Foreign Investors Increasingly Cautious amidst Ongoing Global Turbulence, MIGA Finds
Source: World Bank (Multilateral Investment Guarantee Agency)
Foreign investors are increasingly cautious about investing in developing countries in the face of continued global economic and political turbulence, finds the World Investment and Political Risk 2013 report published by the Multilateral Investment Guarantee Agency (MIGA). A survey conducted for the report finds that macroeconomic instability and political risk rank neck-and-neck as top concerns for investors as they plan over the short and medium terms. Despite this, the survey finds nearly half of respondents expect to increase their investments in developing countries over the next 12 months—with that number increasing to 70 percent when the horizon is extended for three years.
The fifth annual MIGA-EIU Political Risk Survey finds that breach of contract and regulatory risks once again top survey respondents’ political risk concerns. Survey results show that these concerns are based on actual experience as well as sentiment.
World Investment and Political Risk 2013 notes that the continued level of investor caution has been a boon for the political risk insurance industry. The dramatic increase in political risk insurance issuance of recent years has continued, rising 33 percent in 2012 and on track for similar growth in 2013.
Political risk insurance issuance has once again exceeded the pace of increase in FDI flows into developing economies over the same period. The report notes the ratio of FDI to PRI now stands at 14.2 percent for developing economies, a marked increase on the low-water mark of nearly 5 percent in 1997.
This new release in the Deloitte (United States) SEC Comment Letter series includes extracts of frequently issued SEC staff comments, additional analysis, and links to resources that are relevant to SEC filers. The seventh edition features:
- New and updated analysis of comments related to MD&A, risk factors, and financial statement accounting and disclosures, including:
- Quantification and analysis of factors causing changes in registrants’ results of operations.
- Liquidity risks and restrictions on a registrant’s ability to transfer cash or pay dividends.
- Cybersecurity risks, disclosures pertaining to sponsors of state terrorism, and non-GAAP financial measures.
- Disclosures related to unobservable inputs in Level 3 fair value measurements.
- Revenue recognition disclosures, including those about multiple-element arrangements.
- Segment reporting, particularly if operating segments are aggregated.
Added coverage of comment trends regarding emerging growth companies and initial public offerings.
Expanded discussions of industries covered in the sixth edition, including retail; travel, hospitality, and leisure; energy and resources; financial services; health sciences; technology; and telecommunications.
Appendixes offering insights into current standard setting, the SEC staff’s review and comment letter process, best practices for managing and resolving SEC comment letters, and helpful tips on searching the SEC’s comment letter database.
Navigating the market
Source: Consumer Financial Protection Bureau
To understand the wide range of information sources consumers could be exposed to in making financial decisions, we commissioned a study of the size and scope of the financial information field. The results give an overall indication of the relative amounts spent in the U.S. on financial education and on the marketing of certain types of financial products. The report found that for every dollar put towards financial education, $25 is spent on financial marketing, which can make it difficult for consumers to find objective information.
Information Security & Cyber Liability Risk Management: The Third Annual Survey on the Current State of and Trends in Information Security and Cyber Liability Risk Management
Information Security & Cyber Liability Risk Management: The Third Annual Survey on the Current State of and Trends in Information Security and Cyber Liability Risk Management
Source: Advisen and Zurich
Historians may look at the year 2013 as a sort of cyber tipping-point – the point at which businesses and governments finally realized the severity of the threats they were facing. Revelations about the NSA’s cyber espionage program, evidence of theft of business intellectual property by state-sponsored hackers and attacks on the U.S. financial system by the Syrian Electronic Army are a few of the many cyber events that made headlines.
Exposures such as operational disruptions due to denial of service attacks, lost or stolen data, violation of privacy laws and intellectual property infringement have long been a concern of larger companies. In 2013, smaller businesses began to increasingly realize that they were also at risk. As a result, information security risks became a risk management focus of more organizations and insurance cemented itself as a part of the cyber risk management strategy for a majority of organizations surveyed by Advisen.
Homeowners ROE Outlook — 2013 Update (PDF)
Source: Aon Benfield
Aon Benfield Analytics’ annual review of homeowners rate changes and industry reported financial results finds that the country’s largest homeowners insurers are showing positive rate momentum, coupled with advancements in ratemaking methodology associated with capturing the cost of catastrophe risk. Recovering the cost of capital required to support retained catastrophe risk has seen widespread acceptance by state regulators and by-peril rating is becoming more widespread.
Our prospective after-tax ROE estimate for the homeowners line of insurance is now 4.6 percent. This prospective ROE is based on estimated capital requirements sufficient for a countrywide, diversified personal lines insurer with an A.M. Best “A” rating, net of expected reinsurance benefit estimated by Aon Benfield. While the countrywide outlook is essentially flat relative to last year’s 4.7 percent estimate, at the state level, positive rate momentum is improving the outlook for many states. Excluding Florida, the industry’s prospective ROE is 8 percent, with 36 states having prospective ROE outlooks better than this average, and 28 states with prospective ROE outlooks 12 percent or greater. Although rate adequacy still remains elusive in the gulf and south-eastern states, positive rate and underwriting actions have put the outlook of rate adequacy within reach for states outside these regions.
Furthermore, in an industry desperate for growth as auto premium volumes have stagnated, homeowners continues to be a growth opportunity for personal lines carriers. Homeowners cumulative growth over the last three years has been 15 percent, compared to 6.5 percent for auto, a differential that grows even more when extended to five or ten year timeframes.
After Sandy: A New ULI Report Looks at Mitigating Climate Change Through Land Use, Offers Recommendations on Strengthening Community Resiliency
The reality of climate change will forever change community building, with planning and development decisions increasingly based on strengthening community resilience through what is built, and where and how it is built, according to a new report released today by the Urban Land Institute (ULI).
Leading up to the one-year anniversary of Hurricane Sandy, ULI has prepared After Sandy: Advancing Strategies for Long-Term Resilience and Adaptability, which offers guidance on community building in a way that responds to inevitable climate change and sea level rise, and helps preserve the environment, boost economic prosperity, and foster a high quality of life.
ULI, a global research and education institute dedicated to responsible land use, has a long history of advising communities on repositioning after disasters. At the request of three ULI District Councils—ULI New York (city), ULI Northern New Jersey, and ULI Philadelphia, which serve ULI members in those market areas—ULI in July 2013 convened a panel of the nation’s foremost authorities on real estate and urban planning to evaluate local and federal plans for strengthening community resiliency post- Sandy, and offer guidance on rebuilding efforts. Candid insights and observations from these experts formed the basis for After Sandy, a comprehensive, practical set of 23 recommendations focused on four areas—land use and development; infrastructure, technology and capacity; finance, investment and insurance; and leadership and governance.
The report’s overriding message: The increased frequency of severe weather events, as well as rising sea levels, are compelling the real estate industry to address climate change by working with the public sector to implement adaptive measures that better protect both the built and natural environment.
The Overseas Private Investment Corporation: Background and Legislative Issues (PDF)
Source: Congressional Research Service (via Federation of American Scientists)
The Overseas Private Investment Corporation (OPIC) is an independent U.S. government agency that provides political risk insurance, financing (direct loans and loan guarantees), support for private equity investment funds, and other services to promote U.S. direct investment in developing countries and emerging economies that will have a development impact. Congress has authorization, appropriations, oversight, and other legislative responsibilities related to the agency and its activities. Congress does not approve individual OPIC transactions. However, it places statutory requirements on OPIC’s activities, such as those related to economic and environmental impacts of projects. OPIC’s governing legislation is the Foreign Assistance Act of 1961 (P.L. 87- 195) as amended.
The terrorist attacks of September 11, 2001, inflicted enormous losses on the insurance industry and businesses. In the wake of the disruptions occurring in the insurance market at the time, the government enacted the Terrorism Risk Insurance Act of 2002 to create a “temporary” federal backstop against catastrophic losses. This program subsidized private risk with public funds through a cost-sharing program for which the government does not receive any compensation.
The compelling need for the program was unclear even in the smoldering aftermath of 9/11. Yet in response to effective lobbying by the insurance industry and business interests, Congress has twice extended the program. The program is now scheduled to sunset at the end of 2014, 12 years after this supposedly temporary program was instituted.
If there was some ambiguity about the program’s need before, there is none now. Terrorism risk is not more severe than other insurable risks such as natural catastrophes, and a federal backstop stakes public money to protect the insurance industry, and subsidize the terrorism risk insurance premiums for commercial policyholders. The private market is capable of underwriting this risk. This policy analysis suggests that the program should sunset as scheduled in 2014, thus ending this form of corporate welfare.
Cyber Risks Extend Beyond Data and Privacy Exposures
Although data privacy issues may be top of mind for many organizations in managing cyber risks, they may be overlooking a potentially more severe threat: the impact of technology failures on supply chains and general operations. Technology outages and software failures resulting in supply chain and operational disruptions can cause significant loss of income, increase operating expenses, and damage an organization’s reputation.
According to “Cyber Risks Extend Beyond Data and Privacy Exposures”:
- Unplanned information technology (IT) or telecom outages are the most debilitating source of supply chain disruption, outpacing adverse weather, earthquakes, product contamination, and transportation disruptions.
- Although cyber insurance policies have historically been triggered primarily by data breaches and hacking attacks, many now provide coverage for a broad range of technology failures and outages.
- The purchase of cyber insurance should be just one part of a well-planned and effective risk management program that also includes policies and protocols to prevent and mitigate technology risks.
Free registration required to access report.
Karen Clark & Company Report Examines Present Day Impact of 1938 Hurricane
Source: Karen Clark & Company
Karen Clark & Company (KCC), independent experts in catastrophe risk, catastrophe models and catastrophe risk management, today issued a report, in conjunction with the 75th anniversary of the Great New England Hurricane, examining the impact of a comparable storm making landfall today. The report also explores what the industry losses would be from a 100 year Characteristic Event (CE) for the Northeast.
Considered by many to be the greatest single event in the meteorological history of the region, the 1938 hurricane made landfall near Bellport, Long Island on September 21. Believed to be a Category 3 on today’s Saffir-Simpson scale with sustained winds of 120 mph, the storm caused unprecedented destruction. Significant wind damages were experienced throughout the region, and many coastal towns were completely wiped out by storm surge heights exceeding 10 feet in many areas. Because forecasters believed hurricanes never hit the Northeast, no warnings were issued. As a result, nearly 700 people were killed and an equal number injured. In addition, thousands of homes and other buildings were destroyed, with 63,000 left homeless, and 3,000 ships sunk or damaged. The hurricane felled millions of trees, in some locations destroying entire forests, downing power lines and causing outages over most of the region.
The KCC report estimates that were the 1938 storm to occur today insured losses would exceed $35 billion and that a similar storm, but tracking further to the west, would result in insured losses exceeding $100 billion.
Free registration required to access full report.
New GAO Report and Testimonies
Source: Government Accountability Office
1. Race To The Top: States Implementing Teacher and Principal Evaluation Systems despite Challenges. GAO-13-777, September 18.
Highlights - http://www.gao.gov/assets/660/657937.pdf
1. National Flood Insurance Program: Continued Attention Needed to Address Challenges, by Alicia Puente Cackley, director, financial markets and community investment team, before the Subcommittee on Economic Policy, House Committee on Banking, Housing, and Urban Affairs. GAO-13-858T, September 18.
Highlights - http://www.gao.gov/assets/660/657940.pdf
2. Federal Data Transparency: Opportunities Remain to Incorporate Recovery Act Lessons Learned, by Stanley J. Czerwinski, director, strategic issues, before the Government Performance Task Force, Senate Committee on Budget. GAO-13-871T, September 18.
Highlights - http://www.gao.gov/assets/660/657934.pdf
Addressing Coastal Vulnerabilities Through Comprehensive Planning
Source: RAND Corporation
According to the U.S. Census Bureau, U.S. coastal counties have grown by more than 45 percent between 1970 and 2010, amounting to 50 million new coastal residents and billions of dollars in additional assets (homes and businesses) in these areas. Coastal residents are vulnerable to many potential risks, including damage to human life and property that result from storm flooding. And the increasing concentration of people, property, and other activities in coastal areas can itself contribute to the problem by removing or diminishing wetlands, barrier islands, and other features that serve as natural buffers to storm surges.
The Gulf Coast has borne a substantial portion of the damage from coastal storms in recent decades. For example, Hurricanes Katrina and Rita in 2005 and Gustav and Ike in 2008 collectively caused approximately $150 billion in damage to Louisiana, Mississippi, and other Gulf Coast states. But these coastal risks are also prevalent in other areas, as shown by the massive damage and disruption that “Superstorm” Sandy caused to the people, homes, businesses, and infrastructure of coastal communities along the Eastern Seaboard.
Coastal risks may increase as the climate warms. Sea levels are anywhere from 6 to 12 inches higher now than a century ago and continue to rise at a rate of more than an inch per decade. Current projections suggest that the rate of sea-level rise will continue to increase because of warming oceans and melting glaciers, leading to sea levels from 8 inches to as much as 4–6 feet higher than 1990 levels by 2100. Such increases, when combined with coastal tides and storm surge, will likely dramatically increase the risk of floods to coastal residents and property. And warming sea surface temperatures and changing climate patterns could also either intensify future tropical storms and hurricanes or make large and powerful hurricanes more common.
Reducing the vulnerability of coastal communities to these threats is challenging, given both the scale of the problem across broad geographic regions and uncertainty about the specific nature of the risk. Several restoration efforts in the United States have begun to take more-comprehensive planning approaches to addressing such challenges. Those in the Florida Everglades, Chesapeake Bay, and San Francisco Bay Delta regions are notable recent examples. But such efforts have not yet led to a broadly applicable methodology for identifying and reducing coastal vulnerabilities to climate change.
CRS — Financing Natural Catastrophe Exposure: Issues and Options for Improving Risk Transfer Markets
Financing Natural Catastrophe Exposure: Issues and Options for Improving Risk Transfer Markets (PDF)
Source: Congressional Research Service (via Federation of American Scientists)
The federal government has an established institutional framework for disaster preparedness, reduction, prevention, and response—mainly disaster assistance. However, concerns have been expressed about the nation’s increasing exposure and vulnerability to natural hazards. The rising cost of financing recovery and reconstruction following natural disasters, reports of the nation’s increasing vulnerability to coastal hazards, questions concerning the capacity of state and local governments and private insurers to deal with the rising costs, and disagreements concerning the appropriate role of the federal government in dealing with these costs have all become major topics of congressional debate.
The financial consequences of catastrophic natural disasters, such as Hurricanes Katrina (2005) and Sandy (2012), are largely a result of increasing population growth and the rising concentration of property assets in vulnerable disaster-prone areas. According to the National Oceanic and Atmospheric Administration (NOAA), Hurricane Katrina caused more than $80 billion in economic losses (both insured and uninsured) to private property and infrastructure and, more recently, Hurricane Sandy caused more than $65 billion in economic losses. New York and New Jersey—two of the nation’s most populous states—were especially affected by Hurricane Sandy-induced storm surge and coastal flooding. Sandy also triggered a sustained and heightened policy interest in the potential effects of climate change and population growth on the National Flood Insurance Program (NFIP), the feasibility of innovative public-private sector catastrophe risk management and financing initiatives, and consideration of cost-effective and practical adaptation strategies to make society more financially resilient.
In the wake of Hurricane Sandy, a key policy question for Congress is whether the federal government should intervene in U.S. risk transfer markets to ensure the continued availability and affordability of homeowners’ insurance for all residents. Advocates of federal intervention in property catastrophe insurance markets argue that an inevitable mega-catastrophe event will exceed the financial capacity of private insurers and reinsurers, as well as state insurance programs. Thus, they argue, the federal government should consider establishing a national catastrophe risk-financing program to transfer diversified pools of risk to the capital markets to help states achieve better terms with regard to the cost of insurance protection.
In essence, advocates argue that state residual property insurance pools would benefit from global diversification by transferring government’s catastrophe risk to capital market partners through catastrophe swap or directly to capital market investors through (catastrophe) bond issuance, or the purchase options on their exposure to extreme weather events (weather hedge). These options would presumably reduce pressure on public budgets and help improve insurers’ access to capital to ensure adequate capacity and solvency of the insurance industry to meet consumer needs.
Opponents of federal intervention argue that the insurance and reinsurance industry—with access to existing innovation for risk-financing transactions—has withstood unprecedented recent extreme natural disaster events with minimal disruption.
As will be discussed, several catastrophic risk-financing legislative options are before the 113th Congress. For example, H.R. 737, the Homeowners’ Defense Act of 2013, would establish a National Catastrophe Risk Consortium to facilitate multistate pooling of catastrophe exposures (covering a variety of event probabilities and types) and transferring such risk through catastrophe-linked securities and insurance derivatives directly to investors in the capital markets.
H.R. 240, the Homeowners Insurance Protection Act of 2013, would create the National Commission on Catastrophe Preparation and Protection to provide for reinsurance of state disaster insurance programs. Under this proposal, the Treasury would auction excess-of-loss reinsurance contracts to public and private catastrophe risk-bearers, insurers, and state funds to improve the availability and affordability of coverage for homes. H.R. 549, the Homeowner Catastrophe Protection Act of 2013, would amend the Internal Revenue Code to allow insurers to establish pre-tax reserves by creating disaster protection funds for claims arising from future catastrophic events. Income allocated to the catastrophe reserves would be taxable as income only when withdrawn for the payment of losses.
Global Assessment Report on Disaster Risk Reduction
Source: United Nations Office for Disaster Risk Reduction
The third edition of the United Nations Global Assessment Report on Disaster Risk Reduction warns that the worst is yet to come.
This worrying news follows three consecutive years in which direct economic losses from disasters have soared past $100 billion. If uninsured losses were included, the figure would be even more staggering.
Based on a new state-of-the art global risk model, the report’s findings should raise concern among policymakers and businesses. In a world of ongoing population growth, rapid urbanization, climate change and an approach to investment that discounts disaster risk, the potential for future losses is enormous. The global community continues to mix a destructive ‘cocktail of disaster risk’ despite catastrophic losses in recent years from the Japan earthquake and tsunami, floods in Pakistan and Thailand and the destructive Super Storm Sandy.
At the same time, the report documents encouraging signs of progress. Public-private partnerships in risk management have proven their worth during several disasters, including the 2010 and 2011 earthquakes in Christchurch, New Zealand.
Disaster risk management reduces uncertainty, builds confidence, cuts costs and creates value. More private sector senior executives are coming to recognize this. But growing recognition must be translated into a more systematic approach to disaster risk management that will make tomorrow’s world a safer place.
Climate change, rapid urbanization, and subsiding land are putting the world’s coastal cities at increasing risk of dangerous and costly flooding, a new study calculating future urban losses from flooding shows.
The study, led by World Bank economist Stephane Hallegatte and the OECD, forecasts that average global flood losses will multiply from $6 billion per city in 2005 to $52 billion a year by 2050 with just social-economic factors, such as increasing population and property value, taken into account. Add in the risks from sea-level rise and sinking land, and global flood damage could cost $1 trillion a year if cities don’t take steps to adapt.
Most coastal cities’ current defenses against storm surges and flooding are designed to withstand only current conditions. They aren’t prepared for the rising sea levels accompanying climate change that will make future floods more devastating, the authors write. Protecting these cities in the future will take substantial investment in structural defenses, as well as better planning, they write.
The findings add to a series of recent studies, led by the World Bank’s Turn Down the Heat reports, that have looked closely at expected rises in sea level and their impact on vulnerable regions around the world.
Managing Cyber Security as a Business Risk: Cyber Insurance in the Digital Age
Source: Experian/Ponemon Institute
With the increasing cost and volume of data breaches, cyber security is quickly moving from being considered by business leaders as a purely technical issue to a larger business risk. This shift has spurred increased interest in cyber insurance to mitigate the cost of these issues. In a new study sponsored by Experian® Data Breach Resolution, Ponemon Institute surveyed risk management professionals across multiple sectors that have considered or adopted cyber insurance. Based on responses, many understand that security is a clear and present risk. Indeed a majority of companies now rank cyber security risks as greater than natural disasters and other major business risks.
Free registration required to access report.
Heightened regulatory scrutiny and greater concerns over risk governance have led financial institutions to elevate their focus and attention on risk management, a new global survey from Deloitte Touche Tohmatsu Limited (DTTL) finds. In response, banks and other financial services firms are increasing their risk management budgets and enhancing their governance programs.
According to Deloitte’s eighth biennial survey on risk management practices, titled “Setting a Higher Bar,” about two-thirds of financial institutions (65 percent) reported an increase in spending on risk management and compliance, up from 55 percent in 2010.
A closer look at the numbers finds, though, that there is a divergence when it comes to the spending patterns of different-sized firms. The largest and the most systemically important firms have had several years of regulatory scrutiny and have continued their focus on distinct areas like risk governance, risk reporting, capital adequacy, and liquidity. In contrast, firms with assets of less than $10 billion are now concentrating on building capabilities to address a number of new regulatory requirements, which were applied first to the largest institutions and are now cascading further down the ladder.
Terrorism Risk: A Constant Threat – Impacts for Property/Casualty Insurers
Source: Insurance Information Institute
The April 15, 2013 bombing near the finish line at the Boston Marathon marked the first successful terrorist attack on U.S. soil in more than a decade. The attack left three dead and 264 injured—and adds to a growing list of international terrorism incidents that have occurred since the terrorist attack of September 11, 2001.
The 2002 Bali bombings, the 2004 Russian aircraft and Madrid train bombings, the London transportation bombings of 2005 and the Mumbai attacks of 2008 all had a profound influence on the 2001 to 2010 decade. Then came 2011, a landmark year, which simultaneously saw the death of al-Qaida founder Osama bin Laden and the 10-year anniversary of September 11.
While the loss of bin Laden and other key al-Qaida figures put the network on a path of decline that is difficult to reverse, the State Department warned that al-Qaida, its affiliates and adherents remained adaptable and resilient, and constitute “an enduring and serious threat to our national security.”
The Boston bombing serves as an important reminder that countries also face homegrown terrorist threats from radical individuals who may be inspired by al-Qaida and others, but may have little or no actual connection to militant groups.
Various factors suggest that terrorism risk will be a constant, evolving and potentially expanding threat for the foreseeable future. And the looming expiration at the end of 2014 of the government-backed Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is prompting increased dialogue between industry and government about terrorism risk, a discussion that has gained critical importance in the wake of the Boston bombing.
Caribbean Regional Disaster Response and Management Mechanisms
Source: Brookings Institution
The Caribbean is susceptible to a variety of natural hazards: tropical cyclones, floods, volcanic and seismic activity, droughts and bush fires. These threats are exacerbated by the effects of poor land use and environmental management practices. Small island states in the Caribbean are heavily dependent on the tourism industry and on the agricultural sector, both of which are adversely impacted by weather conditions. Effective disaster risk management (DRM) policies are thus central to development efforts of governments in the region.
This study analyzes the engagement of regional organizations in DRM, beginning in 1991 when the Caribbean Community (CARICOM) heads of government created the Caribbean Disaster Emergency Response Agency (CDERA) as the regional inter-governmental agency charged with coordinating emergency response and relief efforts to participating states. It has evolved away from its traditional “response and relief” methods towards Comprehensive Disaster Management. This evolution led to a transition to the Caribbean Disaster Management Agency (CDEMA) in 2009.