Emerging Issues for the P&C Industry

1. Emerging Issues for the P&C Industry AICP Heartland Chapter Education Day 2008 Mark Smith CPCU, AIS, API Insurance Services Office, Inc.

2. Agenda • Studying Emerging Issues • Climate Change: Insurance Implications • Green Building Construction • Smart Cars/ Smarter Roads • Optional Federal Charter • Questions

3. Studying Emerging Issues

4. Why We Study Emerging Issues • Stay ahead of the game • Improved awareness of hot topics • Potential insurance implications

5. Where We Get Information • Litigation • Scientific studies • Futurists • Newspapers • Claims units • Management team • Panels • Input from speeches

6. Issues to Which We’ve Responded • Mold • Welding Rods • Identity Theft • Personal Injury • Virus/bacteria Exclusion • Artificially Generated Electrical/Magnetic Energy

7. Climate Change: Insurance Implications

8. Global Warming • Simplest terms: increase in the average temperatures of the Earth's near-surface air and oceans and its projected continuation. • Common usage: "global warming" refers to the warming in recent decades and implies a human influence.

9. Global Warming –Greenhouse Gas Effect • The ability of the atmosphere to capture and recycle energy (heat) emitted by the Earth’s surface • Greenhouse Gases - primarily water vapor, carbon dioxide, methane gas and ozone • Increasing amounts of greenhouse gases trap solar heat that would have escaped the Earth’s atmosphere

10. Intergovernmental Panel on Climate Change (IPCC) • In February, 2007 the UN panel studying climate change (IPCC) found: • Warming of the climate system is unequivocal; • Human activity has “very likely” been the driving force in climate change over the last 50 years; • The probability that warming is caused by natural climatic processes alone is less than 5%; • World temperatures could rise by between 1.1 and 6.4 °C (2.0 and 11.5 °F) during the 21st century;

11. Intergovernmental Panel on Climate Change (IPCC) • Sea levels will probably rise by 18 to 59 cm (7.08 to 23.22 in) • There is a confidence level >90% that there will be more frequent warm spells, heat waves and heavy rainfall. • There is a confidence level >66% that there will be an increase in droughts, tropical cyclones and extreme high tides. • Debate moving from whether humans are warming the planet to what we can do about it

12. Catastrophic Effects of Global Warming • Tropical storms stronger and last longer • Increased occurrence of drought; reduced water supplies; declining agricultural yields; • More flash floods; coastal inundation; • More frequent heat waves- more wildfires

13. Risk Management Strategy: P/C Perspective • 2005 Ceres Report: www.ceres.org • Climate changes will result in more claims/higher costs; • More political and financial burden on governments to respond; • 2005 CSPP Report: www.scienceand policy.org • Ceres report flawed - science weak

14. Risk Management Strategy: NAIC Task Force • Dec. ’07 Draft White Paper: • Regulators must develop tools to evaluate climate change insurance risk; • Disclosure is a primary tool; • Feb. ’08 Draft Disclosure Proposal: • Emissions Disclosure; • Strategic Analysis of Climate Risk; • Regulatory risk; • Physical Risk • Proposal still open for comment;

15. Property and Liability Claims • Damage to property is the most obvious and most widely discussed consequence of climate change • Emphasis is increasing on the potential claims of 3rd parties who allege BI or PD • Such BI and PD may allegedly be caused by corporations or other emitters of greenhouse gases

16. Potential 3rd Party Liability Litigation • Question: Will emitters of greenhouse gases be held liable for the impacts to third parties from their contribution to global warming and climate change? • Will commercial liability insurers be required to defend their insureds against such suits?

17. Insurer Involvement • Insurers insure carbon-intensive industries • Auto manufacturing, utilities and oil industries • Homes, autos and planes • All contribute to greenhouse gas emissions • Even if suits are unsuccessful, defense coverage is broad and defense costs are a major concern

18. Greenhouse Gas as Pollutant • EPA has not regulated greenhouse gas emissions – UNTIL NOW • Recent Supreme Court decision (Mass. v. EPA) may change EPA focus • Court found greenhouse gases are within Clean Air Act’s definition of pollutants • EPA now has authority to regulate greenhouse gases

19. CGL Policy Analysis • Definition ofOccurrence: An accident, including continuous or repeated exposure to substantially the same general harmful conditions • Do claims of damage from alleged global warming activity involve an “occurrence”? • Indemnification will depend on facts presented and established during litigation

20. CGL Policy Analysis (Cont’d) • Expected or intended exclusion: Did the policyholder expect or intend BI or PD through its emission of greenhouse gases? • Pollution Exclusion: Supreme Court’s decision that greenhouse gases are pollutants could be beneficial to insurers • Timing: Claims could extend back to before pollution exclusions appeared in policies

21. Risk Management Strategy: P/C Perspective • Executives should assess current and probable environmental risk exposure • Possible exclusion for climate change lawsuits from D&O policies • Business continuity planning as a prerequisite for writing business interruption coverage

22. Strategy: Property and Liability Perspective (Cont’d) • Encourage “Green Building”: • Provide coverage for rebuilding damaged property using “green” building practices • Provide credits for owners of such buildings • Warmer temperatures and more moisture  increased mold • Brown outs/grid failures/heat waves  health concerns

23. Strategy: Property and Liability Perspective (Cont’d) • Pay-as-you-drive insurance or mileage-based discounts • Discounts for hybrid cars • Solar power: coverage for homeowners who generate their own power

24. Global Warming • http://globalwarming.org/ • http://pewclimate.com

25. Green Building Construction

26. Green Buildings • Historically, green building efforts had not achieved broad market acceptance • US Green Building Council’s Leadership in Energy and Environmental Design (LEED) Green Building Rating System • Many federal and state buildings must meet LEED requirements • Increasing support from large cities • LEED is the relied upon rating system for green buildings

27. LEED Rating System • Building can be rated as Platinum, Gold, Silver or Certified • Rating based on the number of points achieved according to a checklist • Applicable to: • New construction • Existing buildings • Commercial interiors • Core and shell development • Residential construction

28. LEED Criteria • Takes into account: • Sustainable sites • Water efficiency • Energy and atmosphere • Materials and resources • Indoor environmental quality • Innovation and design

29. Green Building Requirements • Washington: In 2005, became the first state to enact green building legislation • Boston: Zoning Commission approved amendments to zoning code requiring buildings over 50,000 sq feet to be certifiable • District of Columbia: Green Building Act of 2006 - private non-residential construction projects of 50,000 sf or more. • 6 states: AR-CT-LA-MD-NV-WA have green bldg. mandate for govt. projects • Kansas City: www.usqbckansascity.org

30. Reduced Loss Exposure • Energy-efficient light: less heat and reduced fire hazard • Cement panels: reduce wood content -more resistant to mold, wind, EQ, fire • Energy-efficient windows: resist shattering from heat and resist breakage by thieves

31. Reduced Loss Exposure (Cont’d) • Grid-independent solar power systems: limit business interruptions • High-efficiency/dry fixtures (i.e. compost toilets and occupant sensors) reduce sewer back-ups/burst pipes • Increase reflectivity of rooftops-lower bldg. temperatures (reduce fire loss)

32. Insurance Implications Incentives • Potential for insurance credits • Optional coverage for upgrades to meet requirements: • Ordinance or law coverage • Increased cost of construction additional coverage • Industry Programs

33. Insurance Implications - Costs • Architect’s and design professionals- increased exposure? • Increased cost of green building practices • Damage to solar panels: increased replacement costs; freezing and leakage perils • Impact on performance bond market

34. Smart Cars – Smarter Roads

35. Basics of Smart Cars and Roads • Purpose is to prevent accidents and ease traffic congestion • While cars would begin to have these features, a full system, including intelligent roads, would most likely not appear until the 2010’s

36. Four Categories • Driver Related: • Alarms for “lane drift” • Blind spot monitors • Night vision • In-car breathalyzers • Vehicle Related: • RFIDs embedded in roads • Traffic lights that transmit information about status • Cars “talking” to each other (safe breaking distances, in your blind spot) • GPS information about traffic patterns up ahead

37. Four Categories (Cont’d) • Recorders • EDRs record information at the time of an incident • VDRs (commercial applications) record or transmit information about vehicle and driver • Number of hours driving without a break • Use or condition of vehicle equipment (such as a cement drum turning) • TEEN BLACK BOX

38. Four Categories (Cont’d) • Law Enforcement • Signs that transmit speed limit • Driver’s license standards • The DNA traffic stop • Tolls, meter and road tax collection

39. Equipment • Cars and roads equipped with computers, cameras, GPS and transmitters form communication • Cameras would identify intersections, stop signs and stop lines • Communications would include location of vehicles and their rate of travel to avoid collisions • The on-board computers would determine if a vehicle is stopped ahead or blocking an intersection • Brake and steering assistance would be provided

40. The Little Black Box • First EDRs 1974 (NHTSA); all GM and Ford models today (over 40 million vehicles) • Typically records air bag, seatbelt and brake status, speed of vehicle and engine, throttle position and velocity change • 10 milliseconds increments for 5 seconds • In collision, if bag deployed, data stored indefinitely; if not, stored for 250 starts • Automatic transmission to call center with GPS coordinates

41. New NHTSA Regulation • Takes effect with 2011 models • Requires EDRs in vehicles with a GVW of 8,500 pounds or less to record 15 essential data elements and up to 30 additional elements • Institutes uniform requirements for the accuracy, collection, storage, survivability and retrieval of motor vehicle crash event data • Standardizes the data • Requires manufacturers to make a retrieval tool commercially available • Requires manufacturers to include standard disclosure

42. Driver’s License Standards • The Real ID Act established standards for driver’s licenses • Documents required to obtain license • Verification procedures • Information (full legal name, principal residence) • Security against forgery • Machine readable, including facial-recognition technology pictures • Effective 5/11/08; option to 12/31/09 • States can opt out, but their licenses wouldbe useless for federal purposes

43. Driver’s License Standards (Cont’d) • States must link their record-keeping systems to national databases • States must mine multiple databases to check the accuracy of supporting documents • Requires proof of legal residency – run the application through SAVE (a federal database to prevent illegal immigrants from receiving federal benefits) • Background check on motor-vehicle employees

44. Concerns • Humans react better than computers • EDR and VDR information could one day become the DNA of an automobile • Accidents will be less frequent, but likely more severe, because the increased cost of vehicles will mean they will be more expensive to repair when the car incurs damage

45. Some Car Rental Contracts • Make insurance coverage invalid if the renter • breaks the law • drives outside agreed rental area • Could increase carriers’ exposure even when renter takes out additional damage waivers • Charge for excess wear and tear on car from speeding, off-road use

46. Personal Privacy • EDR and VDR data has already been used in civil and criminal highway-accident cases • Some states already have laws • regulating the ownership and use of EDR data • that insurers cannot put wording in the cooperation clause requiring insureds to provide EDR info • Cameras to watch your teenage driver

47. Auto Hackers • Hackers are starting to target autos with on-board computer systems • Possibilities include unlocking doors and disabling the car • It’s also possible to replace OEM processors with processors that enhance performance

48. Underwriting Implications • Vehicle equipment/technology could become more important in underwriting and rating • Insurers may need to consider driver’s “techie” skills • New vehicle equipment will impact pricing • Identifying vehicle features difficult if not VIN coded • Territories may need to consider existence of “smart roads” • Endorsement for policy – credit to voluntarily provide EDR information to insurer in case of an accident

49. Challenges to Underwriting and Rating Criteria • The basis of the insurance mechanism is to be able to fairly distinguish among classes of risk for purposes of applying proper coverage provisions and obtaining adequate premium • The industry has been accused of discrimination at times for some of its practices • It is possible that these accusations will increase in the future • Should we be investigating alternative methods for categorizing degree of risk?

50. Optional Federal Charter