Insurance Industry M&A on the Rise

A steady rise in mergers and acquisitions in the insurance industry in the first part of this year is part of a trend that should continue into the future, according to reports.

After at least two years of steady decline, the first half of 2011 has brought a significant increase in mergers and acquisitions in the global insurance industry, according to an analysis by Clyde & Co cited in a report by the Financial Times.

The report indicates that global insurance industry transactions are expected to continue at an increased rate moving forward, and suggests that the reinsurance sector and the Bermudan industry are likely to be particularly active in M&A.

The Financial Times quotes Andrew Holderness, a partner at Clyde & Co, as follows:

“It is evident that mergers and acquisitions are back on the agenda of underwriting businesses,” he said. “Regulators and customers are looking for strength and stability...we expect to see continued activity across all types of transactions.”

Read the full article:

Sharp rise in insurance M&A
Paul J. Davies | Financial Times
September 11, 2011

Quantifying the Unquantifiable: Some Perspective on Terrorism Risk

A brief commentary from a terrorism model expert on classifying terror risks after September 11, 2001.

In Jack Seaquist’s article Perspectives: Trying to Quantify Terror Risks at BusinessInsurance.com, the terrorism model expert, and Assistant Vice President at the catastrophe modeling firm AIR Worldwide Corporation, gives a brief overview of what he considers the most significant issues in terrorism risk assessment, as well as a look at the impact of terrorism on the insurance industry in general. Seaquist describes the terrorism threat in the United States as "highly dynamic" considering the "evolving political situations" overseas.[1]

The impact of Sept. 11, 2001, on the insurance industry was immediate. Once covered in most standard all-risk commercial policies, reinsurers either refused to renew terrorism coverage or began charging exorbitant rates. Unable to purchase reinsurance or to otherwise raise sufficient capital, insurers adopted new policy forms with terrorism exclusions. For a time, terrorism coverage was virtually nonexistent.[2]

Until the devastation from Hurricane Katrina in 2005, the 9/11 attacks in 2001 were "the largest cumulative claims payout in global insurance history." The attacks brought about insured losses of $32.5 million across multiple lines of insurance "including property, business interruption, aviation, workers compensation, life and liability."[3]

But terrorism insurance per se did not exist. Insurers paid claims on a loss for which they had collected no specific premiums. Because of its nature, terrorism was a risk considered impossible to underwrite, and insurance dried up for areas—such as Manhattan and Washington—deemed likely targets for future attacks. As a result, risk managers, insurers and business groups pushed for some sort of federal terrorism insurance response.[4]

Seaquist explains that the U.S. government responded by passing the Terrorism Risk Insurance Act ("TRIA") in November of 2002. TRIA was meant to stabilize the insurance market and it established the Terrorism Risk Insurance Program ("TRIP"), which provides "government-furnished reinsurance for direct terrorism losses" for most commercial lines above the company’s deductible. The Terrorism Risk Insurance Program Reauthorization Act, passed in 2007, extended TRIP through 2014 to give insurers "the sense of stability needed for a viable market."[5]

The future of the federal backstop for terrorism coverage is set to expire in 2014 as the administration considers limiting its exposure as part of deficit-reduction efforts. While the current appetite for terrorism coverage is healthy, many insurers have begun to make longer-term plans for terrorism risk management in the absence of the TRIP.[6]

As Seaquist points out, the insurance business model functions best when losses are relatively small, uncorrelated and random, even if those losses are relatively frequent. However, catastrophic losses are generally the opposite: "large, infrequent and highly correlated." Additionally, while catastrophe modelers have been able to use historical data and other methods to overcome many of the obstacles to estimating future losses with respect to natural disasters, estimating losses from terrorist attacks is much more challenging.

Historical data on terrorist attacks is much more limited and may not be representative of the current threat. Even more importantly, while scientists and engineers can achieve mastery over the physical science underlying natural catastrophes and their impact on the built environment, terrorist activity resists scientific quantification. In addition, while natural catastrophe risk remains relatively stationary over time, terrorist threat is highly dynamic.[7]

1. Perspectives: Trying to Quantify Terror Risks, Jack Seaquist, BusinessInsurance.com, September 11, 2011.
2. Perspectives..., Id.
3. Federal Terrorism Coverage Backstop Remains Vital Tool, Mark A. Hofmann, BusinessInsurance.com, September 11, 2011.
4. ;Federal Terrorism..., Id.
5. Perspectives..., Id.
6. Perspectives..., Id.
7. Perspectives..., Id.

Privacy Insurance and Financial Losses from Data Breach

Toby Merrill's article in the Advisen Cyber Liability Journal gives an overview of privacy insurance, also known as network security or cyber insurance, to "cover the financial losses arising from a data breach" that can also include "access to expert advice and services."

Privacy insurance has become more prominent as increases in the scope of federal and state privacy laws "continue to fuel a rise in publicly reported corporate data breach incidents."

Merrill, an Assistant Vice President in the Professional Risk division of ACE USA, warns that not all privacy insurance products are created equal:

While most policies and endorsements address both first-party and third-party exposures, there are often wide differences in coverage terms, conditions, exclusions and financial limits.

Many policies, for instance, may highlight large limits of insurance coverage for statutory notification to the affected parties of a breach and the monitoring of their credit, but fail to provide adequate financial limits or choice among the vendors providing assistance in the aftermath of a data breach.

Thanks to Nina Kallen at Insurance Coverage Law in Massachusetts for the find.

Top NAIC Officials to Scrutinize Lender-Placed Insurance

Insurance regulators focus attention on lender-placed / force-placed insurance amid allegations of monopoly and excessive premiumrates.

Both the current President of the National Association of Insurance Commissioners ("NAIC"), Kevin M. McCarty, and the NAIC President-Elect, James J. Donelon, have turned the insurance regulatory spotlight onto insurance that protects mortgage lenders and lien holders from certain property risks when homeowners allow their property insurance coverage to lapse – known as lender-placed or force-placed insurance.

McCarty intends to examine lender-placed insurance premiums and business practices.

McCarty, who is also Commissioner of the Florida Office of Insurance Regulation, intends to examine lender-placed insurance premium rates and the business practices of insurance carriers who write lender-placed insurance amid allegations of excessive rates. Two companies, Assurant, Inc. and QBE Insurance Group, Ltd., control as much as 90% of the force-placed market, according to McCarty.[1]

Donelon, also Commissioner of the Louisiana Department of Insurance, said the force-placed insurance industry is a "monopoly… that is perpetuating itself" at a recent NAIC hearing, according to an article from Bloomberg. The situation is "extremely profitable for two remaining companies in the market," according to Donelon, "Nobody is minding the store."[2]

Force-placed premiums more than tripled to $5.5 billion in 2010 from $1.5 billion six years earlier, according to New York Department of Financial Services Superintendent Benjamin Lawsky. The insurers often pay out less than 25 cents for every dollar in premiums they collect, he said, compared with about 63 cents on a typical homeowner’s policy.[3]

According to the executive director of the Center for Economic Justice, Birny Birnbaum, premium rates currently charged by force-placed insurers "are not justified when examining the companies' performance and profits over the years."[4]

Others suggest the rate increases are justified by the recent rise in foreclosures, as well as other market forces.

But John Frobose, president of American Security Insurance, suggests the increase in lender-placed insurance is justified by the recent rise in foreclosures, as well as other market forces. Because insurance carriers that write force-placed insurance have been subject to greater hazards, the associated premiums have also risen.[5]

Robert Hartwig, president of the Insurance Information Institute, suggests that the rise in lender-placed premiums has peaked. Hartwig predicted that the market for lender-placed insurance should "contract as foreclosures drop and the U.S. economy improves."[6]

Hartwig, along with the executive director of the American Bankers Insurance Association, Kevin McKechnie, defended lender-placed insurance premium rates, explaining that "carriers do not underwrite individual risks, but rather provide a portfolio of coverage to lenders where insurers are taking on risks… with virtually no information about them."[7]

Insurers also defended the higher rates they charge, saying that because the risks are primarily in catastrophe zones, higher premiums are needed to prepare for what they say is the inevitability of major losses.[8]

Nevertheless, Commissioners McCarty and Donelon, as well as other insurance regulators like Kentucky Insurance Commissioner Sharon Clark, intend to take a critical look at force-placed insurance premium rates and business practices, as well as the costs associated with the administration of lender-placed insurance placement, including the compensation paid to agents and lending institutions.[9]

The lender-placed insurance industry also faces proposed new regulations from the Consumer Financial Protection Bureau.

In addition to increased scrutiny by state-based insurance regulators, the lender-placed insurance industry also faces proposed new rules from the Consumer Financial Protection Bureau, created under the Dodd-Frank Act. The proposed new rules require servicers "to give advance notice and pricing information before charging consumers for the coverage" and "to terminate the insurance within 15 days" upon receipt of evidence that the homeowner has the necessary insurance.[10]

1. U.S. Regulators to Examine Forced-Place Insurance, Zachary Tracer and David Beasley, Bloomberg, August 10, 2012.
2. Insurance for Lapsed Borrowers Lacks Oversight: Regulator, Zachary Tracer and David Beasley, Bloomberg, August 9, 2012.
3.  U.S. Regulators..., id.
4. NAIC Promises Greater Focus on Force-Placed Insurance as CFPB Proposes Rules, By Mark E. Ruquet, PropertyCasualty360.com, August 10, 2012.
5.  U.S. Regulators..., id.
6.  U.S. Regulators..., id.
7. NAIC Promises..., id.
8. NAIC Promises..., id.
9.  U.S. Regulators..., id., NAIC Promises..., id.
10. NAIC Promises..., id.

Independent Directors Liability Insurance

Independent Directors Liability insurance is a specialized form of D&O coverage that provides liability protection for directors even when the limits of standard D&O coverage are exhausted.

The practice of insurance regulatory law is not only about compliance with the various state and federal laws and regulations that impact the insurance industry, its also about protecting your clients and their businesses.

To that end, Elizabeth Judd at Corporate Secretary has an interesting article entitled Do Directors Need Separate Liability Coverage?

IDL coverage limits are not sapped by corporate liabilities, and thus IDL is an option when all other sources of funding are depleted.

As her article details, Independent Directors Liability insurance (“IDL”) provides liability protection for directors outside the limits of the standard directors and officers (“D&O”) insurance coverage that most companies obtain. IDL is a specialized form of D&O coverage that protects only the directors, and it pays out even if the company’s D&O coverage is exhausted.

Scott Godes, counsel at Dickstein Shapiro and author of the Corporate Insurance Blog, is quoted in the article as noting that, while insurance firms have 'remarkably creative lawyers who can find ways to deny coverage or rescind the policy' when D&O claims get messy, these IDL policies are typically being marketed as nonrescindable, which could be a good sign for insured directors.

IDL coverage is an option when all other sources of insurance and funding are unavailable or depleted. IDL coverage does not cover the acts or omissions of the entity or the wrongful acts of the insiders; thus, IDL limits are not sapped by corporate liabilities, according to Godes.

For more of Scott Godes' comments about IDL, check out his Corporate Insurance Blog.

And read the full article from Elizabeth Judd:

Do Directors Need Separate Liability Coverage?
Elizabeth Judd | Corporate Secretary
May 26, 2011