Posted by Jennifer Hoffman
Friday, October 21, 2016
While San Francisco is no stranger to the ever-looming threat of a catastrophic earthquake, a recent discovery of intersecting faults under San Francisco's San Pablo Bay has dramatically increased the risk of a major earthquake in the next thirty years.
Scientists at the U.S. Geological Survey published their discovery this week in Scientific Advances. The Hayward Fault has long been considered a threat because it runs under densely populated neighborhoods east of San Francisco. The study found that beneath San Pablo Bay, it joins with a Rogers Creek fault, a less active underground fracture to the north. This newly discovered direct link between the faults raises the possibility of a simultaneous rupture of the Hayward and Rodgers Creek faults, a scenario that could result in an earthquake up to a magnitude of 7.4 that would cause widespread property damage, extensive loss of life, and far-reaching ripple-effects on the global economy.
The relationship between these two faults had long been unknown. Detailed subsurface imaging, geophysical interpretation and kinematic modeling by the U.S.G.S. team demonstrate that the Hayward and Rodgers Creek faults are directly connected at the surface. The Hayward and Rodgers Creek faults combine to represent a continuous 118 mile-long fault. If they were to break simultaneously, they could produce a magnitude 7.4 quake.
An earthquake of this magnitude would be more than five times stronger than the 1989 Loma Prieta quake on the San Andreas Fault that killed over 60 people and caused an estimated $6 billion in property damage. In addition, the epicenter of the 1989 Loma Prieta earthquake was located 60 miles southeast of San Francisco while the Hayward-Rogers Creek faults run directly beneath the city. David Ponce, a scientist with the USGS research group, was quoted by Popular Mechanics on this risk:
“You have to understand that there are over 2.4 million people living right along this fault, and the population of this whole area is around 7.5 million. It also turns out that major transportation, gas, water and electrical lines cross this fault. So when it goes, it's going to be absolutely disastrous."
Mr. Ponce was also quoted as saying that there is a 32% chance that such a quake could occur in the next 30 years.
Speculation regarding California earthquakes and “the next big one” is hardly anything new, but with the Hayward-Rodgers Creek discovery this week, it appears we have a new front-runner for how that “big one” could originate.
Posted by Matt Gollinger
Wednesday, October 19, 2016
The authors of the Shakeout Scenario noted that although the particular earthquake scenario they modeled “may never happen . . . [b]ig earthquakes on the San Andreas Fault are inevitable, and by geologic standards extremely common, but probably will not be exactly like this one. The next very damaging earthquake could easily be on another fault. However, lessons learned from this particular event apply to many other events and could provide benefits in many possible future disasters.” In other words, the earthquake scenario the Shakeout authors imagined is not their prediction, but it provides a thorough analysis of one possible scenario, and the author’s findings have broad application for those interested in the subject.
Thursday, October 13, 2016
The spread of Zika in 2016 has once again brought to worldwide attention the threat posed by pandemics and infectious diseases.
The World Bank describes a pandemic as “a global disease outbreak that represents a top global catastrophic risk.” Outbreaks of infectious disease have occurred regularly throughout history – Ebola, Avian Flu, SARS are just some recent examples - and market consensus is that a pandemic is inevitable. According to the World Bank, there is a “high probability that the world will experience a severe outbreak in the next 10 to 15 years that could destabilize societies and economies”. Despite advances in medicine and communication, the interconnectedness of international trade and travel in today’s globalised world, plus a larger (and more urbanised) population, means that pandemics spread more quickly and will affect more people.
From a risk point of view, with their large impacts and low probability of occurrence, pandemics are catastrophe scenarios and, given the degree of their disruptive potential, one of the most important issues for the insurance industry.
In addition to human costs in terms of health and life, pandemics result in significant financial costs as a result of their associated economic and societal impact, the secondary impacts including disruption from security threats and civil commotion. The spread of an infectious disease increases both the cost of containing it and the social and economic damage sustained, and the timeliness and effectiveness of the response of international groups and governments is therefore a crucial variable. According to the World Bank, the annual global cost of moderately severe to severe pandemics is around USD 570 billion (0.7 of global GDP), and the cost of a severe pandemic like the 1918 Spanish flu could be as much as 5% of global GDP – most of the losses predicted to be those caused by resulting economic factors. Resulting losses from SARS and Ebola went into billions of dollars in the Asia Pacific region and West Africa respectively, and Zika is forecast to cost billions to Latin America and the Caribbean alone.
Due to the various impacts of a pandemic, (re)insurers may face claims across various lines.
As well as travel, health and life policies, (re)insurers may face exposures under liability policies (including employers’ liability) for alleged negligent exposure to disease. Whether the cover will respond will depend on the specific situation and policy wording, and the operations of any exclusions, for example, for Expected or Intended injuries, Pollution and Bacteria.
An outbreak will also affect a company’s operations and revenues, for example, if it is required to temporarily cease operations partially or completely due to pandemic-related issues. During the Ebola outbreak, in addition to the voluntary evacuation of employees, curfews were imposed in some countries, resulting in the cessation of operations at some sites, closure of ports and borders and disruption of global supply chains; (re)insureds particularly affected were those with business or supply operations in West Africa, particularly in the mining, energy or travel sectors. Claims may be brought for business interruption and/or contingent business interruption. BI (and CBI) is one of the most significant risks faced by a company generally, heightened by the increasing interconnectivity of global supply chains and the nature of modern production processes; in the event of a pandemic, the ‘just in time’ model of many businesses may cause supply shortages thus exacerbating the damage.
However, a standard BI policy would only be triggered after the policyholder has experienced a direct physical loss or damage to insured property; it would not automatically be triggered if an organization suffered loss of income as a result of, for example, Ebola. The general market view is that disease is unlikely to constitute physical damage to property and therefore BI losses cannot automatically result. As with any policy, everything depends on the wording and circumstances of the specific case, for example: whether contamination is considered a direct physical loss of the premises; whether BI coverage may extend to temporary closures due to “dependent properties,” such as a major supplier, or prohibited access by civil authorities to the insured’s premises due to a direct physical loss of another property.
BI policy extensions such as Loss of Attraction, Denial of Access and Suppliers/Customers may respond but are subject to sublimits and the terms and conditions of the policy in question. Similarly, extensions of cover for Infectious Diseases, which are sometimes included within a standard BI policy to cover BI losses attributable to the outbreak of diseases, would again be subject to the wording and conditions that apply - for example, if the wording is based on “notifiable human diseases”, cover will not automatically apply as the list of notifiable diseases of public health bodies will be jurisdiction-specific, and such cover may also be subject to orders of local civil authorities.
Re(insureds) could therefore face gaps in coverage for potentially huge costs in situations where there is no physical damage to property. There may be certain circumstances in which property may be found to be damaged as a result of disease, for example if necessary decontamination measures are destructive, or where more extensive property damage occurs as a result of the secondary impact of a pandemic, such as strains on the emergency services or shortage of personnel to carry out the necessary repairs (although exclusions applicable to secondary impacts, for example for civil commotion, will also need to be considered). Should a pandemic result in severe financial losses as predicted, it is likely that there will be increase in policyholders looking for ‘deep pockets’ and advancing wider interpretations of policy language.
However, pandemics are just one example of BI losses triggered by non-physical damage events that businesses are increasingly facing, and specific cover for pandemic-related BI exposures, or “non-damage” BI polices, is available.
Pandemics are inevitable. (Re)insurers should assess their potential exposure and, as always, review their own policy wordings. While it may be that specific exclusions are written into policies (as was the case for many UK and US insurers in the wake of Ebola), (re)insurers also have the opportunity to offer bespoke products to meet the increasing need of companies for non-physical damage BI scenarios and the other multitude of risks that pandemics present.
Posted by Deepa Sutherland
Wednesday, October 12, 2016
But in the merciful end, two important things did not happen. Matthew did not make landfall in Florida – which kept the most powerful winds off-shore and away from homes and businesses – and it never made the arcing loop that would have carried it back to the Florida coast for a second round of damage. But Matthew was nonetheless a powerful storm that did its share of harm, including multiple fatalities in the U.S. and an astounding death toll in Haiti. How you view Matthew, then, is largely dependent on who you are and what you were expecting. Were you a Miami homeowner hoping for the best, and the storm spun east and did most of its damage north of you? Are you a Jacksonville shop owner whose business was flooded and ruined? Are you an insurer with concentrated exposures along the coastline? Did you dodge a bullet, or do you feel like you took a direct hit? It depends, but the early estimates suggest there is plenty of damage to go around thanks to Matthew – billions of dollars, in fact, on top of the human toll.
Lucky or unlucky? It’s in the eyes of the beholder.
An assignment of benefits (AOB) is a legal tool that allows a third party to be paid for services performed for an insured homeowner who would normally be reimbursed by the insurance company directly after making a claim. AOB is commonly used when a homeowner experiences a water loss – such as a leaky pipe, an overflow from a sink, or a damaged appliance – and contacts a contractor or water remediation company for assistance. Most AOB agreements presented to the insured allow the contractor to stand in the shoes of the insured for insurance collection purposes.
How are AOBs trending?
Newly formed at the beginning of 2016, the Consumer Protection Coalition was created to raise awareness of AOB abuse. The Consumer Protection Coalition reports Florida AOB lawsuits have increased 90,000 percent since 2000, with the predominance of claims in South Florida. The increase of AOB claims and litigation became further highlighted when the state-run insurer, Citizens Property Insurance Corp., filed for a rate increase this year citing AOB abuse as the driving force.
Citizens data reveal a 46% rise in water loss claims in a 5-year period. Additionally, the Citizen’s data shows those claims are more expensive and far more likely to lead to litigation, thereby increasing the overall cost of the claim. Citizens data also reveals geographic trends. It shows that nearly 1 in 4 South Florida insureds are more likely to assign benefits to a third party (i.e. a contractor, water mitigation company, or public adjuster) prior to submitting a claim to their carrier.
What about judicial enforcement of contract provisions, such as an anti-assignment clause?
For almost a century, there has been a body of Florida case law that supports the position that policyholders have the right to assign post-loss claims without insurer consent. A more recent example of this area of law was illustrated in 2015, when the Fourth District Court of Appeals entertained argument by an insured’s assignee who brought a breach of contract action against a homeowner’s insurer for failing to adequately compensate the assignee for emergency water removal services it performed in the aftermath of an August 2012 water event. Specifically, the water remediation company argued that the trial court erred as a matter of law in dismissing its complaint based on the anti-assignment and loss payment provisions of the policy and maintained that: (1) post-loss assignments of insurance are valid under Florida law even if the policy contains an anti-assignment clause; (2) the right of payment accrues on the date of the loss; and (3) the loss payment provision does not preclude an assignment of benefits and has never been construed to have any bearing on the issue of assignments. In making its determination, the court explained:
“we are not unmindful of the concerns that [the insurer] expressed in support of its policy change, providing evidence that inflated or fraudulent post-loss claims filed by remediation companies exceeded by thirty percent comparable services; that policy holders may sign away their rights without understanding the implications; and that a ‘cottage industry’ of ‘vendors, contractors and attorneys’ exists that use the ‘assignment of benefits and the threat of litigation’ to ‘extract higher payment form insurers.’ These concerns, however are matter of policy that we are ill-suited to address…[which] are more properly addressed to the Legislature.”
Insurers, consumer protection groups, state agencies and - with the additional lightening of wallets resulting from the approved rate hikes - insureds are all affected by the AOB crisis in Florida. Legislative efforts to address the AOB problem have failed. Senate Bill 596, filed October 21, 2015, died in judiciary on March 11, 2016. That same day House Bill 1097, filed January 4, 2016, died in the Regulatory Affairs Committee.
With the recent change of the guard from Kevin McCarty (retired May 2, 2016) to David Altmaier, as Insurance Commissioner, a watch for change begins. The Commissioner acts as both a regulator and consumer watchdog, and takes the heat if insurance rates go up. As the new Insurance Commissioner, Altmaier will have his hands full with this growing problem right out of the gate as he steps into a state of emergency caused by AOB abuse.
Tuesday, October 11, 2016
Wednesday, October 5, 2016
Tuesday, October 4, 2016
On September 27, the U.S. Geological Survey announced preliminary calculations showing that there was up to a 1 in 100 chance of a magnitude 7 or greater earthquake occurring on the southern San Andreas Fault through October 4. The USGS subsequently revised these calculations on September 30 to indicate up to a 1 in 500 chance of such an earthquake through October 7. The probability revisions corresponded to a decrease in earthquake swarm activity. These estimates are made using the Uniform California Earthquake Rupture Forecast model (UCERF3), combined with the most recent probability modeling of the likelihood that an earthquake aftershock could be larger than its 4.0+ magnitude mainshock.
The initial Advisory was issued the same day that California Governor Jerry Brown signed legislation designed to advance the development of the earthquake early warning system in California. In 2013, California previously enacted legislation mandating the creation of an earthquake warning system led by Cal OES in concert with the California Integrated Seismic Network, the USGS and others in both the private and public sector. The legislation signed on September 29 of this year, SB 438, establishes the California Earthquake Early Warning Program and Advisory Board within the California Governor's Office of Emergency Services to advance the implementation of the program and to encourage further investment in the early warning system.
Though the 1% risk of a 7.0 quake was ultimately downgraded to a 0.2% risk, the Director of the Cal OES took the opportunity to remind Californians of the need to be prepared. “California is earthquake country. We must always be prepared and not let our guard down,” said Mark Ghilarducci. “The threat of an earthquake on the San Andreas Fault hasn’t gone away, so this is another important opportunity for us to revisit our emergency plans and learn what steps you need to take if a significant earthquake hits.”
The risk of a San Andreas-based earthquake causing catastrophic losses hardly needs explanation to even the most casual reader. Both the 1906 San Francisco earthquake and the 1989 Loma Prieta earthquake were caused by movement along the San Andreas Fault. Beyond the loss of life, the loss of real and personal property, public infrastructure, and related economic losses added up to billions upon billions of dollars.
More recently, the USGS predicted that a magnitude 7.8 earthquake along the southern San Andreas Fault, an event consistent with the Cal OES Advisory issued last week, could cause about 1,800 deaths and substantially more than $200 billion in property and economic losses.
While an early warning system might only provide a handful of seconds advance notice of an earthquake, even such a tiny amount of time could save lives and vast sums in property and economic losses. Mexico and Japan have invested in early warning systems and related automated safety/loss mitigation systems that have delivered positive results.
With experts predicting the risk of “the next big one” to be on the rise, it would appear that we will have the opportunity to evaluate the effectiveness of California’s investments in its early warning systems sometime in the not-so-distant future.
Posted by Matt Gollinger