

The pattern recognition system being developed by UIPIand Pattern Recognition Systems (PRS), Chicago, seeks to takethe use of non-traditional information even further. That systemis being designed to search databases to identify new patternsof consumer behavior that correlate to insurance risk.

As PRS explains it, companies typically use regression-based forecasting to determine when to award loans or insur-ance coverage. Under regression-based methods, informationabout each applicant is entered into an equation, and applicantsare approved or denied depending on how their scores comparewith a criterion value.

According to PRS, pattern recognition systems harness theenormous power of modern computers to analyze the interac-tion between variables and the combination of factors that sig-nificantly predict a customer’s behavior.

“Customer databases become their memory of past experi-ences,” PRS writes on its Web site (www.patrec.com). “When anew situation arises, our systems search that memory and, usingpattern-finding techniques, find examples of similar situations.”

“In essence, the applicant is processed by asking, ‘Whohave I seen like this before?’ and ‘What type of credit riskshave those people been?’ The process [then] selects a specialsubset of prior applicants and determines an appropriateweighting factor for each one.”

Pattern recognition relies on the ability of a system to rec-ognize how new variables that may not have been considered inthe past can dramatically change how a consumer is scored,says Canh Tran, PRS president.

For example, he says, three reports of rejection for creditmay produce a negative profile for an applicant. But, he adds, ifyou combine them with reports that a person has just orderednew checks and has a satisfactory bill payment history, a new,more complete profile emerges that suggests the person is start-ing to build or rebuild a financial profile.

In that case, a small number of credit rejections is not nec-essarily predictive of a poor risk for either lending or insurance,according to Tran.

HeterogeneousThe ability to discern and analyze different patterns of con-

sumer behavior is critical to enabling carriers to write morebusiness in urban areas, he adds.

“Urban markets are more heterogeneous than suburbanmarkets,” he says. “Urban markets have a wider range of peo-ple and behaviors than you find in the suburbs.”

“People with different behaviors may still have good suc-cess profiles.”

When facing calls to write more business in urban markets,“insurance companies are faced with customer segments forwhich they have incomplete information,” says Reade at theUIPI.

“Companies are reluctant to embrace new market segmentsif they cannot rate and price accurately,” she says. “This patternrecognition initiative is designed to increase the appetite for awider array of risk.”

Companies that want to learn more or participate in theproject can contact Suzanne Reade at 773-880-8780.


INLAND MARINE

A questionof classWhat constitutes an inland marine“class,” and why isn’t the number of classes growing?

AAIS recently filed a comprehensive revision of itsCommercial Inland Marine (CIM) Program, an undertakingthat updates the policy forms and rating information for thecommercial classes traditionally subject to filing requirements(see sidebar on page 21).

While the update is significant for many insurers’ opera-tions, an observer could easily wonder why the number of stan-dard classes in inland marine insurance--both filed and non-filed--has remained essentially unchanged for decades.

This is the case even though the amount and variety ofproperty that could be insured under an inland marine policyhas grown substantially over the years.

For example, the revised AAIS CIM Program includes anupdate for the traditional “Photographic Equipment” class, butno separate class for video equipment or digital cameras has

arisen.To understand why this is so, it is necessary to review the

history of inland marine and the current conditions that affectthe development of the line.

Portable propertyAccording to Robert Guevara, AAIS vice president of

inland marine, the notion of classifying certain types of proper-ty into an inland marine “class” dates from the years when“fire” and “marine” insurers were strictly separated by regula-tion and practice.

Fire policy underwriting was (and remains) heavily depend-ent on the characteristics of an insured location, and did notadequately address exposures to high-value portable propertyexposed to perils--particularly theft--away from insured loca-tions.

Cameras, furs, jewelry, musical instruments, and doctorsand dentists equipment were examples of such property. Inlandmarine classes, whether filed or nonfiled, were defined for thepurposes of insuring them.

In addition, inland marine classes were defined for othertypes of property (accounts receivable, valuable papers andrecords, signs, mobile equipment, and more) that were uniquein nature, mobile, or subject to constant change, and thus ill-suited for standard “fire” coverage.

Before the age of consumer electronics, most other personalproperty worth insuring was large, not easy to steal, and typi-cally covered under location-focused property policies.

Times changeThings had changed in the insurance business by the time

electronic technology made valuable portable property com-monplace.

The distinction between fire and marine companies waspractically eliminated, and much the same has happened to thedistinction between property and marine departments withincompanies.

Along with that trend, portable personal property is nowcommonly insured with other types of personal property underthe personal property limit of a commercial property policy,subject to limitations for losses away from the insured premises.

“Without a strict separation of marine and property insur-ance, there is less of a call to define certain types of property asbelonging to a class,” says Guevara.

Another reason there has not been growth in the number ofinland marine classes is that some classes have adapted to

include new types of property that have developed over theyears.

This is the case for electronic data processing, a nonfiledclass that emerged in the early years of the computer age andnow addresses exposures to Web sites and other forms of elec-tronic property not known when computers were introduced.

If there are no new standardized classes for video equip-ment or digital cameras, says Guevara, the reason is that what-ever items are not covered under property policies can beinsured under the Photographic Equipment class.

Proto-classes?It’s one thing to identify a category of property as having

unique exposures.But, an inland marine “class” is not established until three

things are developed:• A distinct policy form for insuring the property;

• A distinct procedure for rating the policy; and

• Fields for data capture related to the property instatistical plans.

There is a cost to each of these, and the benefits of defininga class have diminished as property policies have broadenedtheir coverage for personal property.

That is not to say that the process of developing inlandmarine classes has stopped entirely, however.

As an example of classes potentially in development,Guevara cites mobile medical equipment and electronic equip-ment for agriculture.

At the request of AAIS inland marine affiliates, Guevara’steam recently developed standard policy forms for insuringsuch equipment.

For the time being, and perhaps indefinitely, those formswill be included in the “Miscellaneous Floaters” section of theAAIS Inland Marine Guide, the leading industry resource offorms, rating procedures, underwriting guidelines, and otherinformation for the traditionally nonfiled classes.

If sufficient demand emerges for standardized rating infor-mation for mobile medical and electronic equipment, they maybecome classes of their own with rating procedures and datareporting fields, says Guevara.


AAIS has initiated a countrywidefiling of revised forms, endorsements,schedules, and manual for itsCommercial Inland Marine (CIM)Program.

This program encompassescommercial inland marine classestraditionally subject to filing require-ments, including Accounts Receivable,Camera and Musical InstrumentDealers, Floor Plan Merchandise,Jewelry Dealers, Mobile EquipmentDealers, Musical Instruments, NegativeFilm, Photographic Equipment,Physicians and Dentists Equipment,Signs, Theatrical Property, andValuable Papers and Records.

Among other things, the revisionmodifies forms and endorsements touse more titles and paragraph breaksto designate conditions, limitations,and exclusions that apply to coveredproperty.

The new format is consistent withthat implemented in the 2004 revisionsof the Inland Marine Guide for nonfiledclasses. Because of this, companies willfind that, in most cases, they can use asingle amendatory endorsement in astate for both filed and nonfiled inlandmarine forms bundled into a packagepolicy.

The format also complies withguidelines arising from a recentCalifornia supreme courts decisionregarding clarity in policy provisions, aswell as those established by theOregon insurance department. Thenew countrywide format eliminates theneed to maintain separate forms forOregon.

Other enhancements to theprogram include:• Incorporation of an updated defini-

tion of “collapse” where applicable;• Addition of a standard pollution

exclusion to each coverage part;

• Addition of resulting loss language(which broadens coverage) tovarious exclusions (animal nesting/infestation/discharge, contamina-tion/deterioration, mechanical break-down, temperature/humidity, wearand tear, and weather);

• Introduction of an optional calendardate or time failure exclusionendorsement (in place of built-inexclusions originally developed toaddress the “Y2K” problem);

• Filing of updated schedules ofcoverages on behalf of companies,(previously placed on file for infor-mational purposes only); and

• Modifications to various individualforms within classes.For information on affiliating with

AAIS for use of the Commercial InlandMarine Program or Inland MarineGuide, contact Rick Maka, director ofmarketing, at [email protected] by calling 800-564-AAIS.

AAIS revises Commercial Inland Marine Program


>>AAIS NEWS

INDUSTRY NEWS

STAFF UPDATES

TECHNOLOGY

MEMBER COMPANIES

INDUSTRY MEETINGS

State-by-state SERFFrequirements compiled inlatest State Filings Guide

The latest edition of the AAIS StateFilings Guide includes a table of require-ments for each state regarding filingsmade using the System for ElectronicRate and Form Filings (SERFF).

The table indicates which states cur-rently accept SERFF filings, and whetherthey require cover letters, componentheadings, side-by-side forms compar-isons, or other materials.

The State Filings Guide is a compre-hensive resource combining the latestinformation on filing requirements forforms, rules, and rating information in alljurisdictions. This year’s annual updateadds new information on filing guidelinesfor applications and binder certificates,plus the state-specific SERFF require-ments.

All AAIS affiliates received theirupdated version of the Guide inSeptember. Companies not affiliated withAAIS can purchase it for $200 a copy. Toorder a copy, contact Rick Maka, directorof marketing, at [email protected],or by calling 800/5654-AAIS.

Elizabeth Lupetini joins AAISas assistant vice presidentfor special projects

Elizabeth Lupetini has joined AAIS asassistant vice president assigned to specialprojects.

Lupetini has 18 years’ experience inthe insurance industry, and has workedextensively in compliance and commer-cial liability in recent years. An econom-ics graduate of Northwestern University,

Lupetini also holds several professionaldesignations, including that of CharteredProperty Casualty Underwriter.

Before coming to AAIS, Lupetiniserved as assistant vice president ofunderwriting services for General StarManagement Company. Previously, sheworked for Zurich North American,American Horizon Services, InterstateNational Corporation, and the Midwestregional office of the Insurance ServicesOffice.

Deborah Summerlinspeaks before Floridapersonal lines committee

In October, DeborahSummerlin, AAIS vicepresident of insurance lines,addressed members of aFlorida advisory committeecharged with developingpolicy language for providing personalresidential property coverage. Summerlinbriefed committee members on the AAISHomeowners Program, including certainfeatures of its forms and manuals that arespecific to Florida.

A bill passed and signed into law byGov. Jeb Bush states that consumerswere inadequately insured when fourhurricanes hit Florida in 2004 because of“the difficulty consumers encounter intrying to understand the complex natureof property insurance policies.”

In response, the committee is chargedwith developing policy language that“represents general industry standards . . .for comprehensive coverage,” but com-panies will not be required to use thepolicy unless there is further action tothat effect by the Florida legislature.


Countrywide manuals filed for Homeowners and Mobile-Homeowners programs

AAIS has initiated filing action tointroduce countrywide manuals for itsHomeowners and Mobile-HomeownersPrograms. Under this format, pages foridentifying specific state exceptions willbe issued separately, a change from theprevious practice of issuing separatemanuals for each jurisdiction.

The new manuals will display basicrating information in a factor rating for-mat rather than as tables with amountsalready calculated. The manuals will dis-play loss cost base amounts by territory,and provide the applicable relativities forpolicy form, amount of insurance, protec-tion, and construction.

Proposed effective dates for the newmanuals range from May 1 to Sept. 1,2006.

Also, AAIS recently issued updatedstatistical plans to its Homeowners andMobile-Homeowners affiliates. The newstatistical plans are being revised toaccommodate available media for report-ing statistics and to add fields.

For information on affiliating withAAIS for use of its Homeowners orMobile-Homeowners programs, or statis-tical reporting service, contact RickMaka, director of marketing, [email protected] or by calling800/564-AAIS.

Industry references review AAIS programs

AAIS programs for insuring smallbusinesses were recently analyzed inleading insurance reference works.

Commercial Property Insurance, athree-volume reference published bythe International Risk ManagementInstitute, Inc. (IRMI), features discus-sion of AAIS Businessowners formsand endorsements updated in 2004. Theanalysis of endorsements was providedin IRMI's October 2005 supplement tothe publication; analysis of the basepolicy forms was provided in the May2005 supplement.

Also, the September 2005 edition ofthe Policy Form and Manual AnalysisService (PF&M), published by TheRough Notes Co., features a detailedanalysis of the AAIS Artisans Program,concentrating on the open perils formprovided in the program.

For information on affiliating withAAIS for use of its commercial linesprograms, contact Rick Maka, director ofmarketing, at [email protected], orby calling 800/564-AAIS.

AAIS files rating infofor New Jersey fuel oilendorsement

AAIS has filed rating information inNew Jersey for liability coverage relatedto leaks or spills of fuel oil.

Data for the filing was gathered in aspecial data call that collected informa-tion on more than one million policiesfrom carriers that account for 19% of theNew Jersey homeowners market.

Along with the rating information,AAIS resubmitted Homeowners andMobile-Homeowners endorsementsexcluding coverage for bodily injury,property damage, and personal injuryarising from fuel oil spills or leaks.Those exclusions were developed inresponse to a New Jersey SupremeCourt ruling that standard pollutionexclusions did not apply to leaks, dis-charges, or spills unless they were doneintentionally. (New Jersey has manyhomes with fuel oil storage tanks.)The exclusions allow for a “buyback”of coverage for accidental leaks orspills at specified locations, and thenewly filed rating information can beused to price the coverage.


insurance market), selectivity rules and capacity will be allocat-ed to those clients with strong relationships and profitable busi-ness. Even long-term clients can expect demands for moreinformation about risks and modeling adjustments, so reinsur-ers can have more confidence in their management of aggregateexposures. These insurers may pay more for reinsurance sup-port, but they should be able to secure renewal quotes fromtheir current reinsurers. The same may not be true for insurersand reinsurers seeking new covers or new participants in theirreinsurance programs.

More contractual conditions: Tighter contract terms oftenfollow a major loss event as reinsurers incorporate lessonslearned into their renewal offers. It is too early to say whichproposed terms, if any, would emerge in bound contracts.However, cat-related provisions tend to come into discussionsat these times and probably will for 2006 renewals. A short listof possible clauses includes Hours clauses, Industry LossWarrantees, Rating Downgrade triggers, and Moldexclusions/sublimits. Discussions of ex gratia coverage, followthe fortunes, policy reformation and access to records may alsoarise. Since some rating downgrade provisions will be triggeredin the wake of Katrina, insurers are weighing their options anddeciding whether to replace downgraded reinsurers, demandsecurity or do nothing. Such security concerns may be wrappedinto 2006 renewal negotiations and placements.

The Hours Clause has particular relevance to Katrina losses.Most cat covers limit a hurricane occurrence to 72 hours andmany reinsurers were expanding that limit to 96 hours.Applying the Katrina timeline, four days separated the Floridalandfall from the Gulf Coast landfall. Under a 72-hours limita-tion, Florida claims cannot be combined with Mississippi orLouisiana claims into a single occurrence. If Florida losses donot reach the retention, there is no recovery. The benefit of alonger hours clause to any insurer will depend on the event,book of business and specific reinsurance terms, but usuallylonger is better for cedents. For the exception, consider theinsurer who already exhausted reinsurance limits with GulfCoast losses. Adding in the Florida claims does nothing tochange the result--it is still net loss. Since longer is usually bet-ter, insurers may seek longer hours clauses and some reinsurersmay revert back to 72-hour limits.

Higher reinsurance security: The initial wave of ratingagency actions leaves fewer reinsurers firmly in the “A” andhigher categories6. A.M. Best downgraded two reinsurers tobelow “A” and placed 22 companies under review with nega-tive implications; three additional reinsurers already under

review are on notice that the agency will focus on Katrina loss-es. Standard & Poor’s downgraded three reinsurers and placedeight companies on credit watch with negative implications.

Before Katrina, S&P raised its risk-based capital calcula-tions for reinsurers. Aggregate exposure is now measured onthe basis of a more extreme event combined with all occur-rences for that year. This higher RBC standard has the effect ofraising PMLs for financial strength calculations, which in turnraises the ratings bar for reinsurers. Fewer reinsurers will makethe “A” grade but insurers should have more comfort doingbusiness with those reinsurers that do.

The bottom line: Get quotes soon and often

These are uncertain times for insurers and reinsurers, and notjust because of natural catastrophes. The question of terror-

ism coverage looms large as expiration of TRIA approaches. IfTRIA is not renewed, reinsurance capacity will be curtailed fur-ther for many of the same property per risk and property catas-trophe programs battered by Katrina, and to some degree forcasualty business.

In uncertain times, there is great value in having firm offersin a reasonable time frame. If a promise of a renewal quote byDecember 21 is not kept, there are fewer options left in a tightmarket. The earlier reinsurance markets are approached withquality submissions, the more time and options exist, allowingthe insurer to be selective in a market dominated by reinsurerdecisions. Supply and demand are economic forces driving thebroad reinsurance market, but individual insurers can still per-form better than market to secure reinsurance protection for the2006 renewal season.

Tom Hulst is a vice president and treaty account executivebased in Stamford, Conn. and is responsible for treaty reinsur-ance in the Mid-Atlantic region. Tom also serves as Gen Re’sproperty catastrophe business development specialist.1 As of October 13, RMS estimates Katrina insured loss at $40 - 60 billion, andAIR at $34 billion. See also Towers Perrin, “Hurricane Katrina: Analysis of theImpact on the Insurance Industry” (Oct. 2005).2AIR Worldwide, AIR Worldwide Estimates Total Property Damage from

Hurricane Katrina’s Storm Surge and Flood at $44 Billion (Sept. 29, 2005) atwww.air-worldwide.com.3 National Oceanographic and Atmospheric Administration, at www.aoml.noaa.gov.For frequency statistics, see NOAA; for cost statistics, see Insurance InformationInstitute at www.iii.org.4 For statistics on coastal population and property value growth, see AIR, “TheCoastline at Risk: Estimated Insured Value of Coastal Properties” (Sept. 21, 2005)at www.air-worldwide.com; and NOAA, “Population Trends Along the CoastalUnited States: 1980 - 2004” (Sept. 2004) at www.noaa.gov. 5 “Towers Perrin Report: High-Level Katrina Losses to Take Lighter Toll onReinsurers,” BestWire Services (Oct. 7, 2005).

See Towers Perrin Katrina report, Note 1, for collective rating information.

Reinsurance Supply and Demand Continued from page 12


AAIS Welcomes New Affiliates

BEACON NATIONAL INSURANCE COMPANY

HARLEYSVILLE INSURANCE COMPANY OF OHIO

HARLEYSVILLE LAKE STATE INSURANCE COMPANY

HARLEYSVILLE PREFERRED

NATIONWIDE INSURANCE COMPANY OF AMERICA

SEQUOIA INSURANCE COMPANY

STATE NATIONAL INSURANCE COMPANY

Hurricane Katrina Continued from page 8

“Given the amount and variety of farm property, itis important to have information available on propertyfor every type of farm,” says Rissel.

SystematicAccording to Rissel, farm insurers have believed for

years that the intuitive approach to farm valuation wasnot producing a sufficient level of insurance to value.

“They knew they had an issue, but they didn’t havea method,” he says. “There hasn’t been an easy way todo standardized farm valuation.”

Establishing a systematic method for valuing farmproperty is critical today, he says, because the cost ofreplacing all types of structures--rural, urban, or subur-ban--is rising steadily.

“There’s been a clear uptick in the cost of rebuild-ing anything,” Rissel says. “In the past five years, thelevel of household and commercial construction hasbeen accelerating.” E2Value (www.e2value.com) pro-vides valuation services for residential and commercialproperties in addition to farm and ranch.

“Commercial, residential, and farm construction areall drawing from limited contracting capacity.”

progress was made last year when the U.S. P/C insurance industrymade its first underwriting profit since 1978 - of approximately US$5billion11.

If the industry is to remain strong for its policyholders and share-holders in the long-term, it must continually take a realistic assessmentof risk and respond with technical pricing levels. Not only are theexposures enormous, but there are an array of business, economic andregulatory realities that will continue to exert considerable influence onunderwriting decisions for the foreseeable future.

Lisa S. Howard is a communications manager for GE InsuranceSolutions in London. Prior to joining GE in 2003, Ms. Howard hadbeen a reporter adn editor for National Underwriter for 18 years.1 Risk Management Solutions (RMS) estimates. Press release: “Great New Orleans Flood ToContribute Additional $15-25 Billion In Insured Losses For Hurricane Katrina, BringingEstimated Insured Losses To $40-$60 Billion,” Sept. 9, 2005.2 RMS estimates. Press release: “RMS Provides Preliminary Breakdown of Estimated LossComponents for Hurricane Rita”, Sept. 25, 2005.3 Insurance Services Office4 From Insurance Information Institute’s Facts and Statistics. Data accessed Sept. 27, 2005.www.iii.org/media/facts/statsbyissue/catastrophes/ 5 RMS estimates. Press release: “RMS Provides Preliminary Breakdown of Estimated LossComponents for Hurricane Rita”, Sept. 25, 2005.6 RMS estimates. Press release: “Great New Orleans Flood To Contribute Additional $15-25Billion In Insured Losses For Hurricane Katrina, Bringing Estimated Insured Losses To $40-$60 Billion. Sept. 9, 2005.”7 US Federal Reserve Statistics. www.federalreserve.gov/releases/h15/current/8 Aggregate data compiled by the Insurance Information Institute. Data used with permissionfrom III.9 GE Insurance Solutions analysis of statutory filings.10 Tillinghast report entitled “U.S. Tort Costs: 2004 Update,” Jan. 12, 2005.11 Data compiled by Insurance Information Institute (III). Data used with permission from III.

Harvesting Value Continued from page 15

This issue:

American Association of Insurance Services1745 S. Naperville RoadWheaton, IL 60187-8132

2 Wind or Water?Voices call for a restructuring of coverage

6 Hurricane Katrina: AMarket-Turning Event?By Lisa Howard, GE InsuranceSolutions

10 Reinsurance Supply and Demand in a Post-Katrina WorldBy Thomas A. Hulst,General Reinsurance Corp.

14 Harvesting valueCarriers seeking to improvevaluation in farm lines

18 Giving credit where creditis dueNew sources of underwritinginformationcan expand marketopportunities

20 A question of classWhat constitutes an inlandmarine "class," and why isn’tthe number of classes growing?

22 AAIS News

AAIS Annual ConferenceApril 9-11, 2006 | The Ritz-Carlton, Sarasota, Fla.

See www.AAISonline.com

Documents

policies information marine INSIDE structures What makes ... · KATRINA’S AFTERMATH 4 FALL 2005 VIEWPOINT owner-occupied dwellings in New Orleans--81,000 of 84,000 in Orleans Parish--had