2010’s Top Insurance Stories in the West

December 23, 2010

In 2009, independent insurance agents and brokers faced a “perfect storm” with the economic downturn, premiums at a fraction of what they used to be, and unemployment and home foreclosure rates up, said Kevin Baker of San Jose, Calif.-based Suhr Risk Services Inc. and president of the Insurance Brokers and Agents of the West (IBA West). The year 2010 may not have been as economically tumultuous, but the insurance industry, nevertheless, saw its fair share of disturbances in the West.

Mother Nature Speaks

In perhaps a warning to get prepared for the “Big One,” Mother Nature shook the ground in several areas in the western region. January started off with California Gov. Arnold Schwarzenegger declaring a state of emergency after a 6.5 magnitude earthquake struck Northern California and caused about $28 million in damage. In Eureka, the largest city affected by the quake, the damage estimate reached $17.9 million, reflecting damage to 295 buildings.

Then in April, an earthquake that occurred on Easter caused about $91 million in damage in the Golden State’s Imperial County.

State officials from Nevada to Oregon encouraged residents to consider earthquake insurance coverage. Meanwhile, the California Earthquake Authority continued to push for national legislation that would help it reduce its reinsurance requirements.

Mother Nature literally lit a fire under residents over the mountains in Colorado. That state’s Fourmile Canyon fire was surprisingly destructive, as the flames crept just outside Boulder and residents were forced out of their homes on mandatory evacuation orders. According to the Rocky Mountain Insurance Information Association and National Interagency Coordination Center, the fire burned 6,422 acres, destroyed 169 homes and incurred $217 million in insurance claims, making it the most expensive wildfire in the state’s history.

In hopes of avoiding a tragedy, Washington passed legislation to allow the Insurance Commissioner to establish a flood insurance joint underwriting association (JUA), a publicly sponsored, temporary, not-for-profit insurer of last resort to provide insurance when certain types of coverage become unavailable on the open market. The Commissioner believed something was necessary to insure property and businesses at risk from floods arising from the failure of a dam on the Green River are protected. Based on the law’s passage, state Insurance Commissioner Mike Kreidler and more than two dozen insurance companies have launched a new program to help Green River Valley businesses struggling to find flood coverage. The “Washington Flood Market Assistance Plan” will act as a matchmaker, pairing businesses needing coverage with insurers selling it. The Surplus Line Association of Washington has agreed to act as administrator of the plan.

Man-Made Risks

Natural disasters weren’t entirely to blame for insurance claims in 2010. A Pacific Gas and Electric gas line explosion that occurred in September in San Bruno, Calif., killed eight people, left at least nine people critically injured, and destroyed more than a dozen homes.

A California Assemblyman subsequently proposed a bill aimed at preventing pipeline explosions. Assemblyman Jerry Hill’s bill would require utilities to share their emergency plans with police and fire departments, the San Jose Mercury News said. They’d also have to prioritize repairs to pipelines close to earthquake fault lines and install valves that could automatically seal off a ruptured line.

Federal legislation also has been introduced to increase inspections of gas lines.

In Washington, an April 2 blast at Tesoro Corp.’s Anacortes refinery killed seven workers. A state investigation found the explosion could have been avoided, and fined the company $2.38 million. The fine was the biggest the state agency has ever levied — but the state said it wanted to send a message, noting that it found 39 willful violations and five serious violations of worker safety standards.

Following several crane accidents nationwide, the Occupational Safety and Health Administration published a new crane standard at the end of July, marking OSHA’s first crane standard since the 1970s. Subsequently, several states focused on crane safety, including Wyoming and Washington.

Beginning November 8, Wyoming began requiring signalpersons, riggers, and operators of most types of cranes in the United States must be trained, tested, and qualified to meet the new OSHA Rule 1926.1400. Updating its 1926 standards, Wyoming’s new requirements specify industry work practices necessary to protect employees during the use of cranes and derricks in construction, the division said. This final standard also addresses advances in the designs of cranes and derricks, related hazards, and the qualifications of employees needed to operate them safely.

Washington’s crane standards took effect in January 2010, requiring all construction cranes in the state to be certified by an accredited crane inspector and crane operators to be certified for the type of crane they are operating. Crane owners, inspectors, operators, unions and others associated with the industry participated in developing the proposed rules.

Although not be as deadly as industrial accidents, the insurance industry really became aware of the severe risks — and benefits — that can result from the Digital Age. Thanks in large part to Time magazine’s “Person of the Year,” 26-year-old Facebook founder Mark Zuckerberg, forward-thinkers in the insurance industry began implementing social media marketing strategies. Meanwhile, others lamented the fact that the insurance industry, as usual with technology, was behind the times in connecting with customers through online media.

Others looked at social media and new technology from a risk standpoint. Many companies are unwittingly vulnerable to the possibility of data leakage, phishing attacks, trojans or advance persistent threats, according to Lloyd’s, the world’s leading specialist insurance market, and HP, the world’s largest technology company. In their joint report, “Managing digital risks: trends, issues and implications for business,” Lloyd’s and HP warned that, as businesses become more reliant on technology, they will face more complex and damaging digital attacks as sophisticated attackers quickly adapt their methods to steal from, disrupt and spy on businesses. Many companies are unintentionally exposed to digital risks, believing their existing insurance policies will cover them, but most traditional (property and commercial liability) policies focus on the tangible damage to physical property and do not cover the many new areas where digital risks lie.

The current market for cyber insurance is estimated to be around $600 million, a 16 percent to 25 percent increase from 2009, according to a Betterley Cyber Risk and Privacy Market Survey.

Creative Accounting

Several states tried to take from the “haves” to give to the “have nots” in 2010, by raiding profits from state workers’ compensation and other insurance funds to make up for state budget deficits.

California’s legislative attempt to take money from the California State Compensation Insurance Fund was blocked by Insurance Commissioner Steve Poizner’s lawsuit.

In Arizona, a court ruled that the Arizona Legislature’s raid of nearly $4.7 million from a special fund for injured workers was illegal. Meanwhile the state successfully privatized its state fund, allowing the State Compensation Fund of Arizona to become a private mutual insurance company owned by its policyholders as of June 30, 2012.

Colorado’s quasi-governmental workers’ compensation insurer Pinnacol Assurance submitted a potential separation agreement to Colorado Gov. Bill Ritter that would have establish Pinnacol as a domestic mutual insurance company owned by its policyholders in exchange for $330 million to help ease the state’s budget crisis. That deal was rejected.

On the other hand, the Washington Legislature approved a bill to shift $10 million from the state’s Office of Insurance Commissioner Regulatory Account to the State General Fund.

Hawaii was successful in allowing the state to use money from its Hurricane Relief Fund to ease school furloughs. The island chain also raised fees for insurers to help ease budget problems. SB 2159 nearly tripled the fee from $7 to $20 for insurers to obtain a driving record copy. HB 1985 doubled more than 30 other fees that are paid by insurance companies, agents, brokers, adjusters and other insurance entities, including issuance, service, and renewal fees for insurers, producers, adjusters, surplus lines brokers, service contract providers, and vehicle protection product warrantors. Half of the fee is deposited to the compliance resolution fund and half of the fee is an “insurance license and service tax” which is deposited into the general fund.

HB 2600 requires insurance companies to put systems in place to pay premium taxes monthly rather quarterly, which has been the long standing practice. The three new laws went into effect July 1, 2010.

Quirky California

California represents the fourth-largest insurance market in the world, with the state insurance commissioner overseeing about 10 percent of the state’s economy. Consequently, it’s important to note some of Insurance Commissioner Steve Poizner’s achievements from 2010 that affect insurance agents and brokers.

  • After streamlining operations at the Department of Insurance, Poizner reduced fees on agents, brokers and insurers, sending $20 million back into the marketplace.
  • Following several wildfires in which consumers found themselves under-insured, he proposed regulations governing standards and training for estimating replacement value on homeowners’ insurance.
  • In evaluating whether California’s insurers were financially stable, he discovered many were investing in companies that had Iranian investments. Thus, he conducted a terror finance probe that resulted in 1,010 insurance companies — more than 75 percent of insurers licensed to do business in California — agreeing to forgo future investments in 50 companies identified as doing business with Iran’s nuclear, energy or defense sectors.

Other significant news events that occurred in California in 2010 included

  • A California voter initiative that would have allowed drivers who have had insurance for some time to be eligible for a “persistency discount,” did not pass.
  • Calif. State Fund appointed a new CEO, Tom Rowe, who revised State Fund’s broker of record policy, as well as filed for a 5.2 percent overall rate increase for 2011. The company said it will now recognize broker of record letters for direct accounts and pay commission for those accounts in accordance with its 2011 Broker Agreement.

Can’t Buy Me Love

The insurance industry discovered that money can’t buy votes. California Governor’s race was the most expensive in history. Insurance Commissioner Steve Poizner spent nearly $25 million challenging Meg Whitman in an unsuccessful run for governor on the GOP ticket. Then Whitman spent more than $160 million ($140 million of her own money) in an unsuccessful run against Gov. elect Jerry Brown. Meanwhile DOI attorney Brian FitzGerald spent less than $5,000 in his bid to represent Republicans as the insurance commissioner candidate. While FitzGerald lost to Mike Villines in the primary (and Villines lost to Democrat Dave Jones in the general election), he did so by the narrowest of margins. Villines only won with 50.5 percent of the vote.

According to a recent report by the National Institute on Money in State Politics, Whitman was one of 10 candidates for office nationally who primarily self-funded their own campaigns. Eight of them lost, by mostly wide margins.

The insurance industry also didn’t see a pay off when voters in the state of Washington rejected a measure to inject private insurer competition into the state’s workers’ compensation system. The insurance industry had hoped to open up the state’s workers’ compensation insurance system to the private market and eliminate the Department of Labor and Industries’ monopoly on the system by passing Initiative I-1082. However, 58 percent of voters rejected the initiative. The Independent Insurance Agents and Brokers of Washington had put more than $300,000 to help pass the initiative.

In other end-of-year changes, new leader in many western states may bring changes in 2011. Among the insurance commissioner changes:

  • Utah Governor Gary R. Herbert appointed Neal T. Gooch as Commissioner of the Utah Insurance Department. Gooch was appointed acting Insurance Commissioner in January, and previously served as deputy insurance commissioner since 1997.
  • The New Mexico Public Regulation Commission appointed John G. Franchini Superintendent of Insurance by a 4-1 vote. Franchini, a New Mexico native, boasts nearly four decades of insurance industry-related experience and said he looks to use that experience to move the Division of Insurance forward.
  • Hawaii Gov. Linda Lingle selected Gordon Ito as insurance commissioner to oversee the state’s Department of Commerce and Consumer Affairs, Insurance Division. Ito has been with the Department of Commerce and Consumer Affairs for more than 17 years. Former Commissioner J.P. Schmidt resigned in June for a private sector job with a law firm, knowing that Governor-Elect Neil Abercrombie will probably want to appoint his own commissioner.
  • Colorado Department of Regulatory Agencies Executive Director Barbara Kelley announced the departure of Marcy Morrison as Colorado Insurance Commissioner. John J. Postolowski, a veteran state employee and current deputy commissioner of finance and administration at the Division of Insurance, is interim commissioner, pending a permanent appointment by Governor-elect John Hickenlooper.
  • California voters elected Assemblyman Dave Jones to be the state’s next insurance commissioner. Jones, a Democrat, won 51 percent of the vote to defeat Republican Mike Villines, who was favored by the insurance industry. Jones will succeed Republican Steve Poizner, who as mentioned had an unsuccessful run for governor.
  • Oregon Department of Consumer and Business Services (DCBS) Director Cory Streisinger announced she will leave her position at the end of Gov. Ted Kulongoski’s term, Jan. 10, 2011. Governor-Elect John Kitzhaber will appoint a new DCBS director, who will then decide if any additional staffing changes are necessary, according to Lisa Morawski, spokeswoman for the DCBS. The state Insurance Division falls under the DCBS, but no personnel changes have yet been announced, she said.
  • Arizona, Nevada and Wyoming’s new governors also may choose to name new commissioners.
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