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Business Insurance Year in Review and 2015 forecast

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<em>Business Insurance</em> Year in Review and 2015 forecast

Risks during 2014 ranged from lawsuits over defective products to malware-infected computer systems to the fear of Ebola-infected employees. Yet abundant insurance capacity and a relatively quiet catastrophe year pressured commercial insurance pricing, generally benefitting risk managers and buyers.

Product recalls dominated the headlines. This was especially true in the automotive sector as industry heavyweights including General Motors Co., Ford Motor Co., Chrysler Group L.L.C. and Toyota Motor Corp. recalled hundreds of thousands of vehicles for various defective parts, and airbag supplier Takata Corp. became the subject of criminal probe in the U.S. as a result of defective products.

GM's troubles were especially acute as the automaker faced litigation over defective ignition switches believed responsible for 29 deaths. It set aside $400 million to establish a program to compensate crash victims.

2014 also was marked by a rapid rise in cyber risk as Target Corp., The Home Depot Inc. and several other firms acknowledged major data breaches. According to a study by PricewaterhouseCoopers L.L.P., the number of global cyber security incidents in 2014 increased 48% over 2013.

Target said in August that it exhausted $90 million in cyber insurance to pay expenses related to the breach. In November, Home Depot reported pretax net expenses of $28 million related to its breach and said it anticipates the total cost will be at least $34 million this year.

As a result of the breaches, major retailers became subject to higher rates and retentions and lower coverage limits for their cyber insurance.

Some insurers attempted to exclude cyber coverage under commercial general liability policies. In October, a unit of The Travelers Cos. Inc. sought a ruling stating that it is not obligated to indemnify and defend P.F. Chang's China Bistro Inc.'s data breach under its commercial general liability policy.

The Ebola outbreak that hit several West African nations throughout 2014, prompting major health care risk management revisions following a patient's October death at a Dallas hospital and the infection of two hospital workers, also elicited a response from the insurance industry.

In October, London-based Miller Insurance Services L.L.P. and Boston-based William Gallagher Associates Insurance Brokers Inc. launched pandemic disease business interruption insurance coverage to cover loss of income arising from the closure of health care facilities.

Likewise, Aon P.L.C. introduced Ebola liability coverage for hospitals and other health care facilities. In a move to limit its Ebola exposure, Ace USA in October said it would exclude Ebola claims, on a case by case basis, via an endorsement for new and renewing general liability insurance for those with African exposures.

While 2014 was notable for a relative lack of losses due to hurricanes and convective storms in North America, a magnitude-6.1 earthquake did hit California's Napa Valley in September, with insured loss estimates for the winery area ranging from $250 million to $1 billion.

Still, harsh winter weather over much of the U.S. early in the year likely will result in insured losses exceeding $2.5 billion, about double the 20-year annual average, according to the Insurance Information Institute Inc.

High-profile mishaps and attacks also affected the aviation and space sector.

In October, an unmanned Orbital Sciences Corp. rocket exploded soon after liftoff, and an experimental Virgin Galactic spacecraft crashed in California.

In March, Malaysian Airline System Bhd flight MH-370 mysteriously disappeared shortly after leaving Kuala Lumpur International Airport and has yet to be found. In July, Malaysia flight MH-17 was shot down over Ukraine.

More than 500 people died in the two crashes, which experts said resulted in total insured losses in excess of $200 million.

Abundant capacity was a common thread throughout much of the commercial insurance sector in 2014.

In the excess and surplus lines market, overcapacity depressed rates as much as 5% to 10% for midyear renewals in areas such as the large commercial property sector.

One factor exacerbating the soft pricing was competition from standard market insurers.

On the reinsurance side, alternative capacity continued to flow into the market and exert downward pressure on pricing for U.S. property catastrophe business. According to a September report by Aon Benfield Analytics, global reinsurer capital reached a record $570 billion at the end of June, up 6% from the end of 2013.

Investor appetite for insurance-linked securities and other alternative risk transfer options was so strong in 2014 that brokers and capital market investors began exploring ways to transfer new forms of risk, such as contingent business interruption, through capital markets.

Market conditions prompted strategic recalculations as mergers and acquisitions continued to reshape the insurance landscape.

Arthur J. Gallagher & Co. was particularly active, agreeing to acquire Toronto-based Noraxis Capital Corp. in May after acquiring the insurance brokerage operations of Australian conglomerate Wesfarmers Ltd. and London-based Oval Group in separate deals in April.

The reinsurance sector also saw some sizeable consolidations and one near miss. In December, RenaissanceRe Holdings Ltd. said it had signed a $1.9 billion agreement to merge with Platinum Underwriters Holdings Ltd.

Conversely, after a protracted battle waged in both the boardroom and the press, Aspen Insurance Holdings Ltd. managed to fend off a hostile takeover attempt from fellow Bermuda insurer Endurance Specialty Holdings Ltd.

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