Download Other Emerging Issues

Emerging Issues for the P&C Industry
AICP Heartland Chapter
Education Day 2008
Mark Smith CPCU, AIS, API
Insurance Services Office, Inc.
4/9/2008
Agenda
•
•
•
•
•
•
Studying Emerging Issues
Climate Change: Insurance Implications
Green Building Construction
Smart Cars/ Smarter Roads
Optional Federal Charter
Questions
4/9/2008
Studying Emerging Issues
4/9/2008
Why We Study Emerging Issues
• Stay ahead of the game
• Improved awareness of hot topics
• Potential insurance implications
4/9/2008
Where We Get
Information
•
•
•
•
•
•
•
•
Litigation
Scientific studies
Futurists
Newspapers
Claims units
Management team
Panels
Input from speeches
4/9/2008
Issues to Which We’ve Responded
•
•
•
•
•
•
Mold
Welding Rods
Identity Theft
Personal Injury
Virus/bacteria Exclusion
Artificially Generated
Electrical/Magnetic Energy
4/9/2008
Climate Change: Insurance
Implications
4/9/2008
Global Warming
• Simplest terms: increase in the
average temperatures of the
Earth's near-surface air and oceans
and its projected continuation.
• Common usage: "global warming"
refers to the warming in recent decades
and implies a human influence.
4/9/2008
Global Warming –Greenhouse
Gas Effect
• The ability of the atmosphere to capture and
recycle energy (heat) emitted by the Earth’s
surface
• Greenhouse Gases - primarily water vapor,
carbon dioxide, methane gas and ozone
• Increasing amounts of greenhouse gases
trap solar heat that would have escaped the
Earth’s atmosphere
4/9/2008
Intergovernmental Panel on
Climate Change (IPCC)
• In February, 2007 the UN panel studying
climate change (IPCC) found:
– Warming of the climate system is unequivocal;
– Human activity has “very likely” been the driving
force in climate change over the last 50 years;
– The probability that warming is caused by natural
climatic processes alone is less than 5%;
– World temperatures could rise by between 1.1 and
6.4 °C (2.0 and 11.5 °F) during the 21st century;
4/9/2008
Intergovernmental Panel on
Climate Change (IPCC)
• Sea levels will probably rise by 18 to 59 cm (7.08 to
23.22 in)
• There is a confidence level >90% that there will be
more frequent warm spells, heat waves and heavy
rainfall.
• There is a confidence level >66% that there will be
an increase in droughts, tropical cyclones and
extreme high tides.
• Debate moving from whether humans are warming
the planet to what we can do about it
4/9/2008
Catastrophic Effects of
Global Warming
• Tropical storms stronger and last longer
• Increased occurrence of drought;
reduced water supplies; declining
agricultural yields;
• More flash floods; coastal inundation;
• More frequent heat waves- more
wildfires
4/9/2008
Risk Management Strategy:
P/C Perspective
• 2005 Ceres Report: www.ceres.org
– Climate changes will result in more
claims/higher costs;
– More political and financial burden on
governments to respond;
• 2005 CSPP Report: www.scienceand
policy.org
– Ceres report flawed - science weak
4/9/2008
Risk Management Strategy:
NAIC Task Force
• Dec. ’07 Draft White Paper:
– Regulators must develop tools to evaluate
climate change insurance risk;
– Disclosure is a primary tool;
• Feb. ’08 Draft Disclosure Proposal:
–
–
–
–
Emissions Disclosure;
Strategic Analysis of Climate Risk;
Regulatory risk;
Physical Risk
• Proposal still open for comment;
4/9/2008
Property and Liability Claims
• Damage to property is the most obvious and
most widely discussed consequence of
climate change
• Emphasis is increasing on the potential claims
of 3rd parties who allege BI or PD
• Such BI and PD may allegedly be caused by
corporations or other emitters of greenhouse
gases
4/9/2008
Potential 3rd Party Liability
Litigation
• Question: Will emitters of greenhouse
gases be held liable for the impacts to
third parties from their contribution to
global warming and climate change?
• Will commercial liability insurers be
required to defend their insureds
against such suits?
4/9/2008
Insurer Involvement
• Insurers insure carbon-intensive industries
– Auto manufacturing, utilities and oil industries
– Homes, autos and planes
• All contribute to greenhouse gas emissions
• Even if suits are unsuccessful, defense
coverage is broad and defense costs are a
major concern
4/9/2008
Greenhouse Gas as Pollutant
• EPA has not regulated greenhouse gas
emissions – UNTIL NOW
• Recent Supreme Court decision (Mass.
v. EPA) may change EPA focus
• Court found greenhouse gases are
within Clean Air Act’s definition of
pollutants
• EPA now has authority to regulate
greenhouse gases
4/9/2008
CGL Policy Analysis
• Definition of Occurrence: An accident,
including continuous or repeated exposure to
substantially the same general harmful
conditions
• Do claims of damage from alleged global
warming activity involve an “occurrence”?
• Indemnification will depend on facts
presented and established during litigation
4/9/2008
CGL Policy Analysis (Cont’d)
• Expected or intended exclusion: Did the
policyholder expect or intend BI or PD
through its emission of greenhouse gases?
• Pollution Exclusion: Supreme Court’s decision
that greenhouse gases are pollutants could
be beneficial to insurers
• Timing: Claims could extend back to before
pollution exclusions appeared in policies
4/9/2008
Risk Management Strategy:
P/C Perspective
• Executives should assess current and
probable environmental risk exposure
• Possible exclusion for climate change
lawsuits from D&O policies
• Business continuity planning as a
prerequisite for writing business
interruption coverage
4/9/2008
Strategy: Property and Liability
Perspective (Cont’d)
• Encourage “Green Building”:
– Provide coverage for rebuilding damaged
property using “green” building practices
– Provide credits for owners of such buildings
• Warmer temperatures and more
moisture  increased mold
• Brown outs/grid failures/heat waves 
health concerns
4/9/2008
Strategy: Property and Liability
Perspective (Cont’d)
• Pay-as-you-drive insurance or mileagebased discounts
• Discounts for hybrid cars
• Solar power: coverage for homeowners
who generate their own power
4/9/2008
Global Warming
• http://globalwarming.org/
• http://pewclimate.com
4/9/2008
Green Building Construction
4/9/2008
Green Buildings
• Historically, green building efforts had not
achieved broad market acceptance
• US Green Building Council’s Leadership in
Energy and Environmental Design (LEED)
Green Building Rating System
• Many federal and state buildings must meet
LEED requirements
• Increasing support from large cities
• LEED is the relied upon rating system for
green buildings
4/9/2008
LEED Rating System
• Building can be rated as Platinum, Gold,
Silver or Certified
• Rating based on the number of points
achieved according to a checklist
• Applicable to:
–
–
–
–
–
4/9/2008
New construction
Existing buildings
Commercial interiors
Core and shell development
Residential construction
LEED Criteria
• Takes into account:
– Sustainable sites
– Water efficiency
– Energy and atmosphere
– Materials and resources
– Indoor environmental quality
– Innovation and design
4/9/2008
Green Building Requirements
• Washington: In 2005, became the first state
to enact green building legislation
• Boston: Zoning Commission approved
amendments to zoning code requiring
buildings over 50,000 sq feet to be certifiable
• District of Columbia: Green Building Act of
2006 - private non-residential construction
projects of 50,000 sf or more.
• 6 states: AR-CT-LA-MD-NV-WA have green
bldg. mandate for govt. projects
• Kansas City: www.usqbckansascity.org
4/9/2008
Reduced Loss Exposure
• Energy-efficient light: less heat and
reduced fire hazard
• Cement panels: reduce wood content more resistant to mold, wind, EQ, fire
• Energy-efficient windows: resist
shattering from heat and resist
breakage by thieves
4/9/2008
Reduced Loss Exposure
(Cont’d)
• Grid-independent solar power systems:
limit business interruptions
• High-efficiency/dry fixtures (i.e.
compost toilets and occupant sensors)
reduce sewer back-ups/burst pipes
• Increase reflectivity of rooftops-lower
bldg. temperatures (reduce fire loss)
4/9/2008
Insurance Implications
Incentives
• Potential for insurance credits
• Optional coverage for upgrades to meet
requirements:
– Ordinance or law coverage
– Increased cost of construction additional
coverage
• Industry Programs
4/9/2008
Insurance Implications - Costs
• Architect’s and design professionalsincreased exposure?
• Increased cost of green building
practices
• Damage to solar panels: increased
replacement costs; freezing and leakage
perils
• Impact on performance bond market
4/9/2008
Smart Cars – Smarter Roads
4/9/2008
Basics of Smart Cars and Roads
• Purpose is to prevent accidents and
ease traffic congestion
• While cars would begin to have these
features, a full system, including
intelligent roads, would most likely not
appear until the 2010’s
4/9/2008
Four Categories
• Driver Related:
–
–
–
–
Alarms for “lane drift”
Blind spot monitors
Night vision
In-car breathalyzers
• Vehicle Related:
– RFIDs embedded in roads
– Traffic lights that transmit information about status
– Cars “talking” to each other (safe breaking distances,
in your blind spot)
– GPS information about traffic patterns up ahead
4/9/2008
Four Categories (Cont’d)
• Recorders
– EDRs record information at the time of an
incident
– VDRs (commercial applications) record or
transmit information about vehicle and driver
• Number of hours driving without a break
• Use or condition of vehicle equipment
(such as a cement drum turning)
– TEEN BLACK BOX
4/9/2008
Four Categories (Cont’d)
• Law Enforcement
– Signs that transmit speed limit
– Driver’s license standards
– The DNA traffic stop
– Tolls, meter and road tax collection
4/9/2008
Equipment
• Cars and roads equipped with computers, cameras,
GPS and transmitters form communication
• Cameras would identify intersections, stop signs
and stop lines
• Communications would include location of vehicles
and their rate of travel to avoid collisions
• The on-board computers would determine if a
vehicle is stopped ahead or blocking an intersection
• Brake and steering assistance would be provided
4/9/2008
The Little Black Box
• First EDRs 1974 (NHTSA); all GM and Ford models
today (over 40 million vehicles)
• Typically records air bag, seatbelt and brake status,
speed of vehicle and engine, throttle position and
velocity change
• 10 milliseconds increments for 5 seconds
• In collision, if bag deployed, data stored
indefinitely; if not, stored for 250 starts
• Automatic transmission to call center with GPS
coordinates
4/9/2008
New NHTSA Regulation
• Takes effect with 2011 models
• Requires EDRs in vehicles with a GVW of 8,500 pounds or
less to record 15 essential data elements and up to 30
additional elements
• Institutes uniform requirements for the accuracy, collection,
storage, survivability and retrieval of motor vehicle crash
event data
• Standardizes the data
• Requires manufacturers to make a retrieval tool
commercially available
• Requires manufacturers to include standard disclosure
4/9/2008
Driver’s License Standards
• The Real ID Act established standards for
driver’s licenses
–
–
–
–
–
Documents required to obtain license
Verification procedures
Information (full legal name, principal residence)
Security against forgery
Machine readable, including facial-recognition
technology pictures
• Effective 5/11/08; option to 12/31/09
• States can opt out, but their licenses would
be useless for federal purposes
4/9/2008
Driver’s License Standards
(Cont’d)
• States must link their record-keeping systems
to national databases
• States must mine multiple databases to check
the accuracy of supporting documents
• Requires proof of legal residency – run the
application through SAVE (a federal database
to prevent illegal immigrants from receiving
federal benefits)
• Background check on motor-vehicle
employees
4/9/2008
Concerns
• Humans react better than computers
• EDR and VDR information could one
day become the DNA of an automobile
• Accidents will be less frequent, but
likely more severe, because the
increased cost of vehicles will mean
they will be more expensive to repair
when the car incurs damage
4/9/2008
Some Car Rental Contracts
• Make insurance coverage invalid if the
renter
– breaks the law
– drives outside agreed rental area
• Could increase carriers’ exposure even
when renter takes out additional damage
waivers
• Charge for excess wear and tear on car
from speeding, off-road use
4/9/2008
Personal Privacy
• EDR and VDR data has already been used
in civil and criminal highway-accident
cases
• Some states already have laws
– regulating the ownership and use of EDR
data
– that insurers cannot put wording in the
cooperation clause requiring insureds to
provide EDR info
• Cameras to watch your teenage driver
4/9/2008
Auto Hackers
• Hackers are starting to target autos
with on-board computer systems
• Possibilities include unlocking doors
and disabling the car
• It’s also possible to replace OEM
processors with processors that
enhance performance
4/9/2008
Underwriting Implications
• Vehicle equipment/technology could become
more important in underwriting and rating
• Insurers may need to consider driver’s
“techie” skills
• New vehicle equipment will impact pricing
• Identifying vehicle features difficult if not VIN
coded
• Territories may need to consider existence of
“smart roads”
• Endorsement for policy – credit to voluntarily
provide EDR information to insurer in case of
4/9/2008
an accident
Challenges to Underwriting
and Rating Criteria
• The basis of the insurance mechanism is to be
able to fairly distinguish among classes of risk
for purposes of applying proper coverage
provisions and obtaining adequate premium
• The industry has been accused of discrimination
at times for some of its practices
• It is possible that these accusations will increase
in the future
• Should we be investigating alternative methods
for categorizing degree of risk?
4/9/2008
Optional Federal Charter
4/9/2008
Optional Federal Charter
• Bush DOT “Blueprint for a Modernized
Financial Regulatory Structure”
• Recommends establishing an Optional
Federal Charter for insurers, reinsurers
and producers
• One of the “intermediate” goals
4/9/2008
Optional Federal Charter
• Sets up Office of National Insurance
• States would not have jurisdiction over OFC
insurers
• OFC insurers could still be subject to some
state laws, such as:
– state tax laws,
– compulsory auto and workers’ comp;
– participation in residual markets;
– participation in guarantee funds.
4/9/2008
Optional Federal Charter
• OFC “principles based” regulatory concepts:
– Ensure safety and soundness of markets;
– Enhance competition in markets;
– Increase market efficiency, including:
•
•
•
•
elimination of price controls;
promote more rapid technological change;
encourage product innovation;
reduce regulatory costs;
– Provide consumer protection
4/9/2008
Optional Federal Charter
• Office of Insurance Oversight:
– exercise newly granted statutory authority
to address international regulatory issues,
such as reinsurance collateral;
– serve as an advisor to the Secretary of the
Treasury on major domestic and
international policy issues.
4/9/2008
Optional Federal Charter
Full “Blueprint” available at:
http://www.treas.gov/press/releases/reports/Blueprint.
pdf
4/9/2008
QUESTIONS????
4/9/2008
Emerging Issues in Insurance Coverage
Mark Smith
ISO, 545 Washington Blvd, Jersey City, NJ 07310
201-469-2642
[email protected]
No part of this presentation may be copied or redistributed without the prior written consent of
ISO. This material was used exclusively as an exhibit to an oral presentation. It may not be, nor
should it be relied upon as reflecting, a complete record of the discussion.
4/9/2008