Year in Review 2011: The year in risk management

This year will enter the record books as one of the most costly in terms of natural catastrophe losses.

According to an analysis issued in September by Swiss Re Ltd., insured catastrophe losses for the first half of the year alone totaled more than $70 billion. Only 2005—during which a string of hurricanes including Hurricane Katrina battered the United States—had a larger full-year total, at $120 billion.

Among the major catastrophes affecting the global insurance markets during the first half of the year were the earthquake that devastated downtown Christchurch, New Zealand, in February, March's earthquake and tsunami in Japan, and a series of tornado and other weather-related losses in the United States.

Although the second half of the year did not suffer nearly as many losses, September's Hurricane Irene added at least $4 billion to the insured-loss total for the year, and floods in Thailand added as-of-yet-undetermined billions more. The fact that this year's hurricane season, despite Irene, was relatively benign in terms of insured losses may play a key role in keeping 2011 from becoming the costliest catastrophe year in history.

The magnitude-9.0 earthquake and subsequent tsunami that hit Japan March 11 resulted in nearly 16,000 deaths and thousands of people missing and injured, and ultimately will likely result in insured losses in the range of $30 billion.

The earthquake, which struck near the city of Sendai, was the largest known quake to ever hit Japan, and the tsunami it triggered reached heights of more than 130 feet.

Adding to the costs of the catastrophe was damage to the nuclear power plant at Fukushima. While officials said the plant survived the earthquake without damage, the tsunami caused a cooling-system failure that resulted in reactors' nuclear fuel melting down and subsequent releases of radiation.

The nuclear disaster forced authorities to evacuate a 12-mile exclusion zone around the stricken plant, which remains in place.

Together with damage to transportation systems and reduced electrical supplies resulting from the Fukushima plant disaster and the need to take other plants offline for inspection and repairs, the March earthquake led to massive supply chain disruptions, prompting heightened concern about supply chain risk at businesses around the world.

Buyers of insurance this year may have witnessed an end to eight years of decreasing commercial property/casualty insurance prices, but no major market turn is expected despite increases across several lines.

The first quarter of the year saw commercial property rates decrease slightly. But catastrophes so far have stemmed the decrease and have caused a definite flattening of rates, experts say.

While three of four lines tracked in a November benchmark survey for the Risk & Insurance Management Society Inc. for the third quarter saw premium increases, only directors and officers liability showed a premium decrease, at 1.9%. Average premium increases were 1.2% at renewal for general liability, 1.6% for property and 2.1% for workers compensation, RIMS said in a statement.

“Indications have been strong over the past couple of quarters that the market was near bottom, so it's not surprising to see premiums drifting upward a bit now,” David Bradford, president of Advisen Ltd.'s research and editorial division and editor-in-chief of the survey conducted for New York-based RIMS, said in the statement.

The market remains “quite competitive,” Mr. Bradford said. “Sharply higher rates like we saw in 2001 are nowhere in sight,” he said, referring to the market tightening after the 2001 terrorist attacks on New York's World Trade Center and elsewhere.

Throughout most of the year, some buyers of primary and excess casualty insurance saw moderate declines for renewals, and flat renewals were the norm, while high-hazard industries such as energy and automobile manufactures saw some firming, experts say.

“The majority of renewals are flat,” Pamela F. Ferrandino, executive vp of the North American casualty practice at Willis North America in New York, said in July. National accounts saw renewals ranging from flat to down 5%, Ms. Ferrandino said. “What we've stopped seeing in the GL space is the reduction of 5% to 10% in the primary” coverage.

“Basically what we've seen is certainly somewhat of a change in the market, although it is continuing its downward trend albeit at a slower pace,” Anthony DeFelice, managing director in the national casualty practice at Aon Risk Solutions in New York, said in July.

Pricing changes are being driven primarily by certain higher-hazard risk classes such as energy, some life sciences, generic pharmaceuticals and some rail and auto parts manufacturing, Mr. DeFelice said.

During beginning-of-year renewals for 2011, property insurance coverage rates declined, according to experts.

“Rates continue to head downward, mostly in the single-digit range,” Tim Rose, senior vp and chief underwriting officer at Liberty Mutual Group Inc.'s national property accounts unit in Weston, Mass., said in January. Some “larger, really good accounts” experienced double-digit decreases, he said.

The lack of major U.S. catastrophe losses in 2010 helped continue current soft market conditions, said Sanjay Godhwani, executive vp and property division executive at Lexington Insurance Co. in Boston.

“Given that 2009 was pretty benign from a cat standpoint, there's been downward pressure on rates,” he said in January.

But during mid-year renewals, underwriters took a closer look at catastrophe-exposed property as they grappled with increased losses and a revised U.S. hurricane model.

With major catastrophes this year in the United States and abroad, commercial property catastrophe “rates in general have bottomed out and are starting to move into a positive rate environment,” said Jon Hall, executive vp at Factory Mutual Insurance Co., which does business as FM Global, in Johnston, R.I., in July.

He noted that reinsurers also are looking for tighter terms and conditions and are increasing their rates, which insurers will pass on to buyers. “So we're looking at flat to plus 5% to 10% going forward,” Mr. Hall said.

Dan Hurley, senior director of risk management and safety for Norfolk Public Schools in Norfolk, Va., said in July that he was aware that the earthquake and tsunami in Japan and a series of U.S. storms had resulted in increasing rates for catastrophe-exposed commercial property. “Particularly on the Atlantic seaboard, my understanding is that local cities are feeling increases. I've heard between 5% to 10%,” he said.

Also affecting commercial property rates is Risk Management Solutions Inc.'s version 11 Atlantic hurricane model, released this year. The Newark, Calif.-based firm's updated model includes assumptions of greater inland wind damage, which experts say caused several underwriters to rethink their pricing. The model has had a significant impact on insurers' risk accumulation in catastrophe-prone areas, said. “The industry, as it currently stands, would be susceptible to a significant hurricane that makes landfall on the United States,” Charlotte Stone, managing director of the worldwide property practice for Arthur J. Gallagher & Co. in Los Angeles, said in July. “If that happens, we could see some major shifts in the market.”

As insurers continue to deal with extensive catastrophe losses and disappointing investment returns, any market turn is likely to be more of a stabilization than a true market hardening, experts say. Moving into 2012, “there doesn't seem to any kind of a hard market in the historical sense—it's more of a gradual process,” said Alan Murray, vp and senior credit officer at Moody's Investors Service Inc. in New York, in November.

Employers scored what was described as a major victory in June when the U.S. Supreme Court ruled in Wal-Mart Stores Inc. vs. Betty Dukes et al. against a proposed nationwide class of some 1.5 million members.

The majority ruled that the “respondents have not identified a common mode of exercising discretion that pervades the entire company.”

The lawsuit, originally filed in 2001, alleged that Bentonville, Ark.-based Wal-Mart promoted and paid female employees less than men despite female workers' higher performance ratings and seniority.

But while employers may have breathed a collective sigh of relief as a result of the decision, that was not the end of the case. In October, plaintiffs refiled the case on behalf of an estimated 90,000 current and former female workers only in California.

“The Supreme Court did not rule on the merits of the action, but only ruled that the class as certified could not proceed,” said the revised suit. “It did not preclude prosecution of a class that was consistent with its newly announced guidelines and standards.”

Accordingly, the lawsuit said, the revised complaint alleges claims on behalf of current and former female employees “who have been subjected to gender discrimination as a result of specific policies and practices in Wal-Mart's regions located in whole or in part in California.”

In addition, a lawsuit accusing Wal-Mart of gender discrimination in Texas, which is parallel to the litigation in California, also has been filed.

Plaintiff attorneys said more suits are planned.

Cyber risks continued to grow this year with no overall solution in sight.

While the problem is universal, health care institutions have been identified as being particularly vulnerable to data breaches because of factors that include stringent federal and state regulations, widespread dissemination of patient data and a growing black market for patient medical information.

Another worry is the growing use of cloud computing.

While the use of cloud computing may result in significant savings in companies' hardware and software costs, experts say the remote storage of sensitive data raises a series of liability risks, including the problem of keeping personally identifiable information private and safe from data breaches.

On an even larger scale, a white paper issued by Santa Clara, Calif.-based MacAfee Inc. this year identified massive state-backed advanced persistent threat attacks against dozens of governments and organizations, including businesses.

Meanwhile, many company executives remain unaware of the cyber threats they face, experts said during a presentation this year at the Business Insurance Risk Management Summit in New York.

For instance, Scott Schleicher, assistant vp of technology products at XL Insurance said, companies are not doing all they can to control the exposures.

Mr. Schleicher said that most cyber attacks aren't sophisticated, and that the vast majority of data breaches can be avoided by measures as simple as large companies requiring their employees to have password protection on their iPhones.