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October 17, 2005

Farmers Insurance Group of Companies Announces Hybrid Vehicle Discount in California; Farmers is First in Offering Hybrid Insurance Discount in the U.S.

hybrid.jpgThe Farmers Insurance Group of Companies announced it is the first in the U.S. to offer an insurance discount to customers who own a hybrid or alternative-fuel vehicle. The discount amount will be 5% for auto customers in California.

"Customers are opting more for vehicles with environmentally friendly hybrid or alternative-fuel engines, and that trend is expected to continue because of high gas prices and a growing number of hybrid models," said Kevin Kelso, President of Personal Lines at Farmers. "We are happy to offer drivers who are concerned about the environment a discount," added Kelso.

Hybrid vehicles draw power from two energy sources, typically a gas or diesel engine combined with an electric motor. According to R. L. Polk & Co, a firm that collects and interprets automotive information, California tops the list for the number of registered hybrid vehicles in the U.S. In 2004, over 25,000 hybrid vehicles were registered in the state of California -- a 102% increase over 2003. The use of alternative-fuel vehicles -- vehicles that utilize biodiesel, electricity, ethanol, hydrogen, natural gas, and propane -- has also increased in California from 66,366 vehicles in 2001 to 77,761 vehicles in 2003.

"In order to make our air clean in California , it's going to take everyone working together. That means, not just individuals but government and business as well," said Councilmember Eric Garcetti. "We are proud that a Los Angeles-based business is taking the lead in encouraging Californians to drive environmentally sensitive cars."

"The era of the cleaner-burning vehicle is upon us as we're seeing more and more hybrids on our streets and highways," said Councilmember Tom LaBonge. "This program initiated by Farmers Insurance is sure to accelerate the popularity of these hybrids, and I thank them for this great initiative."

The discount, effective October 1, 2005, is for all customers who own a hybrid or alternative-fuel vehicle. All new business customers will receive the discount as of the new business date, and existing customers will receive the discount upon renewal.

Posted by Tom Troceen at 05:52 PM

Ernst & Young Insurance Industry Outlook Identifies Trickle Down Impact of New Legislation and Regulatory Requirements; Companies Must Move Beyond Pure Compliance

The Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP today released its quarterly outlook identifying the need to take risk management beyond legislative and regulatory compliance to the next level. As a result, insurers should consider conducting a "Bottom Up Risk Analysis" as well as transforming their actuarial risk measurement processes and corporations should reexamine the role of the risk manager.

Bottom Up Risk Analysis... First Step in the ERM Journey

Enterprise risk management (ERM) long recognized as an important objective, but placed on the back burner, is beginning to move to the top of the "CFO to do list" as companies become increasingly sensitized to the heightened need for enhanced risk governance, management and measurement. This includes an acknowledgment that there needs to be a more disciplined approach to risk measurement and risk management.

The first step for organizations looking to implement ERM is a Bottom Up Risk Analysis. Conducted by management and approved by the board of directors, the analysis must account for insurance risk, catastrophe risk, credit risk, market risk, operational risk, etc....with a defined corporate risk profile as the end product.

The corporate risk profile serves as the cornerstone for the development of an ERM strategy. It allows senior management to set risk policy and risk tolerances and offers a guide for assessing risk management and measurement processes and controls.

"Insurance companies are recognizing that when it comes to risk governance the minimum acceptable standards are not enough anymore," explains Doug French, Global Director, Insurance and Actuarial Advisory Services (IAAS), Ernst & Young LLP. "In the new regulatory environment, smart companies are creating best practices which will pay off for their stakeholders in the end."

Actuarial Transformation(SM)... Relieving the Growing Pressure

With the emergence of options and guarantees in insurance products, increasing external scrutiny from analysts and rating agencies and emphasis on the true economics and risks is driving the trend from rules-based to principles-based financial reporting with a significant added push coming from the NAIC in the form of upcoming C3 Phase II regulatory capital requirements. As companies prepare to make the shift there is further pressure on the actuarial function, which in many cases, is already struggling to keep pace with the ever increasing needs and complexity of the business.

It is becoming clear that existing actuarial systems and processes will need to be overhauled. As a result, leading companies are transforming their actuarial financial and risk measurement capabilities by implementing next generation software tools, redesigning their key actuarial processes, dramatically increasing computing power, and utilizing technology more effectively to achieve integrated and automated solutions.

"Trying to maintain the status quo in an increasing complex risk environment is a formula for failure," explains Michael Hughes, Senior Actuarial Advisor with Ernst & Young's IAAS. "With the significant level of regulatory and business changes that have occurred in the last few years band-aids won't cut it. It is time for a true overhaul."

404 Domino Effect... Reinventing the Role of the Corporate Insurance Risk Manager

To date, the job of the corporate risk manager has been focused on the purchase of insurance and the management of risks for which a transfer market exists. The passage and implementation of Sarbanes-Oxley 404 ("404") compliance has also changed the strategic role of the risk manager, or at least it should. Corporate risk managers must expand their knowledge base and interaction with accounting and internal and external audit in order to understand the results of 404 implementation and its impact on the risk management process. Information gathered from 404 can have a significant impact on risk identification, measurement, prioritization and assessment, affecting the marketing, financing and monitoring of the corporate insurance programs.

The imperative to identify and document risks and controls and monitor those enterprise risks has created an opportunity for risk managers to become involved in C-level strategy and planning. To perform in this expanded role, new skills and tools will be necessary as risk managers must be able to present ideas and strategies which dovetail with the goals and objectives of their audit committees. They will also need to decipher senior management concerns and then provide well-versed perspectives and solutions for operational and financial risk solutions to protect employees, assets and key stakeholders.

"There is an opportunity today for risk managers to serve in the executive suite as risk champions for their organizations," explains Bruce Zaccanti, National Practice Director with Ernst & Young's IAAS Insurance Risk Management practice. "Their success hinges on their ability to see the big picture, communicate clear and concise insurance information in the context of the balance sheet and financial statement account impact. They also need to be able to confirm to management that they have protected the interest of the employees, assets and shareholders while optimizing the use of corporate resources."

Posted by Tom Troceen at 05:51 PM

October 05, 2005

Aon Re Study: Poor Fundamentals in Homeowners Insurance Market in Hurricane- Prone States Should Lead to Significant Change

katrina.jpg Even before Hurricane Katrina made landfall, homeowners insurers in coastal states knew their returns were insufficient to sustain the capital required to support the growing exposure to catastrophes. An Aon study, released today, underscores this fact -- average expected results for homeowners insurance in hurricane-prone states are insufficient to cover the cost of capital.

Randall Brubaker, head of the ratemaking support practice of Aon Re Services, Inc. commented, "Many factors combine to create the continual need for higher premiums from homeowners in coastal states. These factors include constant population growth on concentrated coastlines, increasing home sizes and values, expansion of coverage through changing interpretations of policies or statutes, and an increase in the frequency of hurricanes making landfall."

While these factors generate higher premium requirements, strong resistance from regulators and consumer advocacy groups artificially delay the inevitable rise in premiums for policyholders and accelerate insurer downgrades and insolvencies. Policyholder choices are limited in most coastal states.

After Hurricane Katrina and the four significant hurricanes of 2004, the underlying assumptions about the frequency and severity of storms will be adjusted by insurers to reflect their experience and expectations for the future. Capital levels have deteriorated so significantly for homeowners insurers that operating results must now generate new surplus to support even current risk levels. Coastal states insurance results are far from returning the cost of capital required to support operations.

Other states have had their own challenges through the past decade. With rate changes and other underwriting changes many of these states are producing returns consistent with the cost of capital. While several non-hurricane- prone states appear to be competitive, simply earning the cost of capital is not sufficient to sustain competitive markets for policyholders nor does it allow cushion for any significant unusual events.

New underwriting strategies better incorporating the component costs of catastrophe risks, including more conservative views of the uncertainty associated with such risks, will be formulated over the course of the next year, particularly in hurricane-prone states. Bryon Ehrhart, president of Aon Re Services, Inc., commented, "Policyholders likely have a better appreciation for the value of homeowners insurance given recent events and should expect that insurers may need to raise rates to continue to provide their critical service."

Posted by Tom Troceen at 02:52 PM