Severe convective storms—tornadoes, hail, drenching thunderstorms with lightning, and damaging straight-line winds—are among the biggest threats to life and property in the United States. They were the costliest natural catastrophes for insurers in 2019, and this year’s tornado season is already shaping up to be the worst in nearly a decade.
A new
Triple-I paper describes how population
growth, economic development, and possible changes in the geography, frequency,
and intensity of these storms contribute to significant insurance payouts. It
also examines how insurers, risk managers, individuals, and communities are
responding to mitigate the risks and improve resilience through:
Improved
forecasting,
Better
building standards,
Early
damage detection and remediation, and
Increased
risk sharing through wind and hail deductibles and parametric insurance
offerings.
The 2020 tornado season coincided with most of the U.S. economy shutting down over the coronavirus pandemic. This could affect emergency response and resilience now and going into the 2020 hurricane season, which already is being forecast as “above normal” in terms of the number of anticipated named storms.
Business interruption insurance and liability issues remain
on the front burners as governments begin gradually “reopening the economy” amid scary new
projections about the pandemic.
A measure that would make it
easier for small businesses in Washington, D.C. to claim coronavirus-related damages
under business interruption insurance policies is on hold after six of the 12
D.C. Council members raised concerns about its legality and the costs it could
impose on insurers.
Council Chairman Phil Mendelson
struck the language from a broader pandemic emergency bill to allow for more
debate. Councilman Charles
Allen had spearheaded the measure after many small
businesses have seen their insurers deny such claims.
The American Property
Casualty Insurance Association estimates local businesses
could claim losses of hundreds of millions of dollars each month.
“These numbers dwarf the
premiums for all relevant commercial property risks in the key insurance lines
for D.C., which are estimated at $16 million a month,” David Sampson, the
association’s president and CEO, wrote in a statement. “We oppose
constitutionally flawed legislation that retroactively rewrites insurance
contracts and threatens the stability of the sector, to the detriment of all
policyholders.”
Faced with 20,000 coronavirus
deaths and counting, the nation’s nursing homes are pushing back against a
potential flood of lawsuits with a sweeping lobbying effort to get states to
grant them emergency protection from claims of inadequate care.
The Associated Press reports that
at least 15 states have enacted laws or governors’ orders that explicitly or
apparently provide nursing homes and long-term care facilities some protection
from lawsuits arising from the crisis. And in the case of New York, which leads
the nation in deaths in such facilities, a lobbying group wrote the first draft
of a measure that apparently makes it the only state with specific protection
from both civil lawsuits and criminal prosecution.
As the federal and state governments discuss plans for “reopening
the economy,” it’s important to recognize and plan for the fact
that the impacts of the virus and our responses to it will be playing out for
some time to come.
Were auto insurers too quick to give back?
Despite record-low vehicle miles traveled, Digital
Insurance reports, severe and fatal
crashes in U.S. cities have increased since COVID-19. There have been more
speeding and more severe and deadly crashes than before the business shutdowns
and sheltering in place instituted in response to the pandemic.
In New York City, traffic volume decreased between 78% and 92%
compared to January, but there was a 57% increase in speeding violations in the 10 days following the governor’s stay at home
orders. And there were six deadly crashes from
March 2 to April 8, which is more deadly crashes than the same time period in
any of the previous five years.
Numbers like these suggest the auto insurers that have returned
more than $10 billion to policyholders
through premium relief – on the premise that fewer cars on the road would mean
fewer crashes and claims – might have acted prematurely.
A.I. to enforce social distance, limit liability
Reuters reports that stores and other workplaces eager to avoid spreading the virus that causes COVID-19 are equipping existing security cameras with artificial intelligence software that can track compliance with health guidelines including social distancingA. and mask-wearing.
The software will allow them to show not only
workers and customers, but also insurers and regulators, that they are
monitoring and enforcing safe practices.
“The last thing we want is for the governor to shut all our
projects down because no one is behaving,” said Jen Suerth, vice president at
Chicago-based Pepper Construction, which introduced software this month to
detect workers grouping at a project in Illinois.
How will the COVID-19 pandemic affect auto
insurers in the longer term? No one knows for sure, of course, but a new McKinsey
study provides a framework for considering the question.
Fewer people are driving due to business
closures and work-from-home practices. This could lead to fewer accidents and
claims – but evidence suggests severity of the claims generated may worsen. Speeding
has increased in several states – in some cases, leading to fatal accidents.
In the longer term, McKinsey suggests, the
pandemic could precipitate structural changes in the market for car insurance:
“Mobility trends may pause if more people choose to own a car and drive
everywhere because they think ride sharing and public transportation are too
risky…. Historically low oil prices will make driving much more affordable.”
On the other hand, if car purchases decrease
because of economic uncertainty and unemployment, insurance sales could decline,
hurting revenues. The industry already has returned
more than $10 billion to policyholders through premium
relief during the crisis, which also could affect insurers’ bottom lines.
Four scenarios
The McKinsey report lays out four scenarios to
help insurers think about how the economic impact may play out in the longer
term.
Pause and rebound. This scenario
supposes the economic slowdown will end rapidly and the rebound will occur as
quickly as the contraction. Consumers’ behavioral changes are assumed to be
limited. Drivers might be a bit more conservative after the shutdown,
exhibiting more caution, leading to fewer accidents which would help insurer
profitability.
“Pent-up demand, supply-chain innovation, and infrastructure
commitments would pull the economy to near pre-COVID-19 levels within weeks,”
McKinsey writes.
YOLO (You Only Live Once).
This scenario is defined by a rapid economic rebound but also more aggressive
driving behaviors: “Fueled by cheap gas and a disdain for shared mobility, the
roads and highways would become more crowded.”
Under
this scenario, McKinsey writes, accident
severity would continue to climb, putting pressure on insurers to raise rates.
The sudden drop in accident frequency during the pandemic, followed by a rapid
escalation, “could strain the accuracy of actuarial techniques and regulatory
expectations.”
Retrenchment. Difficulty managing
the virus and complications from the business shutdown lead to a lengthy
economic downturn: “As in the pause and rebound scenario….new behavioral norms
would result in less travel, redefine entertainment, and contribute to a more cautious
outlook on life.”
Favorable trends in claims frequency would continue, and claims
severity would moderate in line with the more conservative behaviors.
But, McKinsey writes, “consistent with economic conditions, a
surge would occur in the nonstandard market and state risk pools. Fraud would
also spike as a by-product of economic pressures.”
Insurers could face consumer and regulatory pressure to return more
premiums or reduce them further and expand coverage. Profitability would suffer.
Black swan. Worst case for
economic contraction and behavioral changes. New behavioral norms generate a YOLO outlook and compromise
policing capabilities. Accident frequency would rise sharply. Claims severity
would continue to climb.
“In addition,” McKinsey writes, “regulatory pressure could push
rates down further or force expanded coverage,” exacerbating worsening profitability.
McKinsey
analyzes the potential impact on auto insurers under each of these scenarios
and associates each with a projected combined ratio – the most frequently used
measure of insurer profitability.
Social media has been abuzz with posts suggesting life insurance claims related to COVID-19 are being summarily denied. Much of the anxiety seems to stem from a news story titled: Would my life insurance policy cover COVID-19 related death?
An anchor for the news organization that aired the piece shared it on Twitter below the tweet:
Will your life insurance cover you if you die from #COVID19?
Well, it depends.
The tweet is accurate enough. As it would be if the reference to COVID-19 was deleted. Or if the tweet referred to another form of insurance.
Claims sometimes are denied.
According to the American Council of Life Insurers 2019 Fact Book, life insurance death benefits paid in 2018 totaled nearly $80 billion, up from $77 billion in 2017. Steadily rising annual payouts like the ones shown in the chart below don’t suggest an industry that spends a great deal of time slithering through loopholes to avoid paying legitimate claims.
“Life insurance claims are rarely denied,” says Triple-I chief economist Dr. Steven Weisbart. “When they are, it’s typically because the policies had lapsed due to non-payment of premium or the policyholders had provided inaccurate or misleading information at the time of application or renewal.”
Even in the event of a material misstatement on a life insurance application – say, the applicant lied about a significant health issue – the insurer has to discover the misrepresentation within a defined “contestability period.”
If the policyholder dies within that period, which typically lasts two years from the date of purchase, Dr. Weisbart says, the insurer can investigate whether the information the applicant provided was accurate. If the policyholder dies after the contestability period ends, the insurer is out of luck.
Insurers don’t make money by rejecting claims. They make money by underwriting accurately, investing wisely, and making customers happy enough to recommend them to friends and family.
Compare the chart above, showing the billions of dollars in death benefits paid, with the chart below showing that contested claims are only a tiny fraction of those paid – and bear in mind that many, if not most, of those contested claims ultimately ended up being paid.
Regulated and closely watched
Insurance is one of the most heavily regulated and closely scrutinized industries in the world, and claims payment is at the heart of the insurance customer experience. Insurers don’t make money by rejecting claims. They make money by underwriting accurately, investing wisely, and – as with any other business – making customers happy enough to recommend them to their friends and family.
Unfortunately, many people – including much of the media – simply don’t understand how insurance works: how premiums are set, what types of risks are excluded (or that exclusions are even “a thing”), and how reserves and policyholder surplus work.
This is demonstrated in some of the contentious discussions around COVID-19-related business interruption claims. In the case of business interruption, most of the denied claims have been against policies that specifically exclude losses related to infectious disease. Moves are now afoot to retroactively rewrite those contracts – to the immediate detriment of the insurance industry and longer-term danger to the people and businesses that depend on insurance – as well as anyone who ever enters into any contract ever again.
I know of no life insurance policy that specifically excludes death from infectious disease. It’s possible some “dread disease” policies that cover specific conditions, such as cancer, might not be paid if COVID-19 – rather than the disease insured against – is deemed to be the cause of death. Or that a life claim might be denied if premium payments were missed or a policyholder smoked or engaged in some other activity associated with high coronavirus mortality that they’d denied on their application less than two years earlier.
So, yes: Some claims may be denied. But such denials are rare and – social media agitation notwithstanding – don’t imply nefarious behavior on the part of insurers.
Financial First Responders
As the economic impact of the pandemic makes it difficult for consumers to keep current on their bills, states have begun to mandate that life insurers keep policies in force, even if policyholders miss payments. At the same time, insurers – facing big financial hits across the many categories of risk they cover (including recent tornadoes and the upcoming hurricane and wildfire seasons) – are doing a lot to support their customers and the communities in which they do business during this crisis.
Insurers are financial first responders when it comes to just about any loss-creating event the average person might imagine. Media organizations would do their consumers a greater service by clarifying that role and helping them understand how best to shop for the insurance they need than by dropping scary, misleading tweets on an already anxiety-filled public.
Triple-I CEO Sean Kevelighan today joined legislators and legal experts to discuss proposed measures that could retroactively rewrite business interruption insurance policies.
“The insurance industry is
applying forward-thinking solutions to take care of its customers, communities,
and employees during the COVID-19 crisis,” Kevelighan said, citing more than $10
billion so far returned to customers through premium relief; $200 million in
charitable donations; and insurers pledging not to lay off employees during the
crisis and implementing innovative solutions to conduct daily operations while
respecting social distancing. “We’re deeply engaged in mitigating the economic
impact of this pandemic.”
But the industry can only do
these things – while keeping its promises to policyholders and preparing for impending
catastrophes – if policyholder surplus isn’t eliminated, as it could be if some
of the proposed legislative “solutions” were enacted.
Legislation has been discussed or
introduced in Louisiana, Massachusetts, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, and South Carolina that would retroactively enact
business interruption coverage into existing policies despite an absence of the
physical damage required in property policies and/or express exclusions for
communicable diseases in those policies.
Kevelighan explained how policyholder
surplus provides a cushion that enables insurers to meet their obligations,
even when large, unexpected catastrophes occur. He showed how retroactively
rewriting insurance contracts could make it impossible for insurers to play
their critical role as “financial first responders.”
The scenarios he discussed could
cost the industry $150 billion and $380 billion per month – “quickly
eliminating the surplus it has taken the industry centuries to accumulate.”
And they would do this in the
midst of a tornado season that is shaping up to be the deadliest
in eight years and as a “more active than
normal” hurricane
season approaches.
Kevelighan made his remarks
during a webinar sponsored by the National Council of Insurance Legislators
(NCOIL) and the Rutgers Center for Risk and Responsibility at Rutgers Law
School. Other panelists included NCOIL
President and Indiana Rep. Matt Lehman; New Jersey Assemblyman Lou Greenwald; and Jay Feinman and Adam Scales, Professors
of Law at Rutgers Law School and Co-Directors of the Rutgers Center for Risk
and Responsibility.
The panelists all expressed support for the creation of a COVID-19 Business Interruption and Cancellation Claims Fund, similar to the 9/11 Victims Compensation Fund enacted by Congress in 2001, for businesses suffering from costs related to the interruption of their businesses, as well as the many associations that have had to cancel events. Funded by the federal government and operated by a special federal administrator, it would facilitate distribution of federal funds and liquidity to impacted businesses during this time of incalculable business interruption.
The coronavirus crisis continues to generate data that can be valuable for understanding and decision making. Below are just a few resources that may be of interest to insurers and the people and businesses they serve.
Graphs from the University of Texas COVID-19 Modeling Consortium show reported and projected deaths per day across the United States and for individual states.
The Verisk COVID-19 Projection Tool has been made available to enhanceunderstanding of the potential number of worldwide COVID-19 infections and deaths. It provides an interactive dashboard that leverages the AIR Pandemic Model.
Small and medium-size businesses account for roughly 44% of the U.S. economy and provide employment to about 59 million people. McKinsey is tracking their sentiment to gauge how their views on economic activity, employment, and financial behavior—as well as their expectations about financial institutions and public authorities—change as a result of ongoing public and private interventions.
