Monthly Archives: July 2024

Insurance News, Legal Environment

Agents Play Critical Role in Navigating Impacts of Legal System Abuse on Customers

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Legal system abuse, including frivolous lawsuits and inflated claims, is driving insurance claims costs to record highs, particularly in liability lines, disrupting the industry and impacting policyholders, insurers and independent agents, according to Triple-I.

Defining and Understanding Legal System Abuse

Legal system abuse involves actions that unnecessarily increase the costs and time required to settle insurance claims. Examples include filing frivolous lawsuits, inflating claims, ubiquitous attorney advertising that glorifies lawsuits and promises big payouts, and third-party litigation funding (TPLF), Dale Porfilio, Triple-I’s chief insurance officer, wrote in an article published in Agent for the Future. In TPLF, hedge funds and other financiers invest in lawsuits in exchange for a percentage of any settlement or judgment, which can incentivize holding out for bigger payouts and drawing out litigation.

These abusive practices increase claims costs while being nearly impossible for insurers to forecast and mitigate. Legal system abuse often compounds with other elements like economic inflation to further shift loss ratios and disrupt cost forecasts, making claims management even more challenging, Porfilio said.

“It is one driver of the market that we see right now,” noted Luke Bills, president of independent agent distribution at Liberty Mutual and Safeco Insurance. “Carriers start to withdraw. That’s a huge impact for independent agencies. We’re starting to see this across all lines of business.”

The effects of excessive claims costs due to legal system abuse ripple through the entire insurance industry, impacting policyholders, insurers and agents alike, according to Porfilio.

As claims payouts and premiums rise, it becomes more difficult for agents to sell coverage. Insurers may also pull back on the types of risks they are willing to cover, diminishing coverage availability in the market. Understanding and deterring legal system abuse is crucial for maintaining a healthy, affordable insurance market for all.

Role of Agents in Deterring Abuse

As legal system abuse threatens insurance coverage availability and affordability, agents play a crucial role in mitigating its effects on customers. By being proactive in client conversations, staying engaged with their customer base, and offering guidance throughout the claims process, agents can help their clients navigate the challenges posed by legal system abuse and remain a trusted advisor in an increasingly complex insurance landscape, Porfilio emphasized.

According to Bills, agents should be the policyholder’s first call after an insurable event. “We are seeing a significant increase in attorney-represented claims coming in at first notice of loss,” he said, noting that this trend is becoming more common even in personal lines.

At the point of sale, agents can discuss best practices for managing risks as part of the conversation on coverage options. They can also guide clients through the claims process when an insurable event arises.

To help curtail legal system abuse, Porfilio suggested that agents may want to consider integrating the following guidelines into their operations:

Know your customers to understand their financial situation and coverage needs. Adequate coverage is an integral component of a strong financial management plan, and agents should be ready to point clients to pertinent resources.

Be proactive in conversations about rising rates and help clients explore affordable coverage options that work with their budget. Explain that insurance rates rise for everyone due to more frequent claims and higher claims costs.

Stay engaged with your client base to increase awareness of policy responsibilities and the pitfalls of legal system abuse. Use communication channels, such as e-newsletters, to share tips on avoiding scams and understanding agreements like assignments of benefits.

Reach out proactively when you realize a client may have experienced an insurable event. Offer to answer questions and guide them through the claims process, reminding them that attorney and third-party involvement can significantly reduce their portion of any payout.

Industry Financials, Insurers and the Economy

Economic & Actuarial Analyses Ensure Our
“Best Pick Is Our Last Pick”

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By Lewis Nibbelin, Guest Blogger for Triple-I

Insurance underwriting and pricing require a clear view of loss experience and reliable economic projections. Today’s dynamic environment – marked by historically high inflation, climate-related risks, and regulatory constraints that vary widely by state – complicate such projections while making them more important than ever.

“Actuarial ratemaking is prospective in nature, but you have to look at history to be able to do that,” explained Dale Porfilio, Triple-I’s Chief Insurance Officer and President of the Insurance Research Council (IRC), in an interview for the All Eyes on Economics podcast. “A core part of that actuarial ratemaking is to say, ‘How are losses different? How have they trended? How are they going to grow?’”

Current economic uncertainty – particularly via rising replacement costs and high general inflation – presents a myriad of evolving factors many actuaries may struggle to contextualize.

“It just takes a while to get through the timeline of claims occurring and losses getting paid,” Porfilio told host and Triple-I Chief Economist and Data Scientist Dr. Michel Léonard. “We can already be in a cycle of increasing or decreasing inflation, and you won’t see it in losses yet… You’re going to see it faster from economic indicators than you’re going to see it in insurance.”

For economists and actuaries alike, projections are data-driven inferences. Using multiple data sources and various forms of sophisticated analysis all strengthen the precision of those inferences.

For example, IRC – like Triple-I, an affiliate of The Institutes – is developing a database that aggregates detailed personal auto injury claims information from numerous insurers. It encompasses five and a half years’ worth of data on not only the total claim payout, but the specific injuries and care within each claim file.

A database of this magnitude has the potential to help insurance carriers improve the accuracy of pricing and underwriting. More important, this research will help policymakers and carriers identify opportunities to reduce claim costs, which can improve the affordability of personal auto insurance.

Ultimately, synthesizing diverse perspectives reduces the role of luck for insurers when setting rates. 

Triple-I works to provide a “combined wisdom,” Porfilio said, through the quarterly Insurance Economics and Underwriting Projections: A Forward View, a joint report with Milliman. The report presents an underwriting projection model which – by using P/C replacement cost indices and economic growth data as leading indicators – is both actuarially and economically sound.

Understanding economic trends is crucial, but understanding how risk influences these trends is equally important. Ongoing geopolitical risk, for instance, continues to strain global supply chains, and integrating this information into underwriting projections is one way to build resilience against disruptions.

“Learning to speak as an economist or an actuary is another language,” Porfilio said, and resources such as Triple-I’s Chart of the Week serve to simplify the sharing of economic research for insurers and consumers.

This wealth of available data analysis ensures that “our best pick is our last pick,” Porfilio said. “We’re always putting our best answer on the page to share the best insights that we can…and educate and inform as wide of an audience as possible.”

The full interview is available now on Spotify, Audible, and Apple.

Auto Insurance, Homeowners Insurance, Insurers and the Economy, Market Conditions, Workers Compensation

NCIGF Moves Ahead
to Support Insurers

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By Max Dorfman, Research Writer, Triple-I

For the last 35 years, the National Conference of Insurance Guaranty Funds (NCIGF) – an organization dedicated to serving 55 property/casualty state guaranty funds – has provided operational support; communications, education, and outreach; as well as public policy management for these organizations.

State guaranty funds make up a privately funded, nonprofit state-based national system that pays covered claims up to a state’s legally allowable limits, protecting policyholders if their insurer becomes insolvent. There are 55 such funds because some states have more than one.

“All states have a property/casualty guaranty association, and some have a workers compensation guaranty association,” NCIGF President and CEO Roger Schmelzer explained in a recent “Executive Exchange” with Triple-I CEO Sean Kevelighan.

“We’re not claims payers,” Schmelzer said, “We try to do things for our members that they wouldn’t be doing for themselves or that it’s better to be doing in one place.”

For nearly five decades, the guaranty fund system has paid out more than $35 billion to cover claims against about 600 insolvencies.

“Through the years, the system has successfully met every challenge that’s come its way, and has been instrumental in supporting the insurance promise,” Schmelzer said.

NCIGF recently announced its updated organizational strategy, which focuses on:

  • Pre-liquidation planning with regulators and receivers,
  • Understanding and preparing for the changing landscape in insolvencies, and
  • Seeking shared solutions to common problems among state associations.

“We want to understand better the trends and factors that could lead to insolvency,” Schmelzer said. “Then we want to do everything we can with our members, working through our educational arm, to make sure members are prepared for whatever those trends might bring.”

Insurers and the Economy

Economic Analysis Matters More Than Ever
in “Golden Age” of Data

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By Lewis Nibbelin, Guest Blogger for Triple-I

Though data collection and curation have always been critical to insurance underwriting, advancements in artificial intelligence and data analytics have revolutionized how data is aggregated and applied to risk assessment and pricing.

This, in turn, increases the importance of economic analysis in insurance. 

“We are able to understand correlation better and make better predictions to prevent risks that formerly we were just being reactive to,” explained Josh Landau, President of the International Insurance Society (IIS), in an interview for the All Eyes on Economics podcast.

While AI and sophisticated models can gather and organize larger, more complex data sets in more interesting ways far more quickly than ever before, they can’t make the sorts of assessments or draw the kinds of salient conclusions that economists and actuaries can. 

“Drawing a conclusion would be impossible for AI to do,” Landau told host and Triple-I Chief Economist and Data Scientist Dr. Michel Léonard. “Really understanding where these non-correlated issues are impacting each other and how they’re impacting decisions, that’s where I see the economist’s role.”

Similarly, while automation may expedite data processing, critical thinking and socioemotional skills have never been more crucial for underwriters. Adaptability to technological developments, as well as the ability to meaningfully interpret intricate datasets, are necessary within a constantly evolving insurance landscape.

For example, the use of telematics to track actual driving behavior has contributed to more accurate underwriting and pricing, supporting the emergence of usage-based auto insurance.  A 2022 survey by the Insurance Research Council found that 45 percent of drivers made significant safety-related changes in how they drove after participating in a telematics program. An additional 35 percent said they made small changes in their driving behavior.

Ethical concerns surrounding the use of AI further underscore the significance of critical interpretation by humans.

Due to its many extensive investments and ability to determine what projects to insure – or not to — the insurance industry has an “outsized influence,” Landau said.

“As a result of that awesome depth and breadth of resources,” he said, “it’s important for carriers “to understand how they navigate through this responsibility, how they interact – not only with each other, but also with industry leaders and government leaders.” 

The digitized space’s potential for inaccuracies, biases, and data breaches presents a dilemma for stakeholders at every level, so managing these risks must always take precedence. 

Human oversight, diversity in AI training datasets, transparency about use of AI, and responsiveness to stakeholder feedback are all ways for insurers to utilize automated technologies while upholding the industry’s commitment to equity and security.

IIS – like Triple-I, an affiliate of The Institutes – facilitates industry dialogue through targeted webinars and its annual Global Priorities Survey and corresponding Global Insurance Forum (GIF), the next of which is held this upcoming November in Miami, Fla., in coordination with Triple-I’s Joint Industry Forum (JIF). Registration for GIF is available here. You can register for JIF here.

The full interview is available now on Spotify, Audible, and Apple.

Insurance News

Commercial P/C Market Stabilizes Amid Lingering Challenges: Baldwin Group

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The commercial property/casualty (P/C) insurance market shows signs of stabilization in 2024, despite persistent challenges like frequent natural disasters and social inflation, according to a midyear market report from The Baldwin Group (TBG). While rate increases have slowed and capacity has improved in some areas, insurers remain cautious, focusing on policyholders’ ability to manage potential loss scenarios.

“Though certain lines, industries, and geographies remain challenging, overall market conditions are easing,” the report’s authors state. “While rate increases have decelerated and there is new capacity for certain lines, insurers are still taking a very stringent approach to underwriting by putting a magnifying glass on insureds’ ability to prevent, respond to, and rebound from potential loss scenarios.”

Key Market Drivers and Trends in Commercial P/C

Severe weather events continue to be a major focus for insurers in 2024, as they remain concerned about the impact of unmodeled secondary perils and interconnected weather events on their books of business, according to TBG. Experts are predicting an increase in named storms for the 2024 Atlantic hurricane season, further emphasizing the need for insurers to closely monitor and assess their exposure to these risks, TBG noted.

Litigation trends have also had a significant impact on the commercial P/C market. The effects of legal system abuse and social inflation have become more evident, with the U.S. P/C industry witnessing a downturn in favorable reserve developments in 2023, stemming primarily from adverse developments in general liability and auto liability sectors, the report stated.

“Losses for these two lines are only projected to continue to grow at a fast rate due to social inflation and nuclear verdicts,” TBG said.

Several states have begun to fight back against legal system abuse, nuclear verdicts, and third-party litigation funding (TPLF). However, other states have expanded liability in certain areas, such as wrongful death cases, creating a complex and varied regulatory landscape for insurers to navigate, according to the report.

The economy continues to pose challenges for businesses and insurers alike. Slowing economic growth, persistent inflation, and high interest rates have created a difficult environment by increasing the cost of capital, claims, and goods, TBG reported. As a result, insurers are hesitant to deploy capital and implement drastic rate reductions, instead taking a cautious approach to exposure growth.

Geopolitical dynamics also play a role in shaping the commercial P/C market. Political dynamics and the threat of civil instability at local, state, national, and global levels pose risks to economic growth and supply chain stability, adding another layer of complexity for insurers to consider, according to the report.

To address these challenges, insurers are increasingly turning to advanced technologies, such as artificial intelligence (AI) and machine learning solutions. These technologies are being leveraged to address underwriting talent gaps, improve risk modeling accuracy, enhance operational efficiency, and boost long-term profitability, TBG reported.

One notable development, according to the report, is the release and adoption of Moody’s RMS Version 23 software, which is expected to capture recent trend — both catastrophe losses and higher repair and replacement costs — that have driven up insurer claims costs and provide larger modeled probable maximum losses.

Reinsurance Market Developments

For commercial property reinsurance, April 1 renewals brought increased capacity appetite on excess layers, while lower or primary layers remained challenging.

June 1 renewals in Florida saw some price reductions as dedicated capacity flowed into the market. However, the prospect of a highly active 2024 hurricane season has left reinsurers reluctant to support lower layers on programs, leading to continued bifurcation in appetite and pricing, according to TBG. Despite these developments, reinsurance prices remain well above historical averages from a technical pricing perspective. The next phase of the market cycle will be clearly dictated by how the hurricane season unfolds, the report noted.

On the casualty side, reinsurers continue to express concerns about reserving adequacy due to the impacts of social inflation. The unpredictability of losses related to COVID-19 shutdowns has increased conservatism, especially for casualty and auto portfolios heavily exposed to social inflation, where the expected claimant is a member of the general public rather than a contracted third party, according to the report. Adverse development from claims in the previous soft market (2015 to 2019) have led to increased scrutiny by reinsurers, many of which continue to reiterate their concerns on reserving adequacy, TBG reported.

Commercial Lines Market Conditions and Rate Trends

At the start of 2024, the commercial P/C insurance market showed early signs of stabilization, with a more orderly January 1 reinsurance renewal season indicating improved capacity and potential rate deceleration. As the year has progressed, these early developments have reached fruition, TBG stated.

Though certain lines, industries, and geographies remain challenging, overall market conditions are easing. While rate increases have decelerated and there is new capacity for certain lines, insurers are still taking a very stringent approach to underwriting by putting a magnifying glass on insureds’ ability to prevent, respond to, and rebound from potential loss scenarios, according to the report.

TBG provided a line-by-line update of its earlier market predictions, including rate trends based on the Council of Insurance Agents & Brokers (CIAB) Q1 commercial property/casualty pricing survey:

In the property market, the average rate increase in Q1 was 10.1%, but the market has notably stabilized due to insurer profitability in 2023, favorable renewals, and greater competition. However, distressed risks may see much steeper increases, TBG said.

General liability continues to see a clear bifurcation driven by the type of organization and likely claims sources, with an average rate increase of 4.1% in the first quarter. Social inflation, third-party litigation funding (TPLF), and nuclear verdicts are leading to continued market hardening, according to the report.

Commercial auto remains challenged due to litigation trends and high repair costs, with an average rate increase of 9.8% in Q1. Driver shortages are a focal issue in lawsuits, and insurers are adopting stricter underwriting tied to fleet size. Buyers should expect continued rate increases in this line, TBG reported.

Workers’ compensation remains competitive with plenty of capacity and stable rates, seeing an average rate decrease of 1.8%. It is an area of potential cost savings for insureds, as insurers look to increase profitable business, TBG noted. But medical inflation, an aging workforce, and state regulations could adversely affect claims patterns, the report adds.

In the directors and officers (D&O) liability market, public D&O rates have flattened, with most companies seeing relatively flat renewals. The private D&O market is shaped by bifurcation between stable and challenged risks, with an average Q1 rate decrease of 0.8%.

Employment practices liability insurance (EPLI) is seeing an average rate increase of 0.8% in the first quarter, with capacity and rates remaining stable. However, employee-friendly laws and regulations in states like California, New York, Florida, and Illinois continue to be challenging jurisdictions for underwriters, TBG noted.

Cyber liability has continued its stabilization in 2024, with an average Q1 rate increase of just 0.4%. Flat renewals and eager insurers characterize the market, with security controls and policies being the biggest factors in underwriting.

“Developments with AI are still too nascent for them to be felt in the market, though this will likely change as AI tools become even more prevalent,” TBG reported.

Umbrella liability capacity is restrained, especially for higher limit placements, due to social inflation and nuclear verdicts. Monoline coverage is less competitive than supported umbrella coverage, and the average rate increase in the first quarter was 7.0%.

To view the full report, visit The Baldwin Group website.

Homeowners Insurance, Insurers and the Economy, Legal Environment, Market Conditions

Triple-I Brief Discusses Homeowners Insurance Market Challenges

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By Max Dorfman, Research Writer, Triple-I

Homeowners insurance costs have continued to consistently rise in the wake of the pandemic, alongside several other challenges, according to a new Triple-I Issues Brief.

The COVID-19 pandemic and Russian invasion of Ukraine sparked inflation – particularly with regard to replacement costs due to material shortages. Replacement-cost inflation has been exacerbated by a tight labor market. Even before the pandemic, loss costs had been rising steadily for some time, leading to homeowners insurance premiums climbing consistently from 2001 to 2021, according to the Insurance Research Council (IRC).

These cost factors, combined with rising losses related to natural catastrophes, have contributed to insurance affordability and availability issues, which vary by state. Disaster-related losses have increased over the past 30 years, due mostly to increasing severity of hurricanes and convective storms.

The brief notes that these costs surpassed household income growth, leading to decreased insurance affordability for many U.S. consumers. As expected, disaster-prone states have the least affordable homeowners insurance. The IRC ranks Florida as the state with the least-affordable coverage in the country.

Additionally, legal system abuse, which includes false claims of damage to homes. This has been a common issue in disaster-prone areas, where claims of roof damage, in particular, have substantially increased insurance costs.

The brief states that consumers and policymakers should be cognizant of the dynamics underlying these price shifts and understand why insurers must be forward looking in their approach to pricing these policies.

Learn More

Florida Homeowners Premium Growth Slows as Reforms Take Hold, Inflation Cools

IRC: Homeowners Insurance Affordability Worsens Nationally, Varies Widely By State

Homeowners Insurance Costs Exceeded Inflation From 2000 to 2020

Facts + Statistics: Homeowners and Renters Insurance

Industry Financials, Insurers and the Economy, Market Conditions

P/C Underwriting Profitability Remains
at Least a Year Away

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By Max Dorfman, Research Writer, Triple-I

The property/casualty insurance industry is expected to achieve underwriting profitability in 2025, according to the latest research from the Triple-I and Milliman, a collaborating partner. The report, Insurance Economics and Underwriting Projections: A Forward View, which was presented at a members-only webinar on July 11, also projects a small underwriting loss in 2024.

Michel Léonard, Ph.D., CBE, chief economist and data scientist at Triple-I, discussed how P/C replacement costs continue to increase more slowly than overall inflation.

“For the last 12 months, economic drivers of insurance performance have been favorable to the industry, with P/C insurance’s underlying growth catching up to overall U.S. economic growth rates, and its replacement costs increasing at a sluggish pace compared to overall inflation,” Dr. Léonard said. “We expected this favorable window to last into 2025.”

That may not be the case anymore for two reasons, according to Léonard.

“First, U.S. economic growth slowed more than expected in Q1 2024, largely because of the Fed’s lack of clarity about the timing of interest rate cuts,” he said. “Second, global supply chains are again showing stress due to ongoing and increasing geopolitical risk, such as the tensions in and around the Suez Canal. These causes may be threatening to send inflation back toward pandemic-era levels. Geopolitical risk never left, and supply chains are on a lifeline.”

Dale Porfilio, FCAS, MAAA, Triple-I’s chief insurance officer, discussed the split between personal and commercial lines, noting that, “The ongoing performance gap between personal and commercial lines remains, but that gap is closing.”

 “This quarter, we are projecting commercial lines underwriting results to outperform personal lines premium growth by over five points in 2024,” Porfilio added. “The difference, in large part, illustrates how regulatory scrutiny on personal lines has curbed the ability for insurers to increase prices to reflect the significant amount of inflation that impacted replacement costs through and coming out of COVID.”

Jason B. Kurtz, FCAS, MAAA, a principal and consulting actuary at Milliman – a global consulting and actuarial firm – points out how commercial multi-peril is one line that continues to face long-term challenges.

“While the expected net combined ratio of 106.2 is one point better than 2023, matching the eight-year average, the line has not been profitable since 2015. And with a Q1 direct incurred loss ratio of 52 percent and premium growth rates continuing to slow, we see some improvement but continuing unprofitability through 2026,” Kurtz said.

In juxtaposition, Kurtz pointed out the continuing robust performance of workers’ compensation.

“The expected 90.3 net combined ratio is nearly a one-point improvement from prior estimates and would mark 10 consecutive years of profitability for workers’ comp,” he said. “We continue to forecast favorable underwriting results through 2026.”

“Medical costs are going up, but they have not experienced the same type of inflation as the broader economy,” added Donna Glenn, FCAS, MAAA, chief actuary at the National Council on Compensation Insurance (NCCI). NCCI produces the Medical Inflation Insights report, which provides detailed information specific to workers’ compensation on a quarterly basis. “Since 2015, both workers’ compensation severity and medical inflation, as measured by NCCI’s Workers’ Compensation Weighted Medical Price index, have grown at a similar rate, a quite moderate 2 percent per year.”

Other highlights of the report include:

  • Homeowners insurance underwriting losses expected to continue for 2024-2025, but the line is expected to become profitable in 2026, with continued double-digit net written premium growth for 2024-2025.
  • Personal auto net combined ratio improved slightly from prior estimates and is on track to achieve profitability in 2025.
  • Commercial lines 2024 net combined ratio remained unchanged despite shifts in commercial property (-1 point), workers’ compensation (-1 point), and general liability (+1 point).
  • Net written premium growth rate for personal lines is expected to continue to surpass commercial lines by over 8 percentage points in 2024.
Insurers and the Economy, Legal Environment, Market Conditions, Regulation

Economic Climate Makes Understanding Insurance Increasingly Important

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By Lewis Nibbelin, Guest Blogger for Triple-I

Insurance coverage has long been “a grudge purchase – a once-or-twice-a-year transaction that many consumers didn’t want to think about,” Triple-I CEO Sean Kevelighan said in a recent episode of the “All Eyes on Economics” podcast.

But in today’s dynamic economic environment – marked by inflation the likes of which most insurance purchasers have never experienced – it has become more important than ever for consumers and policymakers to understand how insurance is underwritten and priced.

One of Triple-I’s chief objectives is “helping people understand what insurance can do for you, but also what you can do to change the situation,” Kevelighan told podcast host and Triple-I Chief Economist and Data Scientist Michel Léonard. “The narrative seems, at least from my standpoint, to be less about, ‘Why is my insurance so high?’ It’s more about, ‘What can we do to get it lower?’”

Rising insurance premium rates are the effect of risk levels, loss costs, and economic considerations like inflation. Too often, though, they’re discussed as if they were the cause.

High property/casualty premium rates are the result of numerous coalescing factors: Increased litigation, inflation, antiquated state regulations, losses from natural catastrophes, and pervasive post-pandemic high-risk behaviors, to name a few.

Every dollar invested in disaster resilience could save 13 in property damage, remediation, and economic impact costs, according to a recent joint report from Allstate and the U.S. Chamber of Commerce. As areas vulnerable to climate disasters become increasingly populated, it’s important for policyholders to develop resilience measures against the wildfire, hurricane, severe convective storm, and flood risks their property faces.

Consumer education and community involvement in mitigation and resilience offer a path toward greater control over claims.

However, regulatory barriers to fair, accurate underwriting also contribute to higher insurance costs. Despite tort reforms, rampant litigation has kept upward pressure on rates in Florida and Louisiana. California’s outdated Proposition 103 – by barring insurers from using modeling to price risk prospectively and from taking reinsurance costs into account when setting rates – has   impeded insurers from using actuarially sound insurance pricing.

Confusion around industry practices and effective mitigation is understandable, and during periods of economic instability and unforeseen disasters, blaming the insurance industry may seem the most direct way to regain control.

But rising rates are “not just an insurance problem,” Kevelighan said. “It’s a risk problem, and we all play a role in addressing that risk.”

The full interview is available now on Spotify, Audible, and Apple.

Catastrophes, Coastal Property, Disaster Preparedness, Disaster Resilience, Flood Insurance, Floods, Homeowners Insurance, Legal Environment, Regulation, Wildfire

Triple-I Experts Speak
on Climate Risk, Resilience

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Hurricane Beryl’s rapid escalation from a tropical storm to a Category 5 hurricane does not bode well for the 2024 Atlantic Hurricane season, which is already projected to be of above-average intensity, warns Triple-I non-resident scholar Dr. Philip Klotzbach.

“This early-season storm activity is breaking records that were set in 1933 and 2005, two of the busiest Atlantic hurricane seasons on record,” Dr. Klotzbach, a research scientist in the Department of Atmospheric Science at Colorado State University, recently told The New York Times.

The quick escalation was a result of above-average sea surface temperatures. A hurricane that intensifies faster can be more dangerous as it leaves less time for people in its path to prepare and evacuate. Last October, Hurricane Otis moved up by multiple categories in just one day before striking Acapulco, Mexico, as a Cat-5 that killed more than 50 people.

After weakening to a tropical storm, Beryl made landfall as a Cat-1 hurricane near Matagorda, Texas, around 4 a.m. on July 8, according to the National Hurricane Center, making it the first named storm in the 2024 season to make landfall in the United States.  Beryl unleashed flooding rains and winds that transformed roads into rivers and ripped through power lines and tossed trees onto homes, roads, and cars. Restoring power to millions of Texans could take days or even weeks, subjecting residents who will not have air conditioning to further risk as a sweltering heatwave settles over the state.

Extreme heat was just one climate-related topic addressed by Triple-I Chief Insurance Officer Dale Porfilio in an interview with CNBC’s “Last Call” on July 9. While most farmers are insured against crop damage due to heat conditions and homeowners insurance typically covers wildfire-related losses, Porfilio noted, a “more subtle impact is on roofs that we thought were built to a 20-year lifespan.”

When subjected to extreme heat, roofs can become more brittle and prone to damage from wind or hail.

“So, you have to think about the roof coverage on your home insurance policy,” Porfilio said.

He also pointed out that flood risk represents “one of the biggest insurance gaps in this country. Over 90 percent of homeowners do not have the coverage.”

Many people incorrectly believe homeowners insurance covers flood damage or that they don’t need the coverage if their mortgage lender does not require it.

In an interview on CNBC’s “Squawk Box,” Triple-I CEO Sean Kevelighan discussed the potential impact of the predicted “well above-average” 2024 season on the U.S. property/casualty market.

“This is what the insurance industry is prepared for,” Kevelighan said. “It keeps capital on hand after writing policies to make sure that those promises can be kept.” The P/C industry has $1.1. trillion in surplus as of March 31, 2024.

Kevelighan pointed out that the challenges to the industry go beyond climate-related trends, explaining how legal system abuse, regulatory environments, shifting populations, and inflation are impacting insurers’ loss costs.

In Florida, for example, “you’ve got over 70 percent of all homeowners insurance litigation residing in that state, whereas it represents less than 10 percent of the overall claims.”

He pointed out that Florida’s insurance market has improved – with homeowners insurance premium growth  flattening somewhat – as a result of tort reform legislation and added that Louisiana’s legislature addressed insurance reform during its most recent session.

“In California, insurers can’t catch up with inflationary costs because of regulatory constraints,” Kevelighan noted. “They are not able to model [climate risk] and are not able price reinsurance into their policies.”

California’s wildfire situation is complex, and the state’s Proposition 103 has hindered insurers’ ability to profitably write homeowners coverage in that disaster-prone state. In late September 2023, California Insurance Commissioner Ricardo Lara announced a package of executive actions aimed at addressing some of the challenges included in Proposition 103. Lara has given the department a deadline of December 2024 to have the new rules completed.

Learn More:

Florida Homeowners Premium Growth Slows as Reforms Take Hold, Inflation Cools

Lightning-Related Claims Up Sharply in 2023

Less Severe Wildfire Season Seen; But No Less Vigilance Is Required

Accurately Writing Flood Coverage Hinges on Diverse Data Sources

IRC: Homeowners Insurance Affordability Worsens Nationally, Varies Widely by State

Legal Reforms Boost Florida Insurance Market; Premium Relief Will Require More Time

2024 Wildfires Expected to Be Up From Last Year, But Still Below Average

CSU Researchers Project “Extremely Active” 2024 Hurricane Season

Triple-I Issues Brief: Hurricanes

Triple-I Issues Brief: Attacking Florida’s Property/Casualty Risk Crisis

Triple-I Issues Brief: California’s Risk Crisis

Triple-I Issues Brief: Legal System Abuse

Triple-I Issues Brief: Wildfires

Triple-I Issues Brief: Severe Convective Storms

Triple-I Issues Brief: Flood

Industry Financials, Insurance Industry, Insurance News

Reinsurance Buyers See More Balanced Market at July 1 Renewals: Gallagher Re

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Reinsurers experienced near-record returns in 2023, and continued to post strong results in the first quarter of 2024, with up to a 12% improvement in combined loss ratios, according to Gallagher Re’s 1st View report.

The report attributes these positive outcomes to several factors, including relatively benign natural catastrophe activity, adjustments in the reinsurance market, improved conditions in primary markets, and higher reinvestment rates. Improved results have created a more favorable market for reinsurance buyers, with sufficient capital available to meet increased demand, Gallagher Re observed.

“This more comfortable market for buyers has been underpinned by an increasing supply of capital to meet increased demand as reinsurers balance sheets have expanded on the back of strong 2023 and Q1 2024 results,” commented Gallagher Re CEO Tom Wakefield.

Non-life insurance-linked securities (ILS) capital reached a record level of $107 billion at the end of 2023 and continued to grow in the first half of 2024, driven by successful catastrophe bonds and increased investor interest.

However, ILS capacity became less abundant by midyear, as the Atlantic hurricane season approached,  Gallagher Re noted.

“ILS capacity became scarce as ILS investors were ‘unnerved’ by forecasts of an active hurricane season,” the report stated.

Property outlook

The property reinsurance market has experienced increased competitiveness and capacity due to reinsurers’ strong performance in recent years, the report noted.

While reinsurers were not significantly impacted by natural catastrophe losses in Q1, there were an estimated $43 billion of economic losses and $20 billion insured losses in Q1 with both numbers being near the 10-year average.

The first quarter is not traditionally a major driver of the annual natural catastrophe loss burden, historically only representing 14% of the full-year total. Losses in Q1 have been dominated by severe convective storm losses (34% of insured losses) and other secondary perils of wildfire, drought and flood making up another 29%.

At July 1 renewals, risk-adjusted catastrophe pricing for Florida property was down 0% to 10% on average, and additional capacity demands of $3 billion to $5 billion in Florida were all met.

“Following three consecutive years of double-digit risk-adjusted rate increases, reinsurers were looking to hold the line from a procing perspective,” the reinsurance intermediary said of the Florida property catastrophe market.

The report also highlighted that buyers of property catastrophe insurance have been able to negotiate better terms and conditions on their reinsurance contracts due to the “risk on” approach taken by reinsurers. Risk-adjusted catastrophe placements in the U.S. generally were down 0% to 12% at July 1, Gallagher Re reported.

Non-catastrophe property pricing in the U.S. was down 0 to 10% for loss free accounts, but up 5% to 15% with losses.

Casualty outlook

“Casualty underwriters appear less confident than property underwriters outlined above, although this warrants its own caveat. The issues driving stakeholder concerns are regionally nuanced as the frequency and severity of casualty losses are driven by local societal, economic, judicial, legislative, and behavioral factors,” the report stated.

In the casualty insurance sector, concerns over rate adequacy in the U.S. have increased, following adverse development reported by liability insurers in the fourth quarter of 2023 and the first quarter of 2024. The lengthening and deteriorating tail of liability claims have exacerbated reinsurers’ concerns, as the market is already dealing with economic and non-economic loss inflation.

At July 1 renewals, risk adjusted excess of loss rates for U.S. general liability business were up 5% to 10% with no losses, and up 5% to 15% with emerging losses.

For U.S. health care liability, increased loss severity was seen across the health care sector. Excess of loss rates were up 0 to 5% for limited-exposed layers, and up 3% to 8% for catastrophe layers, without emerging losses. Rate increases were greater — up 5% to 20% — for layers with emerging losses.

Professional liability lines with no emerging losses saw excess of loss rates decline 0% to 5%, while accounts with losses experienced 0% to 10% increases.

Workers compensation has seen continued pressure for increases, even on loss-free layers, Gallagher Re noted. Excess of loss rates with no loss emergence were up 0 to 5% and with loss emergence, increased 5% to 10% at July 1.

The full report can be downloaded on the Gallagher Re website.