Inflation remains the greatest challenge for middle-market companies, according to recent research from Chubb. While the companies Chubb surveyed performed well last year, they are looking at 2024 with trepidation, with rising wages expected to continue fueling inflation. Inflation has also been affected by the Middle East conflicts, which have altered trade routes.
As a result, nearly three-quarters of companies said they would consider increasing their insurance coverage in response to rising replacement costs of their assets due to inflation.
“For companies that experienced operational disruptions, nearly a third acknowledged that they could have been covered if they had purchased available insurance,” the report says. “In addition to potentially being underinsured for inflated property and equipment values, companies often underestimate the time it will take to get back up and running after an insured loss, which points to the need for adequate business interruption coverage and more thorough and realistic business continuity plans.”
Middle-market companies have struggled with inflation since the coronavirus pandemic, partially due to changing employee dynamics. Recession and talent shortage/employee retention were also considered major risks, with 10 percent of those surveyed ranking one of these as the top concern for their companies in the coming year.
The study notes that:
More than two-thirds of companies have raised worker pay in the past year, with an average increase of 5.5 percent.
To retain talented employees, nearly half of companies have offered incentive compensation or retention bonuses and plan to continue that in the future.
Fewer than half the respondents felt they have enough cyber insurance coverage.
Nearly 40 percent of companies surveyed by Chubb expect to raise the prices of their products and services because of these factors.
Other significant findings include respondents stating that small companies are less prepared for business disruptions than mid-size and large ones. This, the study says, opens an opportunity for risk-management strategies that could reduce the need for increased coverage.
Property owners in Lee County, Fla., could lose their flood insurance premium discounts under the National Flood Insurance Program (NFIP) Community Rating System (CRS), according to a recent announcement by FEMA.
CRS is a voluntary program that recognizes and encourages community floodplain management practices that exceed NFIP minimum requirements. Over 1,500 communities participate nationwide.
FEMA informed leaders in the affected communities – which include Cape Coral, Bonita Springs, Estero, Fort Myers Beach, and unincorporated Lee County – that they would begin losing their discounts starting October 1. Under CRS, these communities currently receive discounts of up to 25 percent. Unincorporated Lee County and the City of Cape Coral get the biggest benefit due to their Class 5 ratings. Rates will increase by approximately $300 annually for the 115,000 homeowners impacted by FEMA’s decision.
“This retrograde is due to the large amount of unpermitted work, lack of documentation, and failure to properly monitor activity in special flood hazard areas, including substantial damage compliance,” FEMA said in a statement.
FEMA officials told the Miami Herald that the problems began shortly after Hurricane Ian in 2022, when federal teams visited the communities hit the hardest and looked at the properties they thought were most likely to be substantially damaged, including older homes built in flood zones, some with previous flood damage.
“What the team found, unfortunately, is there was a lot of unpermitted work, lack of documentation,” said Robert Samaan, the regional administrator for FEMA’s Region 4, including Florida. “It was just a failure to properly monitor the activity in the special flood hazard area.”
FEMA shared with the Herald three letters it sent Lee County in 2023 — one in February, one in June and one in December — asking for information on the number of damaged homes and warning that not providing the information could result in the county losing its flood insurance discounts.
In recent months, a number of Florida communities, including Miami-Dade County, have benefited from lower flood insurance premiums as a result of improved CRS scores that reflect resilience-related investment. CRS has become particularly beneficial as NFIP pricing reforms – known as Risk Rating 2.0 –that more closely align premium rates with property-specific risks – have contributed to rising premiums for some property owners. Before these reforms, it was not uncommon for lower-risk owners to be subsidizing higher-risk ones through their premium rates.
Rising NFIP rates have been accompanied by another trend: increased involvement by private insurers in the flood insurance market.
“Florida has the most robust private flood insurance market in the United States, which provides consumers with numerous options for coverage,” said Mark Friedlander, director of corporate communications for Triple-I. “Nearly a third of Florida flood policies are written by private carriers, and many private flood insurers offer better pricing and more robust policies than NFIP. It’s worth taking the time to shop for coverage and obtain multiple quotes.”
As recently as 2018, private insurers provided only 3 percent of flood coverage in Florida.
This growth mirrors a national trend. 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, up from 18 companies writing 12.5 percent. Private insurers are accounting for a bigger piece of a growing pie.
Florida’s Office of Insurance Regulation has heavily promoted the availability of private flood insurance in the state over the past several years, and many private flood insurers are domiciled in the state, Friedlander said.
“We are committed to helping these communities take appropriate remediation actions to participate in the Community Rating System again and work towards future policy discounts,” FEMA said in its statement.
Earlier this year, Sea Isle City, N.J., had its Class 3 rating restored after a brief demotion in 2023. Sea Isle City and Avalon are the only towns in the state to have Class 3 ratings.
By Loretta Worters, Vice President, Media Relations, Triple-I
When Karen Griswold graduated with a B.S. in marketing from Penn State University, her first foray into the business world was to become an executive retail buyer in a large department store. It didn’t take long before she realized it wasn’t a path for her.
She took an informational interview with someone she knew at the Marine Office of America Corp. who suggested she consider participating in their marine insurance training program.
“I didn’t have a maritime background, my family didn’t even own a boat, what did I know about marine insurance?” Griswold said.
“I started as an underwriting trainee assigned to the marine unit,” she explained. “I did 18 months rotating in inland marine, cargo, hull and marine liability and then generalized insurance training through their professional training program and was assigned to a cargo unit in New York as an ocean cargo underwriter.”
It was a fascinating journey, according to Griswold.
“As part of the training I learned aboutmechanical supplies, pharmaceuticals, machinery, and livestock. There was no box you could put yourself in, it was changing all the time.”
Cargo itself was different, Griswold found she had to have a geopolitical sense.
“One day China, another day Brazil, and I had to look at how cargo was shipped weighing variables, such as the value of freight, the price of the boat, whether it will operate inland or on the ocean, and the laws and regulations of countries where the vessel might travel,” she said. “It was fascinating.”
Her career spanned everything from cargo to hull and liability to tugboat and marine facilities. She learned about different classes of marine business, too.
Thirty years later, Griswold is an executive vice president in Chubb’s Ocean Marine Division, and she still finds she learns something new every day.
“It’sa vast insurance world, that’s what I find so exciting and interesting, whether it’s the political impacts of shipping, to global trade laws, different issues in distinct ports, it’s constantly changing and evolving,” she said.
In her current role, Griswold overseas it all: ocean marine, hull, cargo, liabilities, and marinas business. Depending on the day, one might be more interesting than the other.
“That’s one of the things that challenges me the most in my position. “I pick up the paper and find out what’s happening in the world, the political complexities, and how that impacts the way we transact business.”
Education is very important to Griswold, which is why she has been involved with the American Institute of Marine Underwriters (AIMU) since the beginning of her career. She started attending their educational programs as a trainee. Over the years, she has sat on the hull and finance committees and currently serves as AIMU’s Director of Finances.
“AIMU’s President John Miklus has been a great champion of women, and for the industry in general,” she said.
Griswold also is involved with the International Union of Marine Insurance (IUMI) and sits on their policy forum committee that monitors all the global marine issues impacting the industry.
“I believe it is a great privilege to be a woman in the maritime industry; there are not a lot of us,” she explained. “There’s a natural camaraderie between us. For a while, I was the only woman at various events, different organizations, and committees. That has changed throughout my career. It’s an incredible field for people. The gender diversity has increased over the last couple of years and has been encouraging to see.”
Griswold, who celebrated her twenty-fifth anniversary with Chubb, attributes her success to the mentors and sponsors throughout her career – both men and women.
“We need to raise women, not only in the marine industry but in business overall,” she said. “Just being a female in a heavily male-dominated group is a challenge. I’ve been lucky; I’ve been treated fairly, and my experience has largely been positive. Though it has been challenging as a mother, raising children in a male-driven industry, finding that balance. But I’ve had a tremendous amount of support.”
Griswold, who spends a fair amount of time sponsoring women inside and outside the industry, noted that more diversity is needed.
“Being a champion is important, to showcase some of that talent,” she said. “When women see others like them, it’s more empowering to have that bond, that ability to see people like themselves and develop and grow and consider safe spaces. It’s important to showcase those women and their talent.”
While Griswold didn’t have the benefit of sponsorship among senior women, she did have great male sponsors along the way.
“Those men helped me find my voice and my path forward,” she said. “We must help other women to find their voices. We must help each other, empower ourselves, and not create a competitive environment.”
Griswold pointed to the value of Chubb’s business roundtables, which are employee resource groups that offer mentoring and networking.
“We need to find compatibility, friendship, mentoring groups,” she said. “Women need to forge their career paths and find their niche in this field. There is strength in numbers.”
Sea Isle City, N.J., has regained its Class 3 rating under FEMA’s National Flood Insurance Program (NFIP) Community Rating System (CRS) after a brief demotion last year. Being rated Class 3 enables the coastal town’s property owners to receive a 35 percent discount on their federal flood insurance.
CRS is a voluntary incentive-based program designed to encourage strong floodplain management. Class 1 is the highest rating, enabling residents to obtain a 45 percent reduction in their premiums. Class 10 indicates that a community doesn’t participate in CRS. To date, only two of the 1,500 participating communities nationwide have achieved the highest rating: Tulsa, Okla., and Roseville, Calif.
High ratings are not easy to obtain or maintain. Sea Isle City first reached Class 3 in 2018, and the rating was briefly lowered to Class 4 last year after points awarded to communities after Superstorm Sandy expired. The city quickly regained Class 3 status through additional flood-management activities.
In the mid-1990s, conditions were so bad for Sea Isle City that it was nearly ejected from the NFIP. If this had happened, property owners wouldn’t have had access to federal flood insurance. Neil Byrne, the city’s floodplain manager, construction official, building sub-code official, and zoning officer, attributes the improvement to strengthened zoning ordinances that require structures to be elevated higher than FEMA recommends, as well as investment in berms and bulkheads.
“The history of Sea Isle City going from facing expulsion from the NFIP to now leading the charge in the CRS in New Jersey is truly inspirational,” said Thomas Song, FEMA resiliency specialist. “What does not get enough attention is that success in the CRS program has to start with a strong understanding of the day-to-day compliance with NFIP requirements. It is extremely difficult to advance in CRS status without a strong foundation in floodplain-management practices.”
Achieving higher CRS rankings has become something of a friendly competition among coastal New Jersey towns, and only one other New Jersey community – Avalon – has a Class 3.
“Both Sea Isle City and Avalon have demonstrated their commitment in planning for future flooding, implementing higher building standards, and engaging in extensive public outreach,” Song said. “These efforts create an environment geared towards reducing flood damage and enhancing the safety and well-being of residents.”
As NFIP – through its Risk Rating 2.0 reforms – attempts to better align premium rates with risk, CRS discounts become even more significant to owners in flood-prone communities.
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. In January 2024, Miami-Dade County became the latest municipality in the flood- and hurricane-prone state to achieve Class 3, leapfrogging from Class 5 due to the county’s flood-mitigation investments.
Meanwhile, back in New Jersey, Byrne says Sea Isle City hopes to become the state’s first Class 2 community.
“It’s very hard to get to the next level,” he said, but adds that flood pumps could help the city over the hump.
“Ninety-nine percent of our flooding is tidal flooding,” Byrne said, referring to inundation that happens during high tide events. “A lot of it goes away on its own, but we have little areas that need help getting the water out.”
About 90 percent of all U.S. natural disasters involve flooding. For decades, NFIP was practically the only available option for homeowners to obtain flood coverage. Before Risk Rating 2.0, however, coverage for higher-risk properties was often unfairly subsidized by lower-risk property owners.
In recent years, improved data, analysis, and modeling have helped drive increased private-sector interest in flood risk. This, combined with the NFIP reforms, should foster a more competitive flood insurance market in which coverage is both more available and more fairly priced.
“Collective responsibility and multi-disciplinary collaboration are necessary to build resilience around climate-related perils like flood,” said Triple-I CEO Sean Kevelighan. “FEMA’s CRS program is just one example of how communities can make themselves safer and save money through targeted investments that reduce the likelihood and size of catastrophic losses.”
Auto premiums continue to increase as rising labor and material prices, alongside natural disasters, are forcing insurers to contend with significant losses.
As Triple-I previously found in its January report, Insurance Economics and Underwriting Projections: A Forward View, “commercial auto underwriting losses continue, with a projected 2023 net combined ratio of 110.2, the highest since 2017,” according to Jason B. Kurtz, FCAS, MAAA, a Principal and Consulting Actuary at Milliman. 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.
Insurers are now having to increase rates in response to losses that are expected to keep rising.
“Nobody wants to have that higher-price bill,” said Sean Kevelighan, Triple-I’s CEO. However, he added companies “need to price insurance according to the risk level that’s out there.”
While inflation is partially to blame for these increases, natural disasters are also contributing to rising costs—and not only in traditionally disaster-prone areas like Florida and California.
As the overall P&C industry has struggled with severe convective storms, hurricanes, and other natural disasters, these losses have also been felt in commercial auto. In fact, 2023 witnessed around two dozen U.S. storms, each with losses of around a billion dollars or more. This included major lightning, hail, and damaging winds around many areas of the of the U.S.
“While a lot of these storms don’t make national headlines, they do tend to be very costly at the local level,” says Tim Zawacki, principal research analyst for insurance at S&P Global Market Intelligence. “And the breadth of where these storms are occurring is something that I think the industry is quite concerned about.”
While disasters and economic inflation continue to roil commercial auto, so too does social inflation. As the Triple-I previously reported, “social inflation,” which is the presence of inflation in excess of economic inflation, has also significantly contributed to increases in commercial auto premiums.
Triple-I found that “from 2013 to 2022, increasing inflation drove losses up by between $35 billion and $44 billion, or between 19 percent and 24 percent. The pandemic brought significant change to commercial auto liability, decreasing claim frequency while increasing claim severity more dramatically.”
This increased claim severity is at least partially due to changing driving patterns since the pandemic, including distracted driving, which involves behaviors like cellphone use while behind the wheel. A Triple-I Issues Brief, Distracted Driving: State of the Risk, enumerated these concerns, which have undoubtedly played a role in rising commercial auto premiums.
Indeed, a confluence of issues are playing into rising auto premiums. While natural disasters are out of the control of insurance providers and their policyholders, other factors must be addressed to steady the cost of this line of insurance. This includes telematics and usage-based insurance, which has gained more acceptance since the pandemic.
Still, it is incumbent on insurers, policyholders, and policymakers to create a more sustainable market for auto insurance, working together to tackle the challenges of both climate risk and dangerous driving behavior.
Even as the Smokehouse Creek Fire – the largest wildfire ever to burn across Texas – was declared “nearly contained” this week, the Texas A&M Service warned that conditions are such that the remaining blazes could spread and even more might break out.
“Today, the fire environment will support the potential for multiple, high impact, large wildfires that are highly resistant to control” in the Texas Panhandle, the service said.
This year’s historic Texas fires – like the state’s 2021 anomalous winter storms, California’s recent flooding after years of drought, and a surge in insured losses due to severe convective storms across the United States – underscore the variability of climate-related perils and the need for insurers to be able to adapt their underwriting and pricing to reflect this dynamic environment. It also highlights the importance of using advanced data capabilities to help risk managers better understand the sources and behaviors of these events in order to predict and prevent losses.
For example, Whisker Labs – a company whose advanced sensor network helps monitor home fire perils, as well as tracking faults in the U.S. power grid – recorded about 50 such faults in Texas ahead of the Smokehouse Creek fires.
Bob Marshall, Whisker Labs founder and chief executive, told the Wall Street Journal that evidence suggests Xcel Energy’s equipment was not durable enough to withstand the kind of extreme weather the nation and world increasingly face. Xcel – a major utility with operations in Texas and other states — has acknowledged that its power lines and equipment “appear to have been involved in an ignition of the Smokehouse Creek fire.”
“We know from many recent wildfires that the consequences of poor grid resilience can be catastrophic,” said Marshall, noting that his company’s sensor network recorded similar malfunctions in Maui before last year’s deadly blaze that ripped across the town of Lahaina.
Role of government
Government has a critical role to play in addressing the risk crisis. Modernizing building and land-use codes; revising statutes that facilitate fraud and legal system abuse that drive up claim costs; investing in infrastructure to reduce costly damage related to storms – these and other avenues exist for state and federal government to aid disaster mitigation and resilience.
Too often, however, the public discussion frames the current situation as an “insurance crisis” – confusing cause with effect. Legislators, spurred by calls from their constituents for lower premiums, often propose measures that would tend to worsen the problem because they fail to reflect the importance of accurately valuing risk when pricing coverage.
The federal “reinsurance” proposal put forth in January by U.S. Rep. Adam Schiff of California is a case in point. If enacted, it would dismantle the National Flood Insurance Program (NFIP) and create a “catastrophic property loss reinsurance program” that, among other things, would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.
U.S. Rep. Maxine Waters (also of California) has proposed a Wildfire Insurance Coverage Study Act to research issues around insurance availability and affordability in wildfire-prone communities. During House Financial Services Committee deliberations, Waters compared current challenges in these communities to conditions related to flood risk that led to the establishment of NFIP in 1968. She said there is a precedent for the federal government to step in when there is a “private market failure.”
However, flood risk in 1968 and wildfire risk in 2024 could not be more different. Before FEMA established the NFIP, private insurers were generally unwilling to underwrite flood risk because the peril was considered too unpredictable. The rise of sophisticated computer modeling has since given private insurers much greater confidence covering flood (see chart).
In California, some insurers have begun rethinking their appetite for writing homeowners insurance – not because wildfire losses make properties in the state uninsurable but because policy and regulatory decisions made over 30 years ago have made it hard to write the coverage profitably. Specifically, Proposition 103 and its regulatory implementation have blocked the use of modeling to inform underwriting and pricing and restricted insurers’ ability to incorporate reinsurance costs into their premium pricing.
California’s Insurance Commissioner Ricardo Lara last year announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs into their pricing. It is reasonable to expect that Lara’s modernization plan will lead to insurers increasing their business in the state.
It’s understandable that California legislators are eager to act on climate risk, given their long history with drought, fire, landslides and more recent experience with flooding due to “atmospheric rivers.” But it’s important that any such measures be well thought out and not exacerbate existing problems.
Partners in resilience
Insurers have been addressing climate-related risks for decades, using advanced data and analytical tools to inform underwriting and pricing to ensure sufficient funds exist to pay claims. They also have a natural stake in predicting and preventing losses, rather than just continuing to assess and pay for mounting claims.
As such, they are ideal partners for businesses, communities, governments, and nonprofits – anyone with a stake in climate risk and resilience. Triple-I is engaged in numerous projects aimed at uniting diverse parties in this effort. If you represent an organization that is working to address the risk crisis and your efforts would benefit from involvement with the insurance industry, we’d love to hear from you. Please contact us with a brief description of your work and how the insurance industry might help.
When the U.S. Treasury Department’s Federal Insurance Office (FIO) announced in December 2022 that it was considering a new data-reporting mandate for certain property/casualty insurers, it raised red flags for insurers and policyholders.
In response to a request for comments on the proposed data call, Triple-I told FIO the requested data would be duplicative, could lead to misleading conclusions, and – by increasing insurers’ operational costs – would ultimately lead to higher premium rates for policyholders.
“Fulfilling this new mandate would require insurers to pull existing staff from the work they already are doing or hire staff to do the new work, increasing their operational costs,” Triple-I wrote. “As FIO well knows, state-by-state regulation prevents insurers from ‘tweaking’ their cash flows in response to change the way more lightly regulated industries can. Higher costs inevitably drive increases in policyholder premium rates.”
“While we recognize the Treasury’s desire to better understand the impact of climate risk and weather-related exposures on the availability and affordability of the homeowners’ insurance market,” NAIC wrote, “we are disappointed and concerned that Treasury chose not to engage insurance regulators in a credible exercise to identify data elements gathered by either the industry or the regulatory community.”
FIO has listened and responded appropriately. The agency has abandoned its plan to gather data on home insurance rates and availability in high-risk states. Instead, NAIC announced that it has implemented a nationwide Property & Casualty Market Intelligence Data Call (PCMI) in collaboration with FIO.
“The PCMI data call represents the collaborative, nonpartisan work that state insurance regulators have undertaken through the NAIC to address the critical challenge of the affordability and availability of homeowners’ insurance and the financial health of insurance companies,” said NAIC president Andrew Mais, who also serves as Connecticut’s insurance commissioner.
The change in approach is important both on its own merits – in ensuring that FIO obtains the information it needs without excessively and unnecessarily burdening the insurance industry – and in the recognition it reflects that federal actions affecting the insurance industry should involve the industry. For example, legislation proposed by U.S. Rep. Adam Schiff earlier this year to create a federal “catastrophe reinsurance program” raises several concerns that warrant scrutiny and discussion – not the least of which is that it would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.
“Triple-I commends the decision by FIO and NAIC to collaborate on a joint comprehensive property/casualty insurance data call to gather insights into the dramatic changes we’re seeing in the insurance marketplace,” said Triple-I CEO Sean Kevelighan. “Insurance companies are committed to finding solutions for how we can predict and prevent property damage from natural disasters, as well as keeping costs of coverage at competitive levels. Data calls are time-consuming and expensive. A unified collection of data will help make this a more efficient process.”
Even as California moves to address regulatory obstacles to fair, actuarially sound insurance underwriting and pricing, the state’s risk profile continues to evolve in ways that underscore the importance of risk-based insurance pricing and investment in mitigation and resilience.
Triple-I’s latest “State of the Risk” Issues Brief discusses this changing risk environment and the impact of Proposition 103 – a three-decades-old measure that has made it hard for insurers to profitably write coverage in the state. In a dynamically evolving risk environment that includes earthquakes, drought, wildfire, landslides, and — in recent years, due to “atmospheric rivers” — damaging floods, Proposition 103 has prevented insurers from using the most current data and advanced modeling technologies. Instead, it has required them to price coverage based on historical data alone.
It also has restricted accurate underwriting and pricing by not allowing insurers to incorporate the cost of reinsurance into their pricing. Insurers use reinsurance to maximize their capacity to write coverage, and reinsurance rates have been rising for many of the same reasons as primary insurance rates. If insurers can’t reflect reinsurance costs in their pricing – particularly in catastrophe-prone areas – they must pay for these costs from policyholder surplus, reduce their market share in the state, or do both.
Proposition 103 also has impeded premium rate changes by allowing consumer advocacy groups to intervene in the rate-approval process. This makes it hard to respond quickly to changing market conditions, resulting in approval delays and rates that don’t accurately reflect current (let alone future) risk. It also drives up legal and administrative costs.
This has led, in some cases, to insurers deciding to limit or reduce their business in the state. With fewer private insurance options available, more Californians are resorting to the state’s FAIR Plan, which offers less coverage for a higher premium.
This isn’t a tenable situation.
In September 2023, California Insurance Commissioner Ricardo Lara announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs into their premium pricing. In exchange, insurers must cover homeowners in wildfire-prone parts of the state at 85 percent of their statewide coverage.
Issues around property insurance affordability are not confined to California. They’ve been a long time in the making, and they won’t be resolved overnight.
“Any sustainable solutions will have to rest on actuarially sound underwriting and pricing principles,” the Triple-I brief says. “Unfortunately, too often, the public discourse frames the risk crisis as an `insurance crisis’ – conflating cause with effect. Legislators, spurred by calls from their constituents for lower insurance premiums, often propose measures that would tend to worsen the problem because these proposals generally fail to reflect the importance of accurately valuing risk when pricing coverage.”
California’s Proposition 103 and the federal flood insurance program prior to its Risk Rating 2.0 reforms are just two examples, according to Triple-I.
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.
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.
