“It Can’t Happen Here?” Wrong!

Okay, so my rantings about what a great insurance market the Midwest is have come back to haunt me. Evidently we’re just as vulnerable as any other region of the country or the world. Look what happened on Nov. 6, as a tornado sneaked up on southern Indiana and Kentucky, killing 22 people and injuring 230 (see News Currents, p. 6). Although preliminary estimates indicate “only” about $10 million in insured losses, the tornado was a wake-up call for anyone who thinks the flatlands are safe from catastrophes of one kind or another.

In fact, we’re not even immune to catastrophes of a different sort–such as ridiculous jury awards. A case out of normally rational Minnesota, in which a jury awarded the family $720,000 in a loss-of-relationship claim (see News Briefs, p. 28), has some observers worried about a chilling effect on future settlements and the cost and availability of both private passenger and commercial auto insurance.

Tort awards like these continue to be the major driver of rates and availability for commercial auto coverage, according to our sources in the Midwest. Although rates have stabilized in this line of business, it definitely helps in states where there are reasonable courts, lawmakers and regulators.

Brian Sullivan, who publishes regular surveys in his Auto Insurance Report, points to Ohio as the poster child for tort reform. Insurer loss ratios for commercial auto in the Buckeye State were a staggering 107.2 percent in 2000, coinciding with some bad state Supreme Court decisions that expanded coverage and forced insurers to increase reserves and raise rates. Since then, with the help of some reversals and more friendly legislation, loss ratios dropped to 38.8 percent in 2004 (although Brian is quick to point out that Ohio’s results are not typical).

Of course, everyone is waiting for the other shoe to drop after reinsurance treaty renewals happen on Jan. 1, 2006. Whether or not the huge property hits incited by an unprecedented hurricane season will have an effect on other markets remains to be seen.

However, whether rate increases are dramatic or negligible, this year’s catastrophic events have made it clearer than ever before how interconnected we are–not only as an industry, but as a world. Catastrophes along the Gulf Coast, southern Indiana, or a Minnesota courtroom affect us all. Sticking our heads in the sand–whether that sand is here in the Midwest, Washington, D.C., or Kyoto, Japan–is no longer an option.