All posts by Jeff Dunsavage

New Illinois Bills
Would Harm — Not Help — Auto Policyholders

Two bills proposed in Illinois this year illustrate yet again the need for lawmakers to better understand how insurance works. Illinois HB 4767 and HB 4611 – like their 2023 predecessor, HB 2203 – would harm the very policyholders the measures aim to help by driving up the cost for insurers to write personal auto coverage in the state.

“These bills, while intended to address rising insurance costs, would have the opposite impact and likely harm consumers by reducing competition and increasing costs for Illinois drivers,” said a press release issued by the American Property Casualty Insurance Association, the Illinois Insurance Association, and the National Association of Mutual Insurance Companies. “Insurance rates are first and foremost a function of claims and their costs. Rather than working to help make roadways safer and reduce costs, these bills seek to change the state’s insurance rating law and prohibit the use of factors that are highly predictive of the risk of a future loss.”

The proposed laws would bar insurers from considering nondriving factors that are demonstrably predictive of claims when setting premium rates.

“Prohibiting highly accurate rating factors…disconnects price from the risk of future loss, which necessarily means high-risk drivers will pay less and lower-risk drivers will pay more than they otherwise would pay,” the release says. “Additionally, changing the rating law and factors used will not change the economics or crash statistics that are the primary drivers of the cost of insurance in the state.”

Triple-I agrees with the key concerns raised by the other trade organizations. As we have written previously, such legislation suggests a lack of understanding about risk-based pricing that is not isolated to Illinois legislators – indeed, similar proposals are submitted from time to time at state and federal levels.

What is risk-based pricing?

Simply put, risk-based pricing means offering different prices for the same level of coverage, based on risk factors specific to the insured person or property. If policies were not priced this way – if insurers had to come up with a one-size-fits-all price for auto coverage that didn’t consider vehicle type and use, where and how much the car will be driven, and so forth – lower-risk drivers would subsidize riskier ones. Risk-based pricing allows insurers to offer the lowest possible premiums to policyholders with the most favorable risk factors. Charging higher premiums to insure higher-risk policyholders enables insurers to underwrite a wider range of coverages, thus improving both availability and affordability of insurance.

This simple concept becomes complicated when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory. For example, concerns have been raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say this can lead to “proxy discrimination,” with people of color in urban neighborhoods sometimes charged more than their suburban neighbors for the same coverage.

The confusion is understandable, given the complex models used to assess and price risk and the socioeconomic dynamics involved. To navigate this complexity, insurers hire teams of actuaries and data scientists to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.

While it may be hard for policyholders to believe factors like age, gender, and credit score have anything to do with their likelihood of filing claims, the charts below demonstrate clear correlations.

Policyholders have reasonable concerns about rising premium rates. It’s important for them and their legislators to understand that the current high-rate environment has nothing to do with the application of actuarially sound rating factors and everything to do with increasing insurer losses associated with higher frequency and severity of claims. Frequency and claims trends are driven by a wide range of causes – such as riskier driving behavior and legal system abuse – that warrant the attention of policymakers. Legislators would do well to explore ways to reduce risks, contain fraud other forms of legal system abuse, and improve resilience, rather than pursuing “solutions” to restrict pricing that will only make these problem worse.

Learn More

New Triple-I Issues Brief Takes a Deep Dive into Legal System Abuse

Illinois Bill Highlights Need for Education on Risk-Based Pricing of Insurance Coverage

How Proposition 103 Worsens Risk Crisis in California

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

IRC Outlines Florida’s Auto Insurance Affordability Problems

Education Can Overcome Doubts on Credit-Based Insurance Scores, IRC Survey Suggests

Colorado’s Life Insurance Data Rules Offer Glimpse of Future for P&C Writers

It’s Not an “Insurance Crisis” – It’s a Risk Crisis

Indiana Joins March Toward Disclosure of Third-Party Litigation Funding Deals

Litigation Funding Law Found Lacking in Transparency Department

Insurers Engage
as Climate Perils
Drive Up Costs

By Max Dorfman, Research Writer, Triple-I

2023 was another year with high-risk climate and weather-related challenges, with 2024 positioned to pose its own challenges.

Indeed, 2023 was the warmest year for the globe since 1850 — when these records were first made. The temperature in 2023 was over two degrees Celsius above the 20th Century average, with the 10 warmest years in recorded history occurring from 2014-2023. Record-setting temperatures hit areas across Canada, the southern United States, Central America, South America, Africa, Europe, Asia, as well as parts of the Atlantic Ocean, the Indian Ocean, and South Pacific Ocean.

These shifts in global weather – combined with changing population and other dynamics – have played a powerful role in the risk of disasters.

Costs are high

In the United States, Allianz estimates, extreme weather events now cost the country $150 billion a year, making these perils “key threats” for organizations. However, larger companies are leading a response to these risks by transforming their business models to low carbon, while also creating new and improved plans to respond to climate events. Allianz notes that supply-chain resilience is a crucial area of focus for the coming year.

“Although this year’s Allianz Risk Barometer results on climate change show that reputational, reporting, and legal risks are regarded as lesser threats by businesses,” said Denise De Bilio, ESG Director, Risk Consulting, Allianz Commercial, “many of these challenges are interlinked.”

According to Allianz, exposure remains highest for utility, energy, and industrial sectors. Last year’s wildfires in Canada limited oil and gas output to 3.7 percent of national production. Water scarcity is now also considered to be a threat.

Promising developments

As Triple-I reported in late 2023, despite all the concern regarding climate risk, certain weather-related disasters actually declined in the past year. This includes U.S. wildfire, which saw its lowest frequency and severity in the past two decades, despite catastrophic losses in Washington State, Hawaii, Louisiana, and elsewhere, according to a Triple-I Issues Brief. California – a state often considered synonymous with wildfire – last year experienced its third mild fire season in a row.

Homeowners insurance rates in California, as elsewhere in the United States, have been rising.  Some of this trend is due to wildfires and construction in the wildland-urban interface, which put increased amounts of expensive property at risk. According to Cal Fire, five of the largest wildfires in the state’s history have occurred since 2017. 

Much of California’s problem, however, is related to a 1988 measure – Proposition 103 – that severely constrains insurers’ ability to profitably insure property in the state. Late in 2023, California Insurance Commissioner Ricardo Lara announced a package of executive actions aimed at addressing some of the challenges included in Proposition 103.

Flood remains a severe and increasing peril in the United States. While the federal government remains the main source of insurance coverage through FEMA’s National Flood Insurance Program (NFIP), the private insurance market is increasingly stepping up to assume more of the risk. As Triple-I has reported, between 2016 and 2022, the total flood market grew 24 percent – from $3.29 billion in direct premiums written to $4.09 billion – with 77 private companies writing 32.1 percent of the business.  As the charts below make clear, private insurers are accounting for a bigger piece of a growing pie.

This is an important development, as the growing private-sector involvement in flood can reasonably be expected to result, over time, in greater availability and affordability of flood insurance as the peril increases and NFIP – through increased reliance on risk-based pricing – spreads the cost of coverage more fairly among property owners. Historically, the system often subsidized coverage for higher-risk homes, to the detriment of lower-risk property owners. With NFIP premium rates rising to more accurately reflect the risk assumed, private insurers – armed with increasingly sophisticated data and analytical tools – are better equipped than ever to identify opportunities to write more business.

Much yet to be done

Growing awareness and action to address climate-related risk is promising, but the crisis is far from over. In several U.S. states, insurance affordability and even availability are being affected, and much of the conversation around this topic confuses cause with effect. Rising insurance rates and constrained underwriting capacity is a result of the risk environment – not a cause of it.

Investment in mitigation and resilience is necessary, and this will require collective responsibility from the individual and community levels up through all levels of government. It will require public-private partnerships and appropriate alignment of investment incentives for all co-beneficiaries.

Learn More:

Triple-I Issues Brief: Flood

Triple-I Issues Brief: Wildfire

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

Miami-Dade, Fla., Sees Flood Insurance Rate Cuts, Thanks to Resilience Investment

Milwaukee District Eyes Expanding Nature-Based Flood-Mitigation Plan

Attacking the Risk Crisis: Roadmap to Investment in Flood Resilience

It’s Not an “Insurance Crisis” — It’s a Risk Crisis

There’s Never a Dull Moment Working in the Insurance Industry

By Loretta Worters, Vice President, Media Relations, Triple-I

The insurance industry employs about 2.9 million people in the United States — more, if you include people in insurance functions who work at non-insurance companies.  But the industry is confronted by major changes as the U.S. population enters a new demographic stage — “Peak 65” — that it will have to navigate.

About 4.1 million Americans will reach 65 years old this year, according to an analysis by Jason Fichtner, executive director of the Retirement Income Institute and chief economist at the Bipartisan Policy Center. That is about 11,200 a day, compared with the 10,000 daily average from the previous decade, he says. 

This creates a unique opportunity for people at the start of their careers and mid-career employees looking for a change as many of these aging Baby Boomers retire. Insurance Careers Month is a reminder of the number of organizations recruiting and retaining insurance industry professionals.

Insurance careers span a wide range of skills and talents—from actuaries and analysts to data scientists and marketers to drone pilots and engineers.  Without insurers and the thousands of professions supporting it, businesses wouldn’t be able to build factories and offices. Concerts, sporting events, the film industry, even universities, libraries, and parks—all are made possible, in part, by the careful management of risk.

“As the backbone to economic growth and prosperity, a career in insurance provides a wealth of career opportunities,” said Triple-I CEO Sean Kevelighan. “ Whether just starting out in the workforce or thinking about a career change, talented individuals should explore the world of insurance and risk management. Insurance Careers Month is a great reminder that this industry is filled with potential.”

To raise awareness about insurance as a potential career path, the Triple-I continues to partner with the HBCU I.M.P.A.C.T Initiative, Inc.® (IMPACT), a campaign aimed at recruiting students at historically Black colleges and universities (HBCUs) to the insurance industry. The Black Insurance Industry Collective (BIIC), a non-profit affiliated with The Institutes, is focused on accelerating the advancement of Black insurance professionals.

The Institutes also offers student programming at a variety of their events and partners with colleges and universities through a collegiate studies program that enables students to earn credits towards the CPCU designation, among other initiatives.

“The risk management and insurance landscape is evolving rapidly, with advancements in generative AI, offering students entering the workforce the chance to be at the forefront of exciting and innovative solutions,” said Peter L. Miller, CPCU, President and CEO of The Institutes.  “With new approaches and skillsets needed—in a field that prioritizes continuous learning—there are countless opportunities for career growth and development.  A career in the RMI field opens the door to a diverse network of professionals who are problem solvers, strategic thinkers, and invaluable contributors to the global economy.”

The Insurance Industry Charitable Foundation’s (IICF’s) Mentoring Alliance is another initiative that partners with companies across the insurance industry to share a wider range of experiences.

“Our IICF Mentoring Alliance pairs emerging leaders from underrepresented communities with diverse role models and allies within the Insurance Industry,” said Barbara Reilly, senior vice president, Amwins, and a member of the IICF’s IDEA (Inclusion, Diversity, Equity, and Accessibility) Council.  “We are in our second year, and we doubled our mentee/mentor participation,” she said. Mentees appreciate having a mentor from outside their own company but within our Industry, as it provides a safe space to share perspectives and receive valuable guidance.”

“Connecting our high potential nontraditional employees with relatable mentors as they move into their first managerial roles is critical,” added Elizabeth (Betsy) Myatt, vice president and chief program officer, IICF.  “It’s not enough to attract new talent.  We need to keep talent in the industry and ensure success,” she said.

As part of Insurance Careers Month, the sixth annual Emerging Leaders Conference was held between Feb. 4-6, 2024, in San Antonio, Texas.  Hosted by the American Property Casualty Insurance Association (APCIA), AM Best, and the Insurance Careers Movement, it gives younger industry professionals access to executive thought leadership, provides networking opportunities across job functions, and offers an agenda that focuses on professional and personal development. 

The Insurance Council of Texas Education Foundation also is promoting Insurance Careers Month through social media and member communications. Their focus is to raise awareness of career opportunities within the property and casualty industry.

“Through various strategic initiatives, the foundation encourages college students to explore careers in P&C by offering scholarships and financial support at partner universities,” said Richard Johnson, Director of Communications and Public Affairs, Insurance Council of Texas.  “By fostering education and financial assistance, we strive to cultivate a diverse and skilled workforce in the insurance and develop the future leaders of the industry,” he said.

“The insurance industry is facing the most competitive labor market in decades, making retaining and developing talent a top priority,” said Marguerite Tortorello, managing director of Insurance Careers Movement, an industrywide initiative designed to raise awareness of the diverse career options that risk management and insurance offer. “Together, we can help reach broader pools of job seekers around the globe and share strong career opportunities in insurance.”

Learn More:

HBCU Impact: Bridging the Insurance Talent Gap

Church Mutual President: Getting, Keeping Talent is Number One Challenge”

Captain of Her Own Ship: Anne Marie Elder

Insurance Careers: Opportunities in Risk

This Just In: Insurance Isn’t Boring

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

If there was a recurring theme in last week’s Senate Banking Committee hearing on reauthorization of FEMA’s National Flood Insurance Program (NFIP), it was the need for:

  • Congress to reauthorize NFIP, and
  • Communities, businesses, and government at all levels to invest in mitigating flood risk and in improving resilience.

It’s important to amplify this message, especially in light of a recent proposal by Rep. Adam Schiff that would, among other things, disband NFIP and require property/casualty insurers to provide “all-risk policies” based on coverage thresholds and rating factors dictated by a board in which the insurance industry is only nominally represented. Last year’s budget uncertainty – in which a potential government shutdown was threatened – left open the very real possibility of funding for NFIP expiring if Congress failed to reach a deal.

“Federal policies and programs, including NFIP, are essential,” said Daniel Kaniewski, managing director, public sector, for Marsh McLennan in his testimony. “But all disasters are local, and so too are resilience investment decisions.”

Before joining Marsh McLennan, Kaniewski was the second-ranking official at FEMA, where he was the agency’s first deputy administrator for resilience.

“To increase the resilience of communities against the pervasive risk of flooding,” Kaniewski testified, “we believe that risk transfer— including from the NFIP, private flood insurance, reinsurance, and parametric insurance — should be paired with risk reduction.”

In this regard, Kaniewski emphasized NFIP’s Community Rating System (CRS), which encourages and rewards community floodplain management practices that exceed the NFIP’s minimum requirements. He cited Tulsa, Okla., as one of two U.S. communities to have achieved the highest CRS rating (the other is Roseville, Calif.), making residents eligible for the program’s greatest flood insurance discount of 45 percent.

Even without achieving the maximum rating, citizens save on flood insurance when their communities invest in resilience. For example, Miami-Dade County, Fla., recently became the latest jurisdiction in the hurricane- and flood-prone state to benefit from CRS program. The county’s new Class 3 rating will result in an estimated $12 million savings annually by giving qualifying residents and business owners in unincorporated parts of the county a 35 percent discount on flood insurance premiums.  

Last year, 17 other Florida jurisdictions achieved Class 3 ratings. In Cutler Bay – a town on Miami’s southern flank with about 45,000 residents – the average premium dropped by $338. Citywide, that represented a savings of $2.3 million.

Unfortunately, only 1,500 communities nationwide participate in CRS, underscoring the importance of awareness-building, education, and collaboration.

Kaniewski also highlighted the opportunity presented by community-based catastrophe insurance (CBCI), which uses parametric insurance to provide coverage to local government entities that wish to cover a group of properties. Such programs enhance financial resilience by simultaneously providing affordable coverage and creating incentives for risk reduction.

“Our recent CBCI pilot in New York City was developed in partnership with the City of New York and several nonprofit and insurance industry partners and funded by the National Science Foundation,” Kaniewski said. “It provides a level of financial protection for low-to-moderate-income households that previously lacked flood insurance.”

Kaniewski called on other industries – such as finance and real estate – to encourage flood resilience investments, along with the insurance industry and all levels of government. He cited the recent roadmap for resilience incentives issued by the National Institute of Building Sciences (NIBS) – funded by Fannie Mae and co-authored by representatives of a cross-section of “co-beneficiary industries” – that focused on residential structures prone to flooding. Triple-I subject-matter experts were co-authors on the NIBS project.

Sen. Tim Scott of South Carolina, committee co-chair – along with Sen. Sherrod Brown of Ohio – spoke from the perspective of a former insurance professional who has sold flood insurance about his state’s recent investment in mitigation.

“In 2023, the state’s budget included significant funding for mitigation efforts that would reduce flood damage from future storms,” Scott said.“Backing up that investment, the South Carolina Office of Resilience released a nationally praised Statewide Risk Reduction Plan, identifying the communities most vulnerable to floods and targeting mitigation resources to protect those residents. These are local solutions to local challenges – and they will make a huge difference in the lives of South Carolinians.”

While solutions that work in South Carolina might not work in other states, Scott said, “I’m confident that similar, locally based solutions and approaches could make a huge difference.”

Sen. Katie Britt of Alabama invited Kaniewski to elaborate on her state’s Strengthen Alabama Homes program, which provides grants and insurance discounts to homeowners who make qualifying retrofits to their houses. Britt cited research that found the program had “directly resulted in lower insurance premiums and higher home resale values.”

Kaniewski spoke in detail about Alabama’s efforts, including Strengthen Alabama Homes – which, he pointed out, is now being emulated by other states, including hurricane- and flood-prone Louisiana. He also cited by name the author of the research Britt referenced – Dr. Lars Powell, executive director of the Alabama Center for Insurance Information and Research at the University of Alabama and a Triple-I Non-resident Scholar – for producing “the first study that I’ve seen that gives empirical data — real evidence that mitigation pays.”

Steve Patterson, mayor of Athens, Ohio, described a range of nature-based solutions his city has taken – from rerouting the Hocking River, which runs through the middle of the city, to removing invasive plants and restoring native trees along the bank.

“That’s been very effective in reducing flooding in different neighborhoods throughout the city,” Patterson said. “There are a lot of things cities and villages can do.”

The work done by Athens – like green infrastructure work by the Milwaukee Metropolitan Sewerage District in Wisconsin and municipal entities – offers opportunities to reduce flood risk while improving quality of life for citizens. But, as Patterson points out, not all municipalities have the financial capacity to engage in such projects.

That is where the engagement of co-beneficiaries of resilience investment as partners becomes so crucial.

Learn More:

Triple-I Issues Brief: Flood

Miami-Dade, Fla., Sees Flood Insurance Rate Cuts, Thanks to Resilience Investment

Milwaukee District Eyes Expanding Nature-Based Flood-Mitigation Plan

Attacking the Risk Crisis: Roadmap to Investment in Flood Resilience

Proposed Flood Zone Expansion Would Increase Need for Private Insurance

FEMA Incentive Program Helps Communities Reduce Flood Insurance Rates for Their Citizens

FEMA Names Disaster Resilience Zones, Targeting At-Risk Communities for Investment

Shutdown Threat Looms Over U.S. Flood Insurance

Triple-I/Milliman:
Severe Convective Storms Restrain P&C Growth

By Max Dorfman, Research Writer, Triple-I

Severe convective storm losses drove adverse results in 2023 underwriting profitability for the property/casualty industry, according to the latest projections by actuaries at the Triple-I and Milliman.  

The quarterly report, Insurance Economics and Underwriting Projections: A Forward View, which was presented on January 30, at a  members-only  webinar, found that the overall combined ratio is forecast to be 103.9, with commercial lines at 97.7, outperforming personal lines at 109.9. Combined ratio is a standard measure of underwriting profitability, in which a result below 100 represents a profit and one above 100 represents a loss. 

Hard markets continue with 2023 net written premium growth forecast at 9.0 percent. 

Dale Porfilio, FCAS, MAAA, Chief Insurance Officer at Triple-I, discussed the overall P&C industry underwriting projections. 

 “The bad news is that the 2023 Q3 incurred loss ratio for homeowners, commercial auto, and commercial multi-peril exceeded our expectations, as 2023 Q3 incurred loss ratios were above historical averages.” Porfilio said.   

Porfilio elaborated on the industry’s bleak homeowners financial results, stating that, “For 2023, the net combined ratio is forecast at 112.3, the worst since 2011.”  

Porfilio added that the 2023 net written premium growth rate of 12.4 percent is the highest in over 10 years, reflecting rate increases to offset inflationary loss costs.  

“We expect personal auto and homeowners lines to improve in 2024 and 2025, but to remain unprofitable,” Porfilio added.    

Jason B. Kurtz, FCAS, MAAA, a Principal and Consulting Actuary at Milliman – a premier global consulting and actuarial firm – said commercial property and workers compensation continue to be profitable, while commercial multi-peril and commercial auto remain troubled. 

“Looking at commercial auto, underwriting losses continue, with a projected 2023 net combined ratio of 110.2, the highest since 2017,” said Kurtz. “For 2023 Q3, the incurred loss ratio was the highest in over 15 years, while the 2023 Net Written Premium growth rate of 6 percent is noticeably lower than the prior two years.” 

Turning to workers compensation, Kurtz noted that “the 2023 net combined ratio of 88.7 is in line with the five-year average of approximately 89. With anticipated net written premium growth of 2 percent per year from 2023 through 2025, growth will be modest, but the net combined ratio is expected to remain favorable for our forecast horizon.” 

Michel Léonard, Ph.D., CBE, Chief Economist and Data Scientist at Triple-I, discussed key macroeconomic trends impacting the property/casualty industry results including inflation, interest rates, and overall economic underlying growth. 

“Real (inflation-adjusted) gross domestic product in the third quarter of 2023 accelerated to 4.9 percent, but economists still expect year-over-year growth of 2.1 percent,” said Léonard, noting that for GDP, “revised Q3 numbers did not disappoint, but all eyes remain on Q4.”   

Léonard said inflation as measured by the consumer price index (CPI) continues to slow down to 3.1 percent as of November, but CPI, less food and energy prices, is still up 4.0 percent year over year.  

“Year-over-year, P&C underlying growth grew 1.3 percent in 2023 and is forecasted by Triple-I to grow 2.6 percent in 2024,” said Léonard. “This is below U.S. GDP growth in 2023 and slightly above U.S. GDP growth in 2024. Year-over-year P&C replacement costs increased by 1.1 percent in 2023 and are forecasted to increase by 2.0 percent in 2024.” 

Donna Glenn, FCAS, MAAA, Chief Actuary at the National Council on Compensation Insurance (NCCI), identified rate adequacy and medical inflation as two of the workers compensation line’s top concerns.  

“We’ve seen loss costs decline for 10 consecutive years,” Glenn said. She credits a “strong labor market and overall economy” resulting in “payroll increases outpacing loss cost declines.”  

Glenn added that the “NCCI continues to analyze the data with healthy skepticism to identify changes in trends.”  

FEMA Highlights Role
of Modern Roofs
in Preventing
Hurricane Damage

By Max Dorfman, Research Writer, Triple-I

Homes with more modern roofs were able to avoid significant damage from Hurricane Ian, compared with those with older roofs, according to a recent study by the Federal Emergency Management Agency (FEMA).

Of the 200 homes surveyed, 90 percent with roofs installed before 2015 had roof damage, as opposed to 28 percent for those installed after 2015, when Florida imposed new ordinances regarding how roofs are attached to houses and how waterproof they need to be. Indeed, when Hurricane Ian made landfall at Cayo Costa, a barrier island in Lee County, Fla., on Sept. 28, 2022, it damaged 52,514 homes and other structures in the area, causing an estimated $55 billion in insured losses in 2024 dollars.

Some of this damage, according to the data, could have been mitigated by updated roofs.

History tells the same story

After the devastation of Hurricane Andrew in 1992, Florida took the initiative to develop innovative plans to prevent hurricane damage. These changes further came into effect in 2002, with a new focus on roofing. However, there were inconsistencies in the quality of the roofing.

“The 1970s-era homes performed better than some of the post-2002 new building code homes because of the sealed roof deck,” Leslie Chapman-Henderson, president of the Federal Alliance for Safe Homes, told The Miami Herald. “It was a nominal cost (to reinforce the roof) and a simple thing to do, but it made a huge difference.”

Now, with a renewed focus on metal sheet roofs—which bear the brunt of storms more resiliently than asphalt shingle roofs—FEMA’s data could drastically change the way in which homes are built, and how insurers are responding to fraudulent claims.

Insurance scams set progress back

Insurers are forced to raise the price of coverage in hurricane-prone areas in Florida because of a rash of schemes to deliberately damage roofs to qualify them for insurance claims, a persisting trend.

“Fraud drives insurance rates up and harms all Florida policyholders,” Citizens Property Insurance CEO Tim Cerio said. Still, implementing the changes suggested by the FEMA study may help alleviate some of the concerns posed by insurers—and help homeowners.

“When you’re looking at a home and evaluating its ability to survive a hurricane, the health of the roof is the first question to ask,” said Chapman-Henderson. “It not only increases your performance in the hurricane itself, but in the current environment it can help save you money on your insurance.”

Learn More:

Lawsuits Threaten to Swell Hurricane Ian’s Pricetag

Triple-I Issues Brief: Hurricanes

Cellphones Leading Cause of Distracted Driving; Telematics Can Help

By Max Dorfman, Research Writer, Triple-I

Distracted driving—which has significantly increased since the coronavirus pandemic—is most significantly affected by cellphone use, according to a new Issues Brief by Triple-I.

The report, Distracted Driving: State of the Risk, states that cellphone use–which includes dialing, texting, and browsing–was among the most ubiquitous and highest-risk behaviors found in governmental and private sector studies. According to a 2022 national observational survey from the National Highway Traffic Safety Administration (NHTSA), a total of 2.5 percent of drivers stopped at intersections were talking on hand-held phones at any moment during the day in 2021.

The brief also found that the U.S. personal auto insurance industry’s combined ratio—a measure that represents underwriting profitability—increased dramatically from 2022, to 112.2. A combined ratio below 100 indicates an underwriting profit, while one above 100 indicates an underwriting loss.

“As drivers returned to the roads following the pandemic, distracted driving surged, causing higher rates of accidents, injuries, and deaths. This high-risk behavior has worsened in the years since, having huge implications for the insurance industry and their policyholders,” stated Dale Porfilio, chief insurance officer, Triple-I.

The report notes that telematics and usage-based insurance can potentially help insurers—and their policyholders—better understand a driver’s risk profile and tailor auto insurance rates based on individual driving habits.

Indeed, according to an Insurance Research Council survey in 2022, 45 percent of drivers said they made significant safety-related changes in how they drove after participating in a telematics program. An additional 35 percent stated that they made small changes in their driving behavior. Policyholders became more comfortable with having their insurer monitor their driving behavior when it resulted in potentially lower insurance costs during the onset of the pandemic.

“If telematics can influence drivers to change behaviors and reduce the number of accidents, the nation’s roadways will be safer and auto insurance can be more affordable,” Porfilio concluded.

Learn More:

Facts + Statistics: Distracted driving | III

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

Surge in U.S. Auto Insurer Claim Payouts Due to Economic and Social Inflation

Federal “Reinsurance” Proposal Raises Red Flags

By Sean Kevelighan, Triple-I CEO

Legislation proposed by U.S. Rep. Adam Schiff (D-Calif.) to create a federal “catastrophe reinsurance program” raises several concerns that warrant scrutiny and discussion – starting with the question: Does what’s being proposed even qualify as insurance?

If enacted into law, the bill would establish a “catastrophic property loss reinsurance program…to provide reinsurance for qualifying primary insurance companies.” To qualify, insurers would have to offer:

  • An all-perils property insurance policy for residential and commercial property, and
  • A loss-prevention partnership with the policyholder to encourage investments and activities that reduce insured and economic losses from a catastrophe peril.

The proposed program would phase in coverage requirements peril by peril over several years and discontinue FEMA’s National Flood Insurance Program (NFIP). It would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.

And nowhere in the 22-page proposal do any of the following words or phrases appear:

  1. “Actuarial soundness”;
  2. “Risk-based pricing”;
  3. “Reserves”; or
  4. “Policyholder surplus”.

Actuarially sound risk-based pricing and the need to maintain adequate reserves and policyholder surplus to ensure financial strength and claims-paying ability are the bedrock of any insurance program worthy of the name – not technical fine print to be worked out down the road while existing mechanisms are being dismantled and market forces distorted through government involvement.

Insurance is a complicated discipline, and prior federal attempts at providing coverage have struggled to balance their goal of increasing availability and reducing premiums against the need to base underwriting and pricing on actuarially sound principles to ensure sufficient reserves for paying claims.

Actuarially sound risk-based pricing and the need to maintain adequate reserves and policyholder surplus…are the bedrock of any insurance program worthy of the name – not technical fine print to be worked out down the road

Sean Kevelighan, CEO, Triple-I

Learn from history

NFIP is a strong case in point. Created in 1968 to protect property owners for a peril that most private insurers were reluctant to cover, NFIP’s “one-size-fits-all” approach to underwriting and pricing has led to the program now owing more than $20 billion to the U.S. Treasury because it lacked the reserves to fully pay claims after major events like Hurricane Katrina and Superstorm Sandy. It also often led to lower-risk property owners unfairly subsidizing coverage for higher-risk properties.

Having thus learned the importance of risk-based pricing, NFIP has changed its underwriting and pricing methodology. The new approach – Risk Rating 2.0, announced in 2019 and fully implemented as of April 1, 2023 – more equitably distributes premiums based on home value and individual properties’ flood risk. As a result, premiums of previously subsidized policyholders – particularly in coastal areas with higher values – have risen, leading to outcries from many higher-risk owners who have seen their subsidies reduced.

In addition to leading to fairer pricing, Risk Rating 2.0 – by reducing market distortions – increases incentives for private insurers to get involved. For a long time, private insurers considered flood an untouchable peril, but improved data modeling and analytical tools have increased their comfort writing this business. As the charts below show, private insurers have been playing a steadily increasing role in recent years, covering a larger percentage of a growing risk pool.

Over time, this trend should lead to greater availability and affordability of flood insurance coverage.

Rather than incorporating the lessons generated by NFIP’s experience with a single peril, Rep. Schiff’s proposal would discontinue the reformed flood insurance program while adding a new layer of complexity to coverage across all perils and casting into question the future of various state insurance programs and residual market mechanisms currently in place.

Time-tested principles

Any attempt by the federal government to address insurance availability and affordability concerns must be made with an understanding of how insurance works – from pricing and underwriting to reserving and claim settlement. For example, the Schiff bill proposes piloting an all-perils policy with a term of five years. There are good reasons for property/casualty policies to be written with a one-year term. Specifically, the conditions that affect claims costs can change quickly, and insurers – as referenced above – must set aside sufficient reserves to be able to pay all legitimate claims. If they cannot revisit pricing annually, the financial results could be disastrous.

“Who would have thought in 2019 that replacement costs would increase 55 percent within three years?” asked Dale Porfilio, Triple-I’s chief insurance officer. Supply-chain disruptions related to the COVID-19 pandemic and Russia’s invasion of Ukraine contributed to just such a replacement-cost spike. “Requiring five-year terms for policies would have led to a massive drain on policyholder surplus.” 

Policyholder surplus is the financial cushion representing the difference between an insurer’s assets and its liabilities.

In announcing his proposed legislation, Rep. Schiff said it is intended to “insulate consumers from unrestrained cost increases by offering insurers a transparent, fairly priced public reinsurance alternative for the worst climate-driven catastrophes.”

This language ignores the fact that, under state-by-state regulation, premium rate increases are anything but “unrestrained” and ratemaking is based on actuarially sound principles that are transparent and fair. Property/casualty insurance already is one of the most heavily regulated industries in the United States.

Consumers deserve real solutions

Policyholders have legitimate concerns about affordability and, in some cases, availability of insurance. These concerns can create pressure for political leaders at both the state and federal levels to advance measures that are perceived as promising to help. Unfortunately, many recent proposals begin by mischaracterizing current trends as an “insurance crisis,” as opposed to what they really represent: A risk crisis.

Insurance premium rates tend to move in line with the frequency and severity of the perils they cover. They also are affected by factors like fraud and litigation abuse; climate, population, and development trends; and global economics and geopolitics. That is why insurers hire actuaries and data scientists and employ cutting-edge modeling technology to ensure that insurance pricing is actuarially sound, fair, and compliant with regulatory requirements in all states in which they do business.

That is how insurers keep lower-risk policyholders from unfairly subsidizing higher-risk ones.

To its credit, the federal government is working to reduce climate-related risks and investing in resilience through programs like Community Disaster Resilience Zones (CDRZ) and FEMA’s Building Resilient Infrastructure and Communities (BRIC) program. The Bipartisan Infrastructure Law contains substantial funding to promote climate resilience. These are worthy endeavors aimed at addressing risks that drive up insurance costs.

But history has shown that direct government involvement in the underwriting and pricing of insurance products tends not to end well.  Any plan that would attempt to micromanage insurers’ coverage of all perils through a lens that ignores time-tested, actuarially sound risk-based pricing principles raises a host of red flags that must be discussed and addressed before such a plan is allowed to become law.

Learn More:

It’s Not an “Insurance Crisis” — It’s a Risk Crisis

Miami-Dade, Fla., Sees Flood Insurance Rate Cuts, Thanks to Resilience Investment

Illinois Bill Highlights Need for Education on Risk-Based Pricing of Insurance

Education Can Overcome Doubts on Credit-Based Insurance Scores, IRC Survey Suggests

Matching Price to Peril Helps Keep Insurance Available and Affordable

Policyholder Surplus Matters: Here’s Why

Triple-I Issues Brief: Flood

Triple-I Issues Brief: Proposition 103 and California’s Risk Crisis

Triple-I Issues Brief: Risk-based Pricing of Insurance

Triple-I Issues Brief: How Inflation Affects P/C Insurance Pricing – and How It Doesn’t

Triple-I Issues Brief: Race and Insurance Pricing

Miami-Dade, Fla., Sees Flood-Insurance
Rate Cuts, Thanks to Resilience Investment

Miami-Dade County, Fla., has become the latest jurisdiction in the hurricane- and flood-prone state to benefit from participation in FEMA’s Community Rating System (CRS) – an incentive program that recognizes and encourages  floodplain management practices that exceed the minimum requirements of FEMA’s National Flood Insurance Program (NFIP).

The county’s new Class 3 rating will result in an estimated $12 million savings annually by giving qualifying residents and business owners in unincorporated parts of the county a 35 percent discount on flood insurance premiums.  

“This is a huge step forward in resilience for our county,” Miami-Dade County Mayor Daniella Levine Cava said after FEMA announced that Miami Dade had leaped ahead two rankings in the flood-risk rating. “It indicates that we have been able to demonstrate that we can create more resilience, more protection for our community.”

Miami-Dade County has invested $1 billion in stormwater infrastructure over the past 33 years since the inception of the county’s stormwater utility. Under Mayor Levine Cava’s administration, the county has planned to invest an additional $1 billion in stormwater infrastructure. In the past two years, the county has accelerated projects to upgrade Miami-Dade’s infrastructure and implement critical flood mitigation activities. 

Last year, 17 Florida jurisdictions achieved Class 3 ratings. In Cutler Bay – a town on Miami’s southern flank with about 45,000 residents – the average premium dropped by $338. Citywide, that represented a savings of $2.3 million.

Over 1,500 communities nationwide participate in the CRS program, but only Tulsa, Okla., and Roseville, Calif., have taken sufficient steps to achieve Class 1 status and have their citizens receive the greatest premium discount of 45 percent. Both of these communities previously experienced disastrous flooding. Tulsa spent decades developing and implementing stormwater management improvements before receiving its Class 1 designation in 2022.

About 90 percent of all U.S. natural disasters involve flooding. Whether related to coastal and inland inundation due to hurricanes, extreme rainfall, snowmelt, mudflows, or other events, floods cause billions of dollars in losses each year.

As reported in a recent Triple-I “State of the Risk” Issues Brief, flood is no longer an “untouchable” risk for private insurers. For decades, the federally run NFIP was the only place where homeowners could buy flood insurance. But improved data, analysis, and modeling have helped drive private-sector interest in flood risk.

That’s good news for homeowners who understand the evolving nature of this peril, especially as FEMA’s new pricing methodology – Risk Rating 2.0 – applies more actuarially sound pricing to make NFIP’s premium rates more equitable. As NFIP rates become more aligned with principles of risk-based pricing, some policyholders’ prices are expected to fall, while many are going to rise.

CRS provides one avenue for communities to help their citizens get lower rates while proactively reducing flood risk.

Chubb Highlights Perils Keeping High-Net-Worth People Awake at Night

According to a recent Chubb survey of 800 high-net-worth individuals in the United States and Canada, 92 percent are concerned about the size of a verdict against them if they were a defendant in a liability case – yet only 36 percent have excess liability insurance.

When it comes to liability, Chubb says respondents are most worried about auto accidents, allegations of assault or harassment, and someone working in their home getting hurt. Damage awards are rising dramatically for a number of reasons, according to Laila Brabander, head of North American personal lines claims for Chubb.

“Economic damages historically were based on factors such as the extent of an injury and resultant medical expenses or past and future loss of income,” she said. “But we are seeing a rise in non-economic damages, such as pain and suffering and post-traumatic stress disorder, that overshadow actual economic losses.”

Brabander described a case in which a client at a yoga studio fell onto the person next to her and was sued by the injured party for pain and suffering.

“The same plaintiffs’ tactics to encourage large verdicts in commercial trucking, auto liability, product liability and medical malpractice suits are now being utilized to push for larger jury awards against our high-net-worth clients,” Brabander said.

Another factor driving up the cost of settlements is the third-party litigation funding, in which firms  provide funding to plaintiffs and their lawyers in exchange for a percentage of the settlement. These private-equity firms began in the commercial space and are now funding lawsuits against individuals and their insurers.

High-net-worth people also are deeply concerned about the threats posed to their homes by extreme weather and climate-related events. Much of this concern may be due to increased development in coastal areas vulnerable to tropical storms and flooding and in the wildland-urban interface – areas in which development places property into proximity with fire-prone wilderness (see links below).

Chubb’s findings are based on a survey of 800 wealthy individuals in the United States (650 respondents) and Canada (150 respondents). Respondents had investable assets of at least $500,000, with the majority reporting assets of $1.5 million to $50 million and 12 percent reporting assets of more than $50 million.

Learn More:

Triple-I Issues Brief – State of the Risk: Wildfire

Triple-I Issues Brief – State of the Risk: Hurricanes

What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability?