Archive for US Insurance

9/11 Remembered

911 remembered

Insurance Blog is remembering the hundreds of insurance workers and employees who perished in the WTC ten years ago.

Novus Ordo Seclorum

Could Flooding Become A Fundamental Risk in The UK?

For those UK underwriters and loss adjusters watching the scenes of devastation caused by hurricane Irene and particularly flooding in states like Vermont, they will be glad that their insurance company does not have to pick up the bill.

They needn’t have worried though because in the United States Flood Risk is considered fundamental and cannot be covevered under a normal home insurance policy as such…as yet!

In fact all home insurance flood risks are the responsibility of each State to provide under a national scheme. In the United States, uniquely in the developed world, insuring houses against flood damage is the sole province of the federal government.

The National Flood Insurance Program (NFIP), was created in 1968 by Congress and is administered by the Federal Emergency Management Agency, is virtually the only place to get protection against the ever increasing disasters of flood and storm surge.

From an insurance point of view the program is the same as any other private-sector insurance program.

You pay the government a certain amount and when a flood happens, receive coverage for repairs and losses.

As of June 30, the program had nearly 5.6 million policies in force with a total insured value of $1.246 trillion. But from a fiscal standpoint FEMA does not manage the NFIP like a traditional insurer.

Most insurers use a measure of solvency that looks at their capital and reserves and their ability to pay claims. In particular, regulators require insurance companies to keep a statutory reserve of liquid assets to cover potential future losses. FEMA, on the other hand, has said it manages the NFIP to generate enough premiums to cover expenses and losses for an average loss year, rather than keeping capital for the long term.

In other words it does not keep enough reserves! And guess what? It’s run out of money!

Apparantely former agency officials admit it charges rates that dramatically underprice the risks faced. That is all well and good in a normal year and when business is good, but when a worse-than-average loss year happens, the consequences are disastrous.

Folowing the disatrous hurricanes Katrina and Rita in 2005, the NFIP was more or less insolvent, without the capacity to pay the huge volume of claims those hurricanes created. Congress reacted by increasing the NFIP’s borrowing ability from the U.S. Treasury more than 13-fold, to a level of nearly $21 billion. That debt burden is, by all accounts, unsustainable.

While Irene was no Katrina, it comes on top of serious Midwestern flooding that the program has already had to deal with this year. Some people believe NFIP will stretch its debt boundaries and may well end up needing more assistance. “It may be a little bit too soon to tell but it’s certainly not going to be a very good year for the NFIP and we’ve not finished the year yet,” said Robert Hartwig, an economist and the president of the Insurance Information Institute (III).

Hartwig said a private insurance market for flood coverage is absolutely possible, with plenty of insurers and reinsurers willing to get into the business – but only if the NFIP raises its rates and if insurers get assurances from state regulators that they will be able to do the same.

Insurance Blog wonders if given all the recent flood claims in the UK due to climate change and the pressure to build houses on floodplains, whether Flood Insurance will at some point become a fundamental risk in the UK for some homes?

The UK Government would be well advised to consult with construction companies, environmental scientists, climatologists, pressure groups and Insurance companies before we reach the crisis about to hit the US Treasury.

The solution is simple – do not solve the UK housing problem by building on floodplains or areas of geographical risk.

UK Insurance and US Insurance Regulatory Bodies Swap Notes!


The FSA and their American cousins the US Financial Industry Regulatory Authority (FINRA) have  taken an unprecedented step of entering an agreement to work more closely together. Whether this means that they will be able to compare notes on incompetency or even heaven forbid try to learn from each other’s mistakes, we will have to wait to find out. It does however show that maybe, just maybe, that they may be prepared to start listening to outside suggestions. Could this lead to the unthinkable, the mighty FSA one day actually listening to the humble broker? Well one step at a time lads, mighty oaks and tiny acorns and all that.

FSA has deaf ears

So what do we know of  FINRA?

Well we know that they have a habit of over extending their reach into areas where its not particularly welcome. Towards the end of 2009 a group of prominent Financial Planners were moved to petition US congressional leaders to amend a bill including them within FINRA’s authority. On the surface a strikingly similar situation to the UK General insurance industry being shoe horned into the FSA’s remit. Certainly both bodies have shown an overzealous one size fits all attitude to financial regulation when it is clear that a more refined, considered and cultivated approach is more suited to such intricate industries.

Somewhat ironically it was FINRA’s broker bias that had upset the apple cart with those pesky  financial planner fellas who claimed  that the “conscious or subconscious conflict of interest could result in a broker bias in FINRA” claiming that their involvement would further “deepen the differences in how broker-associated advisers are regulated versus independent advisers.” Some may argue this could be a positive influence on the FSA, however in my opinion regardless of where the bias lies, there is no space for such an imbalance in any form of regulatory body.

They must remain impartial, whilst understanding the markets they are supposed to serve.

As I and many others have stated many, many times we need an industry regulator that understands  Insurance. A generic financial regulator lumping us in with the banks simply will not work. Now these two bloated bodies have established a memorandum of understanding which is intended to establish a stronger framework for regulating the worlds two largest markets.

Of course I thoroughly support the move in principle as an opportunity to further strengthen bonds between these two dominant markets and the intention to ease the exchange of information on firms and individuals under common supervision, is of course a very sensible which reflects the global nature of the industry. However, I cannot help but feel that this is nothing more than a bit of back slapping by two organisations that are causing more harm than good to their respective markets.

Perhaps I am being overly critical of poor old FINRA, but if you will lie with dogs…

The FSA have successfully managed to alienate insurers, bankers and IFA’s alike throughout their relatively short existence and show absolutely no signs of bucking the trend any-time soon. Can we really be expected to take an organisation seriously when they are currently even failing to run their own business prudently? Figures bandied around of late have indicated that they are limping towards the end of their financial year at an estimated £14m in debt. It has also been suggested that they have indulged in some £20m plus in bonuses. Now tell me that is in compliance with proper standards.

I hope I am proven wrong and that this benefits us on both sides of the Atlantic. However, I see little of value other than raising the profile of two overgrown, megalomaniac organisations, both more concerned with the amount power they hold, than how effectively they use it for the greater good.

I do genuinely hope wrong, but somehow I doubt it.

Aon in the Red! AIG loses the Shirt off it’s back

The prawn sandwiches were out in force yesterday at Old Trafford as the new sponsors of Manchester United Football Club,  Aon the giant American Insurance Broker, took over the lucrative deal from disgraced and broke AIG the not so giant American Insurance Company.

Aon man utd shirts

AIG had to pull out their 14 million a year deal which ran until the end of May this year, after the company was bailed out by the US Treasury to keep it alive.

It’s been a bad week for AIG who failed to complete the sale of their Asian division AIA to the man from the Pru, as the Treasury ‘overvalued’ the operation at 24.5 billion.

It might not be such a big deal for Aon either who have reportedly paid 80 million to be in the Red and announced at the time that they shared a  desire for excellence and winning, based on tradition, integrity, teamwork and success.

Manchester United are no longer the force they were a year ago when the sponsorship deal was cut.  The club could be said to be in crisis for their high standards. The aging team and manager failed to win a trophy last season  and were ignominiously dumped out of the European Champions League in the quarter finals.

The sale of Manchester United Shirts has dropped dramatically domestically with supporters favouring the green and yellow colours of the original club Newton Heath as a demonstration against the way that American owners the Glazer’s have asset stripped the once rich club.

With a lack of success the lucrative Asian shirt market will likely suffer too.

Hey maybe Aon should buy AIA!

Trying to buy success in the UK football market has so far only been achieved by the Russians!