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Each month we summarize the latest research relevant to the insurance industry. Highlights from the January issue include:
And much more…..
Homeowners insurance non-renewals were on many listeners’ minds during last week’s Insurance Information Institute (I.I.I.) radio satellite media tour (SMT) on the aftermath of the 2017-18 California wildfires.
With 20 media outlets throughout the state participating, I.I.I. CEO Sean Kevelighan, Head of Media and Public Affairs Michael Barry, and Director of Strategic Communications Janet Ruiz were on hand to answer questions from journalists.
As the frequency and cost of California wildfires increase, it’s getting harder for homeowners in fire-prone areas to buy and keep insurance. In August 2019, the California Department of Insurance released data showing insurers are non-renewing an increasing number of residents in areas with high wildfire risk.
The guidance the I.I.I. provided to Californians faced with this dilemma included:
The I.I.I.’s speakers also emphasized during the SMT that property owners can make their homes more resilient to wildfires by mitigating their own risks; how California’s insurers disbursed nearly $25 billion to their customers to help them recover financially from the 2017-18 wildfires; and how state regulators are working with insurers to price accurately the risks of covering homes in wildfire-prone communities.
Within hours of I.I.I.’s SMT, California Insurance Commissioner Ricardo Lara announced mandatory protections from insurance non-renewals extending into new areas of Northern and Southern California. The one-year moratorium covers residential policies in ZIP codes adjacent to recent wildfire disasters. The law cited by Commissioner Lara (Senate Bill 824) protects homeowners adjacent to a declared wildfire emergency who didn’t suffer a total loss — recognizing the disruption non-renewals cause in communities after wildfire disasters.
Below is a list of the participating radio stations and podcasters who taped the I.I.I. conversations for either broadcast or streaming in January 2020:
KCAA 1050-AM/KRLA 870-AM/KSPA 1510-AM Los Angeles/KDIA 1640-AM/KFAX 1100-AM Radio San Francisco-Oakland-San Jose “Bill Martinez Live”
Business Radio X-IND Podcast National, “The Mark Bishop Podcast”
KOCI 101.5-FM Los Angeles/Liberty Express Radio Network-AM/FM Radio Syndicated “School for Startups”
KSZL 1230-AM Radio Los Angeles “America Tonight with Kate Delaney”
KMET 1490-AM Los Angeles – KEST 1450-AM Radio San Francisco-Oakland-San Jose, “Talk! With Audrey”
Transformation Talk Radio-Online Podcast National, “The Dr. Pat Show”
KVTA 1590-AM Radio Los Angeles, “The Kim Pagano Show”
KSTE 650-AM Radio Sacramento-Stockton-Modesto, “The Chad Benson Show”
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For those still tiptoeing around whether the property insurance market is yet officially “hard,” two speakers at Advisen’s Property Insights Conference last week unabashedly used the “H-word,” and none of the 300-plus insurance and risk-management professionals attending seemed to disagree.
Gary Marchitello, head of property broking for Willis Towers Watson, was first to say it in an on-stage conversation with Michael Andler, executive vice president/U.S. property practice leader at Lockton Cos.
Andler concurred: “If it walks like a hard market and talks like a hard market, it’s a hard market.”
Some presenters during the daylong event quibbled over when pricing went from merely “hardening” to “hard”. Some said the hard market is eight quarters old, while others said it began as recently as the second quarter of 2019 – but no one piped up to deny it’s here.
In a hard market, demand for coverage is strong, supply weak. Insurers impose strict underwriting standards and issue fewer policies. Consequently, buyers pay higher premiums. During soft markets, customers can negotiate lower prices as insurers compete for business. When the market hardens again, prices rise as insurers adjust rates at renewal.
Marchitello, with four decades’ experience, said this hard market is different: “With prices rising, you’d expect new entrants to the market. That is absolutely not happening.”
“It’s going to get worse before it gets better,” he added. “Two years of combined ratios above 100 have forced underwriters to drive profitability” rather than pursue market share, as many did during the soft market.
We brought it on ourselves
In a room packed with insurers, brokers, and buyers, one might expect some finger pointing for the dramatic price increases. I heard little to none.
“We as underwriters allowed it to happen,” said Erik Nikodem, senior vice president at Everest Insurance.
“We lost the script during the soft market,” said Michal Nardiello, senior vice president at CNA. “We pushed deals that weren’t sustainable in the long haul.”
And it wasn’t only underwriters accepting responsibility.
“I never turned down a lower rate” when the market was soft, said Lori Seidenberg, global director of real assets insurance for BlackRock. Not that she should have – but professional risk managers know a soft market isn’t going to last forever and need to plan accordingly.
Despite this admirable accountability, it’s important to remember larger forces have been at work. As CNA’s Nardiello put it: “There’s been a massive shift of wealth and people into areas prone to fire, tornados, hail, and flood” – perils that are themselves changing in frequency and intensity.
Also a factor is “social inflation” – rising litigation costs that drive up insurers’ claim payouts, loss ratios, and, ultimately, policyholder premiums. It’s been estimated that social inflation “could ultimately blow a $200 billion hole in global reserves.”
What’s next?
Carriers, customers, and brokers all acknowledged the need to do things differently. While much was said about using technology, data, and analytics to improve underwriting and reduce expenses, the dominant theme was communication. All parties recognized they must communicate early and often.
As Duncan Ellis, head of retail property, North America for AIG, put it: “Bad news doesn’t get better with time.”
“It’s important for brokers to get a handle on the data,” said Theresa Purcell, director of risk management for real estate giant Kushner. She also recommended that brokers “get creative. Suggest different structures. Educate us about other services” that might better suit individual customer needs.
Stephanie Hyde, executive director at P-E Risk, an insurance and risk management consultancy, echoed Purcell, adding that brokers need to “educate yourselves about all lines of coverage your clients need so you can understand what they’re going through.”
Maria Grace, vice president and chief underwriting officer for property and inland marine at Everest, urged brokers to “put us [underwriters] in front of your clients” to help them understand why prices are increasing and, where possible, offer more appropriate solutions.
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Colorado State University’s Department of Atmospheric Science released a summary of the 2019 Atlantic hurricane season today.
The 2019 season yielded 18 named storms, six of which became hurricanes, including three major ones (Category 3 or higher, with maximum sustained winds of at least 111 mph). While 18 is quite a bit more than the seasonal average of 12 , seven of the named storms lasted 24 hours or less – the most on record with such short longevity.
“The season ended up slightly above average when looking at integrated metrics, such as accumulated cyclone energy, that account for frequency, intensity and duration of storms,” said Dr. Phil Klotzbach, research scientist in the Department of Atmospheric Science, non-resident scholar at the Insurance Information Institute (I.I.I.), and lead author of the report. “We generally forecast a near-average season, so we slightly under-predicted overall levels of Atlantic hurricane activity.”
Of the three major hurricanes, Dorian was the most destructive. Forming in late August, it devastated the northwestern Bahamas at Category 5 intensity, causing over 60 fatalities and economic losses that could be as much as $7 billion, according to a recent Artemis report. It then made landfall near Cape Hatteras, North Carolina, as a Category 1 hurricane and later caused significant damage in the Atlantic Provinces of Canada. Insurance broker Aon estimates the economic value of the damage Dorian inflicted on the United States at approximately $1.2 billion.
Hurricane Humberto, forming in September, caused much less damage than Dorian, as it remained hundreds of miles offshore. Nevertheless, it caused large swells across the U.S. East Coast and resulted in one fatality when a man drowned due to a rip current in North Carolina. Another man was reported missing in St. Augustine, Florida after the storm. Bermuda officials reported that no fatalities occurred on the island during Humberto’s passage.
Hurricane Lorenzo became a Category 5 hurricane in the central subtropical Atlantic – the farthest east Cat 5 Atlantic formation on record. It generated 49-foot waves, with an occasional rogue wave nearing 100 feet, sending swells to both sides of the Atlantic. Lorenzo caused 10 fatalities.
The most destructive storm to hit the continental United States in the 2019 season almost didn’t have a name. Two hours before dumping 40 inches of rain in some parts of Texas, Tropical Storm Imelda was just “a tropical depression,” Dr. Klotzbach said. Imelda was upgraded to a named storm 90 minutes before landfall, but it proceeded to deluge southeast Texas, causing at least $2 billion in economic damage and at least five deaths, according to Aon.
“From a wind perspective, Imelda was practically a non-event,” Dr. Klotzbach continued. “But the rain it brought made it the most expensive tropical cyclone to hit the United States during the 2019 season.”
The 2019 Atlantic hurricane season began on June 1 and ends officially on November 30. Colorado State’s full summary and verification report is available here.
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Here are the 5 most clicked on articles from this week’s Triple-I Daily newsletter.
To subscribe to the I.I.I. Daily email daily@iii.org.
Each month we summarize the latest research relevant to the insurance industry. Highlights from the November issue include:
And much more…..
By Max Dorfman, Research Writer, Insurance Information Institute
Brexit and Lloyd’s of London
The latest (but perhaps not the last) Brexit deadline is set for January 31, 2020. Yet the insurers most affected by the U.K.’s divorce from the European Union (EU) have plans in place to continue business with minimal disruption. Indeed, U.K. businesses have been operating in the EU’s Single Market for so long, many are questioning how these entities will adapt to increased regulations. One entity where these questions are particularly relevant is Lloyd’s of London.
What is Lloyd’s?
Lloyd’s is not an insurance company, but a marketplace where capital and underwriting converge on a global platform operated by the Corporation of Lloyd’s. Lloyd’s includes five key stakeholders: syndicates, which function as underwriting entities, assuming risks and paying claims; managing agents, who capitalize and operate the syndicates; brokers, who are intermediaries between policyholders and syndicates; coverholders, which are local MGA’s that underwrite risks on behalf of a syndicate/managing agent (and which also enables the Lloyd’s market to operate globally without establishing local offices); and insurance buyers, many of whom buy insurance through Lloyd’s for complex, emerging or otherwise unique risks. Syndicates specialize in different types of insurance and reinsurance, often participating with each other on a subscription basis (meaning they only take on a part of the risk and pay part of the claim).
The consequences
With gross global premiums written at almost $45 billion in 2018, 13 percent of that generated by the post-Brexit European Union, there were legitimate concerns about how Brexit would affect Lloyd’s role in the EU marketplace. Due to Brexit, “non-admitted” U.K. insurers will no longer be able to conduct insurance business in some EU countries, meaning that nonauthorized insurers cannot conduct business in regulated insurance industries in a different market (which is currently the case in France, Italy, and under certain circumstances, in Germany).
However, Lloyd’s quickly pivoted to ensure that it will continue to provide non-life insurance throughout the European market, regardless of Brexit’s outcome. Although it is anticipated that most of the European Economic Area (EEA) reinsurance will still be written through London on a cross-border basis, in case of a hard Brexit non-life insurance could be covered by Lloyd’s Brussels, which opened in 2018.
Still, non-EU coverholders for Lloyd’s of London—who could previously conduct business throughout the EU without physical offices and permissions from member states—will have to seek proper authorization from the EEA under a “Coverholder Appointment Agreement” (CAA) with Lloyd’s Brussels. This may affect where managing agents raise capital.
Will these new regulations be felt in the US?
A very substantial portion of Lloyd’s international business—over 40 percent of global premiums as of 2018 —is generated in the U.S., with significant exposure on the U.S. insurance lines. While the new regulations will not directly affect business between the U.S. and U.K., the primary concern will be the volume of business in the EEA, which could potentially decrease. But if Lloyd’s pivots some of its business away from Europe, the U.S. could get more attention. In fact, John Neal, Lloyd’s chief executive, stated in an interview with the Financial Times that “If you’re in insurance or investment banking or banking, one dollar in two dollars of everything you do is still U.S. derived, so it’s very important that you maintain your connection and your relevance with the U.S. market.”