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Do Coastal Building Codes Make Stronger Houses?

July 22, 2014 Comments off

Do Coastal Building Codes Make Stronger Houses? (PDF)
Source: Cato Institute

The National Flood Insurance Program (NFIP), which provides federal flood insurance to property owners in participating communities, is currently $24 billion in debt. The shortfall has long been foreseen by policymakers because the insurance is underpriced, effectively subsidizing property owners of coastal properties. Congress attempted to curtail that subsidy with the 2012 Biggert–Waters Flood Insurance Reform Act, which was intended to put the burden of flood risk squarely on property owners rather than taxpayers. However, beneficiaries of the subsidies rallied against the legislation, and earlier this year both houses of Congress passed, and President Obama signed, legislation delaying the 2012 subsidy reform.

Communities that participate in the NFIP must adopt the program’s building code, which incorporates minimum building standards set forth by the Federal Emergency Management Agency (FEMA). Economists have theorized that building codes associated with the provision of subsidized insurance may create moral hazard by inducing risk taking. That is, the acquisition of insurance against some contingency is associated with a decreased incentive to avoid or prevent the insured loss because policyholders do not bear the full consequences of their actions. Independent of any insurance provision, moral hazard can also result from a false perception of safety if building codes are not effective.

This article examines the effectiveness of the NFIP’s building code in reducing damages to barrier island property in a hurricane. We determine whether similarly located properties fare better or worse in a hurricane based on the code regime under which they were constructed. We use data from Lee County, Fla., where 2004’s Hurricane Charley made landfall. Our findings raise questions about the optimal scale of code design, and about unintended consequences from building code changes.

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The Effects of Premium Subsidies on Demand for Crop Insurance

July 21, 2014 Comments off

The Effects of Premium Subsidies on Demand for Crop Insurance
Source: USDA Economic Research Service

Premium subsidies are a major factor in the current success of the Federal crop insurance program. This study measures the change in crop insurance demand across multiple crops and regions following a legislated increase in subsidies. Findings reveal the influence of premium subsidies on participation in the program.

Cyber Risks: The Growing Threat (III – updated)

July 21, 2014 Comments off

Cyber Risks: The Growing Threat
Source: Insurance Information Institute

Amid a rising number of high profile mega data breaches—most recently at eBay, Target and Neiman Marcus—government is stepping up its scrutiny of cyber security. This is leading to increased calls for legislation and regulation, placing the burden on companies to demonstrate that the information provided by customers and clients is properly safeguarded online.

Despite the fact that cyber risks and cyber security are widely acknowledged to be a serious threat, many companies today still do not purchase cyber risk insurance. However, this is changing. Recent legal developments underscore the fact that reliance on traditional insurance policies is not enough, as companies face growing liabilities in this fast-evolving area.

Specialist cyber insurance policies have been developed by insurers to help businesses and individuals protect themselves from the cyber threat. Market intelligence suggests that the types of specialized cyber coverage being offered by insurers are expanding in response to this fast-growing market need.

There is also growing evidence that in the wake of the Target data breach and other high profile breaches, the number of policies is increasing, and that insurance has a key role to play as companies and individuals look to better manage and reduce their potential financial losses from cyber risks in future.

Oversight Issues in Mobile Payments

July 17, 2014 Comments off

Oversight Issues in Mobile Payments
Source: International Monetary Fund

This paper examines oversight issues that underlie the potential growth and risks in mobile payments. International experience suggests that financial authorities can develop effective oversight frameworks for new payment methods to safeguard public confidence and financial stability by establishing: (i) a clear legal regime; (ii) proportionate AML/CFT measures to prevent financial integrity risks; (iii) fund safeguarding measures such as insurance, similar guarantee schemes, or “pass through” deposit insurance; (iv) contingency plans for operational disruptions; and (v) risk controls and access criteria in payment systems. Such measures are particularly important for low-income countries where diffusion is becoming more widespread.

2014 CoreLogic Storm Surge Analysis Identifies More Than 6.5 Million US Homes with Total Reconstruction Value of Nearly 1.5 Trillion Dollars at Risk of Hurricane Storm Surge Damage

July 14, 2014 Comments off

2014 CoreLogic Storm Surge Analysis Identifies More Than 6.5 Million US Homes with Total Reconstruction Value of Nearly 1.5 Trillion Dollars at Risk of Hurricane Storm Surge Damage
Source: CoreLogic

CoreLogic® (NYSE: CLGX), a leading global property information, analytics and data-enabled services provider, today released its 2014 storm surge analysis featuring estimates on both the number and reconstruction value of single-family homes exposed to hurricane-driven storm surge risk within the United States. According to the findings, more than 6.5 million homes along the U.S. Atlantic and Gulf coasts are at risk of storm surge inundation, representing nearly $1.5 trillion in total potential reconstruction costs. More than $986 billion of that risk is concentrated within 15 major metro areas. This exposure could constitute significant risk for homeowners and financial services companies, as many at-risk homes lack protection from insurance coverage.

The analysis examined homes along the coastlines of 19 states and the District of Columbia in the Gulf and Atlantic regions, extending as far west as Texas and as far north as Maine. Florida ranks number one for the highest number of homes at risk of storm surge damage, with nearly 2.5 million homes at various risk levels and $490 billion in total potential exposure to damage. At the local level, the New York metropolitan area, which encompasses northern New Jersey and Long Island as well, contains not only the highest number of homes at risk for potential storm surge damage (687,412), but also the highest total reconstruction value of homes exposed, at more than $251 billion.

Free registration required to download report.

Overcoming Speed Bumps on the Road to Telematics: Challenges and opportunities facing auto insurers

July 11, 2014 Comments off

Overcoming Speed Bumps on the Road to Telematics: Challenges and opportunities facing auto insurers
Source: Deloitte

Early adopters of telematics are collecting data that can reveal a driver’s behavior, which in turn can provide a basis for greater precision in insurance underwriting, pricing and claims. Having such first-hand driving data at their disposal could give existing usage-based insurance (UBI) carriers a considerable leg up over those not using telematics. Of course, early adopters still face many challenges in executing a viable telematics program.

In order to get a better idea of consumers’ reactions to UBI, Deloitte surveyed more than 2,000 respondents about their experiences with consumer mobile technology. We have placed the respondents in three categories — Eager Beavers, Fence Sitters and Naysayers — based on their willingness to have their driving monitored by insurers.

This report provides data and analysis that may help guide carriers that have already started on the road to telematics, along with those poised to join in, as well as others that will have to compete with telematics-driven players.

See also: Telematics: How Big Data Is Transforming the Auto Insurance Industry (SAS; PDF)

Deposit Insurance Database

July 10, 2014 Comments off

Deposit Insurance Database
Source: International Monetary Fund

This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. We extend our earlier dataset by including recent adopters of deposit insurance and information on the use of government guarantees on banks’ assets and liabilities, including during the recent global financial crisis. We also create a Safety Net Index capturing the generosity of the deposit insurance scheme and government guarantees on banks’ balance sheets. The data show that deposit insurance has become more widespread and more extensive in coverage since the global financial crisis, which also triggered a temporary increase in the government protection of non-deposit liabilities and bank assets. In most cases, these guarantees have since been formally removed but coverage of deposit insurance remains above pre-crisis levels, raising concerns about implicit coverage and moral hazard going forward.

Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers

July 8, 2014 Comments off

Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers
Source: Social Science Research Network

This paper contains the statistics of the Equity Premium or Market Risk Premium (MRP) used in 2014 for 88 countries. We got answers for more countries, but we only report the results for 88 countries with more than 6 answers.

37% of the MRP used in 2014 decreased (vs. 2013) and 9% increased.

Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references used to justify the MRP, comments from 30 persons that do not use MRP, and comments from 53 persons that do use MRP.

Medicare Advantage Money Grab

June 24, 2014 Comments off

Medicare Advantage Money Grab
Source: Center for Public Integrity

Congress created private Medicare Advantage health plans 11 years ago to help control health care spending on the elderly. But a Center for Public Integrity investigation found that billions of tax dollars are wasted every year through manipulation of a Medicare payment tool called a “risk score.” The formula is supposed to pay health plans more for sicker patients and less for healthy people, but often it pays too much. The government has for years missed opportunities to corral tens of billions of dollars in overcharges and other billing errors tied to abuse of risk scores. Meanwhile, the growing power of the Medicare Advantage industry has muzzled many critics in Congress, and turned others into cheerleaders for the program.

As risks rise, boards respond A global view of risk committees

June 20, 2014 Comments off

As risks rise, boards respond A global view of risk committees
Source: Deloitte

Boards of directors have been working hard to fulfill their risk oversight responsibilities in a challenging environment. Regulations are changing rapidly in most industries, and vary significantly across countries. Investors, analysts, and the public are demanding greater transparency into risk and risk management, as are creditors, counterparties, and other stakeholders. Many boards legitimately wonder not only what regulators want, but also which approaches to risk oversight actually work.

Deloitte set out to study a specific and very effective risk governance mechanism: board-level risk committees. This report reveals the prevalence of board-level risk committees (whether standalone committees focused solely on risk, or hybrid committees such as audit/risk) based on analysis of 400 large public companies in eight countries.

The big questions about Scottish independence; Towers Watson summarises what Scottish independence could mean for pension plans, their sponsors and financial institutions.

June 17, 2014 Comments off

The big questions about Scottish independence; Towers Watson summarises what Scottish independence could mean for pension plans, their sponsors and financial institutions.
Source: Towers Watson

As we enter the final three months of the countdown to the Scottish Independence referendum, Towers Watson has released a short paper, entitled The big questions, outlining how a yes vote to Scottish independence could affect UK-wide financial institutions and pensions plans. It poses questions in several fundamental areas such as currency, membership of the European Union and tax and fiscal policy.

In the paper Towers Watson summarises the main questions for pension plans, as well as some of those likely to affect the investment and insurance industries, in the event of a yes vote. It suggests that these will only be answered through the developing economic, social and regulatory policies of an independent Scotland and not ahead of time.

New From the GAO

June 12, 2014 Comments off

New GAO Reports and Testimony
Source: Government Accountability Office

Reports

1. Nuclear Nonproliferation: Additional Actions Needed to Increase the Security of U.S. Industrial Radiological Sources. GAO-14-293, June 6.
http://www.gao.gov/products/GAO-14-293
Highlights - http://www.gao.gov/assets/670/663916.pdf
Podcast - http://www.gao.gov/multimedia/podcasts/663020

2. Terrorism Insurance: Treasury Needs to Collect and Analyze Data to Better Understand Fiscal Exposure and Clarify Guidance. GAO-14-445, May 22.
http://www.gao.gov/products/GAO-14-445
Highlights - http://www.gao.gov/assets/670/663385.pdf

3. IRS 2015 Budget: Long-Term Strategy and Return on Investment Data Needed to Better Manage Budget Uncertainty and Set Priorities. GAO-14-605, June 12.
http://www.gao.gov/products/GAO-14-605
Highlights - http://www.gao.gov/assets/670/664082.pdf

Testimony

1. Nuclear Nonproliferation: Additional Actions Needed to Increase the Security of U.S. Industrial Radiological Sources, by David Trimble, director, natural resources and environment, before the Senate Committee on Homeland Security and Governmental Affairs. GAO-14-681T, June 12.
http://www.gao.gov/products/GAO-14-681T

As risks rise, boards respond; A global view of risk committees

June 4, 2014 Comments off

As risks rise, boards respond; A global view of risk committees
Source: Deloitte

Boards of directors have been working hard to fulfill their risk oversight responsibilities in a challenging environment. Regulations are changing rapidly in most industries, and vary significantly across countries. Investors, analysts, and the public are demanding greater transparency into risk and risk management, as are creditors, counterparties, and other stakeholders. Many boards legitimately wonder not only what regulators want, but also which approaches to risk oversight actually work.

Deloitte set out to study a specific and very effective risk governance mechanism: board-level risk committees. This report reveals the prevalence of board-level risk committees (whether standalone committees focused solely on risk, or hybrid committees such as audit/risk) based on analysis of 400 large public companies in eight countries.

Here’s what we found:

  • Board-level risk committees are well-established and widespread — present in 38% of the 400 companies analyzed. About a quarter (22%) have standalone board-level risk committees, while 16% oversee risk through hybrid board-level committees.
  • As might be expected, board-level risk committees are most prevalent in FSI companies (88%), but are also present in other industries (26%), often to a significant extent, depending on the country.
  • Local regulations affect risk oversight structures. Australia, Brazil, Mexico, Singapore, the UK, and the US have regulations that require risk committees at the board level for FSI companies (sometimes dependent on the type and size of the company).
  • Overall, 62% of all companies analyzed do not have a board-level risk committee. This largely reflects the lack of regulatory requirements for board-level risk committees in non-FSI companies in most countries.

Managing Corruption Risks in India

May 29, 2014 Comments off

Managing Corruption Risks in India
Source: Deloitte

In the past few years, India has emerged as one of the most promising destinations for investments. Its democratic government and large economy in terms of purchase power parity, highly skilled workforce, growing domestic market and sizeable English-speaking population, has resulted in an increasing number of global investors. According to a recent survey conducted by United Nations Conference on Trade and Development (UNCTAD), India has been ranked as the third most attractive destination for investments by transnational companies. In addition, the United States is one of India’s largest investment and trade partners and both countries are currently negotiating a bilateral investment treaty as part of their effort to strengthen their mutual economic ties and enhance investor confidence.

While India presents increasing investment opportunities, foreign companies in India face some unique challenges. This article focuses mainly on the corruption landscape in India, several associated risks and the need for implementing an effective anti-corruption compliance program in India.

Insurers Should Push for Climate Resilience

May 14, 2014 Comments off

Insurers Should Push for Climate Resilience
Source: Lloyd’s

The debate over whether climate change is a man-made phenomenon is no longer as important as the debate over how to plan for, and mitigate, the risks posed by it.

The past year has been one of many weather extremes; several all-time temperature records were set in both the Northern and Southern Hemispheres, death Valley in California hit 129.2 °F (the hottest temperature ever recorded in June on Earth), and January 2014 was the wettest month in the UK since 1767. We talk to Lloyd’s Chairman, John Nelson, about the implications of extreme weather conditions for insurers, and how they should be tackling the issues.

Lloyd’s has published a report Catastrophe Modelling & Climate Change which calls for the insurance industry to think about climate change and the potential impact it will have on their bottom line. As part of this, insurers should ensure that the tools they use – and I am expressly thinking about models here – adequately measure and price risks, including the influence of climate change.

New From the GAO

May 9, 2014 Comments off

New GAO Reports
Source: Government Accountability Office

1. Military Training: DOD Met Annual Reporting Requirements for Its 2014 Sustainable Ranges Report. GAO-14-517, May 9.
http://www.gao.gov/products/GAO-14-517
Highlights - http://www.gao.gov/assets/670/663082.pdf

2. Overview of GAO’s Past Work on the National Flood Insurance Program. GAO-14-297R, April 9.
http://www.gao.gov/products/GAO-14-297R

The rising strategic risks of cyberattacks

May 2, 2014 Comments off

The rising strategic risks of cyberattacks
Source: McKinsey & Company

More and more business value and personal information worldwide are rapidly migrating into digital form on open and globally interconnected technology platforms. As that happens, the risks from cyberattacks become increasingly daunting. Criminals pursue financial gain through fraud and identity theft; competitors steal intellectual property or disrupt business to grab advantage; “hacktivists” pierce online firewalls to make political statements.

Research McKinsey conducted in partnership with the World Economic Forum suggests that companies are struggling with their capabilities in cyberrisk management. As highly visible breaches occur with growing regularity, most technology executives believe that they are losing ground to attackers. Organizations large and small lack the facts to make effective decisions, and traditional “protect the perimeter” technology strategies are proving insufficient. Most companies also have difficulty quantifying the impact of risks and mitigation plans. Much of the damage results from an inadequate response to a breach rather than the breach itself.

Complicating matters further for executives, mitigating the effect of attacks often requires making complicated trade-offs between reducing risk and keeping pace with business demands (see sidebar “Seizing the initiative on cybersecurity: A top-team checklist”). Only a few CEOs realize that the real cost of cybercrime stems from delayed or lost technological innovation—problems resulting in part from how thoroughly companies are screening technology investments for their potential impact on the cyberrisk profile.

The Impact on Federal Spending of Allowing the Terrorism Risk Insurance Act to Expire

April 25, 2014 Comments off

The Impact on Federal Spending of Allowing the Terrorism Risk Insurance Act to Expire
Source: RAND Corporation

Congress enacted the Terrorism Risk Insurance Act (TRIA) in 2002, in response to terrorism insurance becoming unavailable or, when offered, extremely costly in the wake of the 9/11 attacks. The law creates an incentive for a functioning private terrorism insurance market by providing a government reinsurance backstop for catastrophic terrorist attack losses. Extended first in 2005 and again in 2007, TRIA is set to expire at the end of 2014, and Congress is again considering the appropriate government role in terrorism insurance markets.

This policy brief examines the potential federal spending implications of allowing TRIA to expire. Combining information on federal spending through TRIA, the influence of TRIA on the availability of terrorism insurance coverage, and the relationship between uninsured losses and federal disaster assistance spending, the authors find that, in the absence of a terrorist attack, TRIA costs taxpayers relatively little, and in the event of a terrorist attack comparable to any experienced before, it is expected to save taxpayers money.

Managing Retirement Risks

April 18, 2014 Comments off

Managing Retirement Risks (PDF)
Source: American College of Financial Services

This table was built for the Retirement Income Certified Professional® (RICP®) designation program for financial advisors. Building a retirement income plan starts by making sure that the client’s income needs and other financial objectives are met. But after that is the tough task of evaluating all the risks that retirees face, and developing a plan to address each one. This table identifies 18 risks in six different categories. With each risk, we define the risk, provide an example, identify facts that describe the magnitude and scope of the risk, and offer a wide range of possible solutions.

The solutions offered here are intended to provide ideas. Building a retirement income plan is a complex process and building solutions to retirement risks is much more than just checking the box. For example, solving longevity risk may include deferring Social Security, purchasing annuities with lifetime payouts, buying life insurance to provide an income stream to a surviving spouse, and carefully choosing a withdrawal strategy from a retirement portfolio. In other words, almost every risk described here requires a carefully crafted, balanced set of solutions that requires thought, knowledge, and experience.

Internists release policy paper on medical liability crisis

April 16, 2014 Comments off

Internists release policy paper on medical liability crisis
Source: American College of Physicians

The American College of Physicians (ACP) today released a policy paper on the medical liability crisis, which continues to have a profound effect on the medical system. “Medical Liability Reform — Innovative Solutions for a New Health Care System” (PDF) provides an update of the medical liability landscape, state-based activity on medical liability reform, and summarizes traditional and newer reform proposals and their ability to affect system efficiency and encourage patient safety.

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