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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