An article in today’s Wall Street Journal got me thinking about how to put the BP oil spill into perspective.

 The gist of it is that although insured losses from the Deepwater Horizon Gulf Coast oil spill could reach $3.5 billion insured, according to Moody’s, this disaster and the volcanic ash mess earlier this year could end up being a shot in the arm for the insurance industry. In the case of the oil spill,  80 percent of the losses will be carried by self-insured BP, and the volcanic ash thing had little impact on insured losses. The “upside” is, insurers will be able to hike rates on property coverage for oil rigs and offshore energy liability insurance to reflect the increase in risk.

The article concludes:

This would provide some welcome relief for an industry that for years has suffered from declining prices and volumes, because demand for cover declined in the absence of large catastrophes.

Talk about turning lemons into lemonade. You can see this oil spill from space and it’s threatening the whole Gulf Coast, Florida Keys and Cuba, but heck, the insurance industry is happy because we might be able to raise rates.

I don’t know about you, but that doesn’t seem like much of a reason to celebrate.

Last week, III came out with a comprehensive study on the impact of Deepwater Horizon and the possible fallout we can expect to see in the insurance industry. True, the industry may only end up shouldering 20 percent of the direct p-c losses, but a disaster of this magnitude will doubtless spread just as inexorably as the oil itself to all areas — especially as the litigation sharks begin to circle (as of May, 110 lawsuits and counting).

According to III, first- and third-party insurance policies that will take the biggest hits are:

• Business interruption/loss of production income
• Comprehensive general liability
• Environmenta/pollution liability
• Operators’ extra expense (provides coverage when controlling well after a blowout)
• Physical damage
• Workers’ compensation/employers liability

 One of the biggest insurance angles of this story, however, doesn’t lie in potential claims or rate increases, but in risk management — or lack thereof. With the U.S. Attorney General announcing that federal authorities were opening criminal and civil investigations into the spill, it’s likely that a host of risk management oversights will come to light, including increasing pressure on the Minerals Management Service and its lackadaisical regulation of offshore drilling.

In fact, based on the number and magnitude of oil spills over the last 20 or so years, nuclear power plants, in spite of their bad press, are beginning to look like paragons of safety in comparison (there’s an interesting blog on the subject here).

And as far as pinning hard-market hopes on Deepwater fallout, I wouldn’t hold my breath — everyone expected that a hard market would be inevitable after the losses of Hurricane Katrina, but it didn’t happen. Given the fact that there’s still plenty of capacity in the market, it seems unlikely that a single event, even as big as this oil spill, will cause the soft market to magically disappear.

Once again our readers gave it to us with both barrels when we asked them in an online poll what they thought about the fracas in Florida between State Farm and the coastal property insurance market.

Our question centered on what will happen to the current State Farm agency force when the company pulls out of the state–and, if they’re allowed to compete as independent agents, whether they present a threat to independent agents.

When asked if State Farm agents in Florida should compete with independent agents, 37.5% said yes, while 62.5% said no.

When asked if they would be worried about the competition if they were doing business in Florida, 31.25% said yes, and 68.75% said no.

As usual, the individual comments are the best:

“I wouldn’t even think of living there. State officials are nuts.”

“Maybe they could all get contracts with Allstate.”

“Florida CFO: butt out. The State Farm agents signed the contract.”

“State Farm AND its agents have both made a fortune from the clients they ‘served.’ Get the company out of Florida and let their agents resign from the company.”

“If this really does happen, most State Farm agents will find a way to open an independent agency, whether licensing their spouse or other trusted person, and move the business. I feel they have had a good run with State Farm in the past and never paid attention to the independent market because they enjoyed favorable pricing. You live by the sword, you die by the sword.”

Although the pundits are still predicting the end of the soft market, most agents and brokers responding to CIAB’s Commercial P/C Market Index Survey reported an average 6.4 percent decrease in commercial rates for fourth-quarter 2008. Forty-three percent of respondents said premiums for small accounts were down from 1 to 10 percent, with 35 percent reporting no change compared with the third quarter. For medium accounts, 50 percent said premiums were down between 1 and 10 percent while 17 percent saw decreases in the 10 to 20 percent range. Eighteen percent saws no change in rates compared with last quarter.

Not surprisingly, one of the few exceptions was in D&O coverage, where 17 percent of respondents reported a 1 to 10 percent increase in premiums, while 36 percent reported no change and 21 percent said rates declined between 10 and 20 percent. Other lines that show single-digit signs of tacking upward included business interruption, broker E&O, commercial property (especially in coastal areas), flood insurance, EPL, marine and workers’ compensation.

For the complete survey, click here.

God knows our economy and the property-casualty industry are engulfed by what seems like an endless bank of dark clouds. But the Big I’s new “Agency Universe Study” suggests that there may be a silver lining in there somewhere (or as the optimistic kid said on finding a pile of horse manure under the Christmas tree, “There must be a pony somewhere!”).

First off, the number of independent agencies has stabilized since the 2006 study. Although down from an estimated 44,000 agencies in 1996, this year’s 37,500 is roughly the same as 2006, suggesting that many of the dire predictions about the demise of the small to midsized independent agent may be premature — and that the M&A boom of recent years is bottoming out.

But the real surprise is not the slowdown in M&A activity, but the increase of small (revenues of $150,00 and under),  start-up agencies — 11 percent of survey respondents were founded in 2004 or later (including 4 percent that launched in 2007 and 2008).

Another interesting point that quantifies what I’ve been hearing from agents is that a lot of this growth is around personal lines, especially in the South Atlantic and West South Central coastal areas where direct writers are reluctant to tread (we’ll tackle the personal lines issue in the February AA&B). These new agencies are deriving 48 percent of their insurance revenue from personal lines commissions.

The survey’s other major findings include:

• Declining revenues due to the soft market and shifting premiums, more common among medium-small and medium agencies (with $150,000 to $1.2 million in revenues), with 23 percent reporting average decreases of 10 percent
• More efficient operation through use of technology with fewer employees, with agencies employing 9 full-time employees in 2008 versus 11.2 in 2006
• Improved satisfaction with carriers, with more than one-third finding business planning with their No. 1 carrier very valuable
• Reduced usage of customer service centers, with only 24 percent of agencies using them
• More carrier representation for personal lines, with an average of 6.2 carriers
• Increased concern about controlling expenses and reinvesting

It seems to me that the really good news in these varied findings is that agents are finding creative ways to get around the problems of the economy and the soft market by providing consumers with a viable alternative to the ducks and the cavemen through more efficient service, increased personalization, and a choice of carriers. And that indeed means a pony is in the wings.

To hear a more in-depth perspective of the Agency Universe Study findings, listen to our interview with  Madelyn Flannagan, Big I’s vice president, education and research, at the podcast portion of the AA&B Web site at http://www.agentandbroker.com/Media/PodcastItems/FlannaganFinal.mp3.

As I’m writing this from drizzly and overcast Chicago, Hurricane Ike is bearing down on the Texas panhandle, predicted to strike late tonight and Saturday morning. In Galveston, which is at the epicenter of the approaching storm, half the island is already under water.

Garry Kaufman, president of Galveston Insurance Associates, took a moment to speak with me this morning about what his firm is doing to get out of harm’s way and prepare for the influx of claims (the agency is about evenly split between commercial property/casualty insurance and commercial lines).

 ”The office is secure, the employees are gone, and management and staff have gone 100 miles inland to set up shop,” he said.

Garry closed up his office yesterday and as of about noon, the agency had all its servers and computers on a trailer headed to College Station, Tex., 130 miles north of Galveston. “We rent server space at a housing facility, where we have 10 work stations and our management staff checked into a hotel there.” This means that the agency’s phones and Internet service will be working when his customers start calling with claims.

Garry himself plans to ride out the storm from his home 30 miles north of the city, where he will be able to process claims manually if needed. “I was going to stay on the island, but as bad as it’s flooding now, I didn’t want to get stranded,” he said. However, his office is ready with generators so the agency will be able to service its clients whether or not power is out.

Although the severity of the situation is similar to 2005, when Hurricane Rita struck, the area seems better prepared to handle evacuations this time. ”For Rita, I stayed in  Galveston, but my folks evacuated, and it was a nightmare,” he recalls. “This time, Galveston and Houston have done a great job and the highways are wide open.”

Garry’s agency has had a solid disaster plan in place for a long time, subscribing to Agility Recovery Solutions,  a nationwide company specializing in disaster recovery. The service can provide them with a double-wide trailer with 40 workstations if the office is destroyed, or assistance with generators and computers if damage is less severe.

Garry has nothing but praise for Fidelity National Insurance Co. and the Texas Windstorm Insurance Association, both of which do an excellent job in handling claims and having adjusters on the ground quickly after disaster strikes. “I wish I could say something nice about the big carriers, but they’ve all stopped writing windstorm and flood coverage in my area,” he adds.

When I compliment him on his disaster preparedness, Garry shrugs it off. “We can’t afford to be complacent. If our customers didn’t count on us, we could be, but we’ve got too many folks depending on us. We’ve been around since 1892, and we know we’ve got to do everything we can to help our customers. Most residents will have a flood claim, and our phone will start ringing the minute this is over.”

In my latest column in the August AAB, I write about the recent proposal by Travelers and Nationwide to establish a coastal wind coverage plan, hinging on federal legislation (drop by our podcast page at www.agentandbroker.com to hear an interview with Travelers’ Eric Nelson on the subject). No sooner was the virtual ink dry on my comments when The Hartford announced its own version of a public-private plan to address natural catastrophes, including a federal backstop for insurers.

Of course, State Farm and Allstate have their own long-standing proposal that includes a call for state and federal cat funds as backstops (see www.protectingamerica.org).

The cool thing about the Travelers proposal is that it has the blessing of both the Big I and the Council, giving it the official thumbs-up for retail agents and brokers.

All this seems to beg the question that was at the heart of the whole Hurricane Katrina fiasco — and that’s the differentiation between flood and wind losses on the standard property insurance policy.

Before its affiliation with the Travelers proposal, Nationwide made headlines by proposing an expanded homeowners policy that would include flood coverage at the same price as the National Flood Insurance Program coverages. (Meanwhile, Congress still hasn’t reauthorized NFIP, in large part because of the outcry against a House proposal that wind be added to its coverage.)

Assuming your clients own property in a high-risk coastal area, which proposal makes the most sense to you?