Category Archives: Insurers and the Economy

Reining in Third-Party Litigation Funding Gains Traction Nationwide

A record number of bills targeting third-party litigation funding are under consideration across the United States, with Georgia and Kansas already passing disclosure measures, according to an analysis by Insurance Insider.

The U.S. Government Accountability Office defines third-party litigation funding as “an arrangement in which a funder who is not a party to the lawsuit agrees to help fund it.” Global multi-billion-dollar investing firms have made it their sole or primary business and are experiencing strong growth. Because the market lacks transparency, estimates on its size can vary but, according to Swiss Re, more than half of the $17 billion invested into litigation funding globally in 2020 was deployed in the United States. Swiss Re estimates the market will be as high as $30 billion by 2028.

Meanwhile, affordability of insurance coverage – especially for commercial auto products – has come under threat from increases in litigation and claim costs. The national surge in legislation seeking to rein in this practice reflects growing concerns about its lack of transparency and undue influence of litigation financing by dark-money investors – many of them outside the United States.

Thirty-five separate bills have been introduced in U.S. statehouses so far this year. The Kansas bill was signed into law by Gov. Laura Kelly, and the Georgia bill is expected to be signed by Gov. Brian Kemp. Similar legislation is advancing through various committees in Arizona, California, Massachusetts, New Jersey, and Oklahoma and have been proposed in more than two dozen other states.

The efforts are not only progressing at the state level. The U.S. House of Representatives is advancing HR 1109 – The Litigation Transparency Act of 2025 – which would regulate third-party litigation funding in federal court cases. A similar bill was introduced in 2024 but did not advance out of committee.

Third-party litigation funding is just one aspect of the larger issue of legal system abuse that contributes to challenges related to property/casualty insurance availability and affordability.

Learn More:

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

Louisiana Litigation Funding Reform Vetoed; AOB Ban, Insurer Incentive Boost Make It Into Law

U.S. Study of Third-Party Litigation Funding Cites Market Growth and Scarce Transparency

IRC Study: Public Perceives Impact of Litigation on Auto Insurance Claims

Florida Bills Would Reverse Progress on Costly Legal System Abuse

Georgia Targets Legal System Abuse

Louisiana Reforms: Progress, But More Is Needed to Stem Legal System Abuse

Despite Progress, California Insurance Market Faces Headwinds

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 impede progress, according to the most recent Triple-I Issues Brief.

Like many states, California has suffered greatly from climate-related natural catastrophe losses. Like some disaster-prone states, it also has experienced a decline in insurers’ appetite for covering its property/casualty risks.

But much of California’s problem is driven by regulators’ application of Proposition 103 – a decades-old measure that constrains insurers’ ability to profitably write business in the state. As applied, Proposition 103 has:

  • Kept insurers from pricing catastrophe risk prospectively using models, requiring them to price based on historical data alone;
  • Barred insurers from incorporating reinsurance costs into pricing; and
  • Allowed consumer advocacy groups to intervene in the rate-approval process, making it hard for insurers to respond quickly to changing market conditions and driving up administration costs.

As insurers have adjusted their risk appetite to reflect these constraints, more property owners have been pushed into the California FAIR plan – the state’s property insurer of last resort.  As of December 2024, the FAIR plan’s exposure was $529 billion – a 15 percent increase since September 2024 (the prior fiscal year end) and a 217 percent increase since fiscal year end 2021. In 2025, that exposure will increase further as FAIR begins offering higher commercial coverage for larger homeowners, condominium associations, homebuilders and other businesses.

Insurance Commissioner Ricardo Lara has implemented a Sustainable Insurance Strategy to alleviate these pressures. The strategy has generated positive impacts, but it continues to meet resistance from legislators and consumer groups. And, regardless of what regulators or legislators do, California homeowners’ insurance premiums will need to rise.

The Triple-I brief points out that – despite the Golden State’s many challenges – its homeowners actually enjoy below-average home and auto insurance rates as a percentage of median income. Insurance availability ultimately depends on insurers being able to charge rates that adequately reflect the full impact of increasing climate risk in the state. In a disaster-prone state like California, these artificially low premium rates are not sustainable.

“Higher rates and reduced regulatory restrictions will allow more carriers to expand their underwriting appetite, relieving the availability crisis and reliance on the FAIR plan,” said Triple-I Chief Insurance Officer Dale Porfilio.

With events like January’s devastating fires, frequent “atmospheric rivers” that bring floods and mudslides, and the ever-present threat of earthquakes – alongside the many more mundane perils California shares with its 49 sister states – premium rates that adequately reflect the full impact of these risks are essential to continued availability of private insurance.

Learn More:

California Insurance Market at a Critical Juncture

California Finalizes Updated Modeling Rules, Clarifies Applicability Beyond Wildfire

How Proposition 103 Worsens Risk Crisis in California

Claims Volume Up 36%
in 2024; Climate, Costs, Litigation Drive Trend

By Lewis Nibbelin, Contributing Writer, Triple-I

U.S. property claims volume rose 36 percent in 2024, propelled by a 113 percent increase in catastrophe claims, according to a recent Verisk Analytics report.

While evolving climate risks fueled claim frequency, uncertain inflation trends and unchecked legal system abuse will likely further strain insurer costs and time to settle these claims, posing risks to coverage affordability and availability.

Abnormally active Atlantic hurricane season

In a “dramatic shift” from previous loss patterns, late-season hurricane activity – rather than winter storms – dictated fourth-quarter claims operations last year, Verisk reported. Hurricane-related claims comprised nearly 9 percent of total claims volume, at a staggering 1,100 percent increase from the third quarter of 2023. Flood and wind claims both also jumped by 200 percent in volume.

“This shift in risk patterns demands new approaches to risk assessment and resource planning, particularly in the Southeast, where costs increased at six times the national rate following hurricane activity,” Verisk stated. Notably, Hurricane Milton generated roughly 187,000 claims totaling $2.68 billion in replacement costs across the Southeast, with 8 percent of claims still outstanding as of the report’s release.

Another above-average hurricane season is projected for 2025 in the Atlantic basin, according to a forecast by Colorado State University’s (CSU) Department of Atmospheric Science. Led by CSU senior research scientist and Triple-I non-resident scholar Phil Klotzbach, the CSU research team forecasts 17 named storms, including nine hurricanes – four of them “major” – during  the 2025 season, which begins June 1 and continues through Nov. 30. A typical Atlantic season has 14 named storms, seven hurricanes, three of them major. Major hurricanes are defined as those with wind speeds reaching Category 3, 4, or 5 on the Saffir-Simpson Hurricane Wind Scale.

Water, hail, and wind events in the Great Plains and Pacific Northwest also contributed to unexpected claim volumes, Verisk added. In contrast, wind-related claims fell in the Northeast compared to the fourth quarter of 2023.

Such regional variations highlight “the importance of granular, location-specific analysis for accurate risk assessment,” Verisk stated.

Contributing economic factors

Labor and material costs continued to rise year over year, with commercial reconstruction costs seeing a more pronounced increase of 5.5 percent compared to residential’s 4.5 percent, Verisk reported. The firm projected moderate reconstruction cost increases within both sectors during the first half of 2025.

Looming U.S. tariffs, however, may complicate this trajectory. Inflationary pressures related to the Trump Administration’s tariffs could further disrupt supply chains still recovering from natural catastrophes and the COVID-19 pandemic. Any such disruptions would compound replacement costs for U.S. auto and homeowners insurers as material costs – such as lumber, a major import from Canada – become even more expensive.

Excessive litigation trends

Similarly, excessive claims litigation – which prolongs claims disputes while driving up claim costs – plagues several of the states Verisk identified as experiencing increased claim volumes. For instance, though hurricane activity helps explain higher claim frequency in Georgia, the Peach State also is home to a personal auto claim litigation rate more than twice that of the median state, with a relative bodily injury claim frequency 60 percent higher than the U.S. average.

Verisk’s preliminary Q4 data reveals a 7 percent decrease in average claims severity compared to the same period in 2023 – a figure the firm expects to rise as more complex claims reach completion. But costly and protracted claims litigation, paired with ongoing tariff uncertainty, could magnify this figure even beyond their projections.

Undoubtedly, both will challenge insurers’ capacity to reliably predict loss trends and set fair and accurate premium rates for the foreseeable future, underscoring Verisk’s point that “staying ahead of these evolving patterns is essential in building more resilient operations in the future.”

Learn More:

Tenfold Frequency Rise for Coastal Flooding Projected by 2050

How Tariffs Affect P&C Insurance Prospects

What Florida’s Misguided Investigation Means for Georgia Tort Reform

Florida Bills Would Reverse Progress on Costly Legal System Abuse

Florida Reforms Bear Fruit as Premium Rates Stabilize 

Georgia Targets Legal System Abuse

Severe Convective Storm Risks Reshape U.S. Property Insurance Market

New Triple-I Issue Brief Puts the Spotlight on Georgia’s Insurance Affordability Crisis

P/C Replacement Costs Seen Outpacing CPI in 2025

California Insurance Market at a Critical Juncture

Florida’s Progress in Legal Reform: A Model for 2025

Louisiana Reforms: Progress, But More Is Needed to Stem Legal System Abuse

Data Fuels the Assault on Climate-Related Risk

California Finalizes Updated Modeling Rules, Clarifies Applicability Beyond Wildfire

U.S. Consumers See Link Between Attorney Involvement in Claims and Higher Auto Insurance Costs

Even With Recent Rises, Auto Insurance Is More Affordable Than During Most of Century to Date

You read that right. As a percentage of median household income, personal auto insurance premiums nationally were more affordable in 2022 (the most recent data available) than they have been since the beginning of this century.

And even the premium increases of the past two years are only expected to bring affordability back into the 2000 range, according to the Insurance Research Council (IRC).

A new IRC reportAuto Insurance Affordability: Countrywide Trends and State Comparisonslooks at the average auto insurance expenditure as a percent of median income. The measure ranges from a low of 0.93 percent in North Dakota (the most affordable state for auto insurance) to a high of 2.67 percent in Louisiana (the least affordable).

The pain is real

This is not to downplay the pain being experienced by consumers – particularly those in areas where premium rates have been rising while household income has been flat to lower.  It’s just to provide perspective as to the diverse factors that come into play when discussing insurance affordability.

Between 2000 and 2022, median household income grew somewhat faster than auto insurance expenditures, causing the affordability index to decline from 1.64 percent in 2000 to 1.51 percent in 2022. In other words, auto insurance was somewhat more affordable in 2022 than in 2000.

“With the recent increases in insurance costs, affordability is projected to deteriorate in 2023 and 2024,” said Dale Porfilio, FCAS, MAAA, president of the IRC and chief insurance officer at Triple-I. “The affordability index is projected to increase to approximately 1.6 percent in 2023 and 1.7 percent in 2024, a significant increase from the low in 2021 but still below the peak of 1.9 percent in 2003.”

In other words, we’ve been here before; and, if risks and costs can be contained, so can premium growth in the long term.

Cost factors vary by state

Auto insurance affordability is largely determined by the key underlying cost drivers in each state. They include:

  • Accident frequency
  • Repair costs
  • Claim severity
  • Tendency to file injury claims
  • Injury claim severity
  • Expense index
  • Uninsured and underinsured motorists
  • Claim litigation.

These factors vary widely by state, and the IRC report looks at the profiles of each state to arrive at its affordability index.

Reducing risk and costs is key

Porfilio noted that “while state-level data cannot directly address affordability issues among traditionally underserved populations, collaborative efforts to reduce these key cost drivers can improve affordability for all consumers.”

Continued replacement-cost inflation is likely to maintain upward pressure on premium rates. Tariffs could exacerbate that trend, as well as hurting household income in areas dependent on industries likely to be affected by them.

At the same time, some states are working hard to ameliorate other factors hurting affordability.  Florida, for example, was the second least affordable state for auto insurance in 2022; however, the state has made recent progress to reduce legal system abuse, a major contributor to claims costs in the Sunshine State. In 2022 and 2023, Florida passed several key reforms that have led to significant decreases in lawsuits. As a result, insurers have been writing more business in the state after a multi-year exodus. This increased competition puts downward pressure on rates, which should be reflected in the IRC’s next affordability study.

Learn More:

IRC Report: Personal Auto Insurance State Regulation Systems

IRC Report: U.S. Consumers See Link Between Attorney Involvement in Claims and Higher Auto Insurance Costs

Florida Reforms Bear Fruit as Premium Rates Stabilize 

What Florida’s Misguided Investigation Means for Georgia Tort Reform

Florida Bills Would Reverse Progress on Costly Legal System Abuse

Inflation Continues to Drive Up Consumers’ Insurance Costs

Improved Commercial Auto Underwriting Profitability Expected After Years of Struggle

Louisiana Is Least Affordable State for Personal Auto Coverage Across the South and U.S.

Georgia Is Among the Least Affordable States for Auto Insurance

Report: No-Fault Reforms Improved Michigan’s Personal Auto Insurance Affordability

Auto Insurers’ Performance Improves, But Don’t Expect Rates to Flatten Soon

How Tariffs Affect
P&C Insurance Prospects

Tariffs and threats of tariffs have been roiling financial markets since January. Property and casualty insurers are no less concerned, as the cost of repairing and replacing damaged property is a driver of claim costs and, ultimately, policyholder premiums.

Triple-I Chief Economist and Data Scientist Dr. Michel Léonard recently sat down to explain the implications of tariffs and trade barriers for insurers and what economic considerations concern industry decisionmakers.

While property and casualty insurers write many kinds of coverage, the lines Léonard primarily discussed were homeowners and personal and commercial auto – “lines that have a physical emphasis on repair, rebuild, and replace.”

Lumber from Canada; cars, trucks, and parts from Canada and Mexico; and garments, furnishings, and technology from Asia all come into play when considering the prospective impacts of tariffs on replacement costs, Léonard said.

“When we’re focusing specifically on China,” he said, “we’re looking primarily at farm equipment and alternative-energy components.”

Uncertainty around tariffs – particularly in recent weeks, as tariffs on Mexico and Canada have been imposed and “paused” – makes analysis even more difficult.

“Much depends on how much clarity there is, how much communication from the policymakers, from the administration and from the legislature,” Léonard said. It’s also important to remember that impacts can last well beyond their implementation and withdrawal.

During the first Trump Administration, tariffs on soft commodities, beef, grain, and so forth had impacts for several years afterwards.

“Those tariffs were fairly short lived,” Léonard said, “but for two to three years afterward farmers were uncomfortable investing in equipment at the same pace, and that reduced farmowners’ insurance growth.”

Regardless of how the current discussions around tariffs play out, the Trump Administration has signaled a decided shift in policy toward greater protectionism. As a result, Léonard said, “We should expect a repositioning in our understanding of our replacement costs and underlying growth forecast for the next 12 months, at a minimum.”

He projects a period of “most likely 24 to 36 months” in which growth will be slower and inflation – including replacement costs for the P&C industry – will be higher.

Learn More:

Tariffs and Insurance – full video (Members Only)

Insurance Economic Outlook (Members Only)

Florida Reforms
Bear Fruit as Premium Rates Stabilize 

Florida’s legislative reforms to address claim fraud and legal system abuse are stabilizing the state’s property/casualty insurance market, according to the latest Triple-I Issues Brief.  

Claims-related litigation has significantly declined over the past two years, and premium averages are nearly flat, with several insurers requesting rate decreases from the state’s insurance regulator.  In addition, the brief says, the number of insurers writing business in the state has rebounded after a multi-year exodus. This competition from the private market has allowed policyholders to leave Citizens Property Insurance Corp. – the state-run insurer of last resort – to obtain coverage at previously unavailable rates from a much healthier private market. 

According to the state’s Office of Insurance Regulation (OIR), Florida in 2022 accounted for nearly 71 percent of the nation’s homeowners claim-related litigation, despite representing only 15 percent of homeowners insurance claims. The same year – before Hurricane Ian made landfall in Florida – six insurers in the state declared insolvency, primarily due to economic pressures from legal system abuse. Based on insured losses, Ian became the second-most costly U.S. hurricane on record, due in large part to extraordinary litigation costs for disputed claims. 

The Legislature responded to the growing crisis by passing several pieces of insurance reform that, among other things, eliminated one-way attorney fees and assignment of benefits (AOB) for property insurance claims and prohibited misleading legal service ads and the misuse of consumer health information for legal services. 

Premium rate growth slowing 

The impact of the 2022 and 2023 reforms can be seen in premium rate changes, particularly with respect to homeowners insurance. Homeowners rates in Florida grew at a much slower rate in 2024, even as rate growth remained strong nationally. Growth in personal auto insurance premium rates in Florida has slowed since the repeal of AOB and one-way attorney fees, but the trend also is consistent with nationwide experience. 

“There are a lot of factors involved in insurance rates, and Florida’s property and auto markets are challenging,” Florida Governor Ron DeSantis said in February, “but…data suggests that, in 2024, Florida had the lowest average homeowners’ premium increases in the nation, and the overall market has stabilized, with 11 new companies having entered the market over the past two years.” 

Among the top 10 national insurers writing homeowners insurance in Florida, 60 percent have expanded their business over the past year, and 40 percent of all insurers operating in the state filed for rate decreases in 2024, according to Florida Insurance Commissioner Michael Yaworksy. 

The cost of reinsurance also continues to decrease for Florida carriers. 

“In 2024, most companies paid less for reinsurance than they did in 2023,” according to the OIR website. “The average risk-adjusted cost for 2024 was -0.7 percent, a large reduction from last year’s change of 27 percent increase from the prior year.” 

Reinsurance costs are factored into premium rates, so this is another reason Florida now has the lowest average rate filings in the United States in 2024, according to S&P Global Marketplace. 

Learn More: 

Florida’s Progress in Legal Reform: A Model for 2025 

How Georgia Might Learn From Florida Reforms 

Resilience Investments Paid Off in Florida During Hurricane Milton 

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

P/C Replacement Costs
Seen Outpacing CPI in 2025

Triple-I expects the pace of increase in average property/casualty insurance replacement costs to exceed increases in the consumer price index in 2025 and beyond as auto replacement costs rise for the first time since 2022 and CPI continues to decline.

Triple-I’s replacement cost index for personal and commercial auto tracks changes in the price of vehicles, parts, and equipment that make up the replacement costs facing insurance carriers providing collision insurance for both personal and commercial motor vehicles. These costs – which have increased by as much as 30 percent over the past five years – are expected to increase by 2.8 percent in 2025.

The index combines replacement costs data for motor vehicles by age and for parts and equipment from the CPI for All Urban Consumers. These cost drivers were chosen from a wider selection of U.S. government sources, including the Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve, Census Bureau, and the Departments of Labor, Transportation, and Energy.

“While we expect the economic drivers of P/C insurance performance to continue improving 2025, performance will be constrained by replacement cost increases, rising natural catastrophe losses, and geopolitical uncertainty,” said Triple-I Chief Economist Dr. Michel Léonard.

P&C Underwriting Profitability Prospects for 2024 Remain Firm

By William Nibbelin, Senior Research Actuary, Triple-I

The U.S. Property & Casualty insurance market is expected to continue its trajectory of improving underwriting results in 2024 into 2025 and 2026, according to the latest projections by actuaries at Triple-I and Milliman. The latest report – Insurance Economics and Underwriting Projections: A Forward View – was released during Triple-I’s January 16 members-only webinar.

Year-over-year gains in net written premium increases and quarter-over-quarter loss ratios are primarily due to better-than-expected Q3 performance in personal auto.

The 2024 underlying economic growth for P&C ended slightly below U.S. GDP growth at 2.3 percent versus 2.5 percent year over year. A further economic milestone occurred in 2024, with the number of people employed in the U.S. insurance industry surpassing three million.

Michel Léonard, Ph.D., CBE, chief economist and data scientist at Triple-I, noted P&C underlying economic growth is expected to remain above overall GDP growth in 2025 (2.3 percent versus 2.1 percent) and 2026 (2.6 percent versus 2.0 percent) as lower interest rates continue to revive real estate and contribute to higher volume for homeowners’ insurance and commercial property.

“This is an improvement on our 2025 P&C underlying growth expectations from second half of 2024,” Léonard said. “The pace of increase in P&C replacement costs is expected to overtake overall inflation in 2025 (3.3 percent versus 2.5 percent). This aligns with our earlier expectations from the second half of last year.”

Personal vs. commercial lines performance

The 2024 net combined ratio for the P&C industry is projected to be 99.5, a year-over-year improvement of 2.2 points, with a net written premium (NWP) growth rate of 9.5 percent. 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. Personal lines 2024 net combined ratio estimates improved by nearly 1 point, while the commercial lines 2024 estimates worsened by 1.2 points.

Dale Porfilio, FCAS, MAAA, Triple-I’s chief insurance officer, expanded upon the dichotomy of commercial and personal lines results.

“Commercial lines continue to have better underwriting results than personal lines, but the gap is closing,” Porfilio said. “The impact from natural catastrophes such as Hurricane Helene in Q3 2024 and Hurricane Milton in Q4 2024 significantly impacted commercial property. The substantial rate increases necessary to offset inflationary pressures on losses have driven the improved results in personal auto and homeowners.”

Personal auto and homeowners are each projected to have improved 6.1 points over 2023, with a 2024 net combined ratio of 98.8 and 104.8, respectively. NWP growth rate for personal lines is expected to surpass commercial lines by 9 points in 2024, with personal auto leading at 14.0 percent, the second highest in over 15 years.

Jason B. Kurtz, FCAS, MAAA, a principal and consulting actuary at Milliman – a premier global consulting and actuarial firm – elaborated on profitability concerns within commercial lines.

“Commercial auto continues to remain unprofitable,” he said. “The 2024 direct incurred loss ratio through Q3 is only marginally improved relative to 2023 and is the second highest in over 15 years.”

Hurricane Milton is projected to be the worst catastrophic event for commercial property since Hurricane Ian in 2022 Q3, driving higher-than-expected losses and subsequently increasing the commercial property projected 2024 net combined ratio up 3.3 points to 91.2, which is also 3.3 points worse than 2023. During the webinar, commercial property forecasts were also shared for the fire and allied and inland marine sub-lines.

Continued worsening in general liability

General liability’s projected 2024 net combined ratio of 103.7 is 3.6 points worse than actual 2023 experience. Kurtz said the line has seen significantly worsening, with each quarterly loss ratio in 2024 worse than 2023 year over year.

“The 2024 direct incurred loss ratio through Q3 is the highest in over 15 years,” Kurtz said. “As a result, we have increased our expectations for 2025 and 2026 net written premium growth, as the industry responds to the worsening 2024 performance.”

Continuing the discussion on general liability, Emma Stewart, FIA, chief actuary at Lloyds added that U.S. general liability has experienced material deterioration in loss ratios and a slowing down of claims development.

“A large driver of this has been the post-underwriting emergence of heightened social inflation, or more specifically, legal system abuse and nuclear verdicts,” Stewart said. “If these trends continue to increase, reserves on this class can be expected to deteriorate further.”

Workers comp loss-cost preview

Ending with workers compensation, Donna Glenn, FCAS, MAAA, chief actuary at the National Council on Compensation Insurance, provided a preview of this year’s average loss-cost changes and discussed the long-term financial health of the workers compensation system. 

“The 2025 average loss cost decrease of 6 percent is moderate, which will inevitably have implications on the overall net written premium change,” Glenn said.  She added that the –6 percent average loss cost level change in 2025 is notably different than the -9 percent average seen in 2024, the largest average decrease since before the pandemic.

“Payroll for 2025 will develop throughout the year resulting from both wage and employment levels.  Therefore, overall premium will become clearer as the year progresses,” she said.

California Finalizes Updated Modeling Rules, Clarifies Applicability Beyond Wildfire

California’s Department of Insurance last week posted long-awaited rules that remove obstacles to profitably underwriting coverage in the wildfire-prone state. Among other things, the new rules eliminate outdated restrictions on use of catastrophe models in setting premium rates.

The measure also extends language related to catastrophe modeling to “nature-based flood risk reduction.” In the original text, “the only examples provided of the kinds of risk mitigation measures that would have to be considered in this context involved wildfire. However, because the proposed regulations also permit catastrophe modeling with respect to flood lines, it was appropriate to add language to this subdivision relating to flood mitigation.”

The relevant language applies “generally to catastrophe modeling used for purposes of projecting annual loss,” according to documents provided by the state Department of Insurance.

Benefits for policyholders

As a result, the department said in a press release, “Homeowners and businesses will see greater availability, market stability, and recognition for wildfire safety through use of catastrophe modeling.”

For the past 30 years, California regulations – specifically, Proposition 103 – have required insurance companies to apply a catastrophe factor to insurance rates based on historical wildfire losses. In a dynamically changing risk environment, historical data alone is not sufficient for determining fair, accurate insurance premiums. According to Cal Fire, five of the largest wildfires in the state’s history have occurred since 2017. 

The state’s evolving risk profile, combined with the underwriting and pricing constraints imposed by Proposition 103, has led to rising premium rates and, in some cases, insurers deciding to limit or reduce their business in the state.

With fewer private insurance options available, more Californians have been resorting to the state’s FAIR Plan, which offers less coverage for a higher premium. This isn’t a tenable situation.

“Put simply, increasing the number of policyholders in the FAIR Plan threatens the solvency of insurance companies in the voluntary market,”  California Insurance Commissioner Ricardo Lara explained to the State Assembly Committee on Insurance. “If the FAIR Plan experiences a massive loss and cannot pay its claims, by law, insurance companies are on the hook for the unpaid FAIR Plan losses…. This uncertainty is driving insurance companies to further limit coverage to at-risk Californians.”

“Including the use of catastrophe modeling in the rate making process will help stabilize the California insurance market,” said Janet Ruiz, Triple-I’s California-based director of strategic communication. “Homeowners in California will be able to better understand their individual risk and take steps to strengthen their homes.”

The new measure also requires major insurers to increase the writing of comprehensive policies in wildfire-distressed areas equivalent to no less than 85 percent of their statewide market share. Smaller and regional insurance companies must also increase their writing.

Requirements for insurers

It also requires catastrophe models used by insurers to account for mitigation efforts by homeowners, businesses, and communities – something not currently possible under existing outdated regulations today.

Moves like this by state governments – combined with increased availability of more comprehensive and granular data tools to inform underwriting and mitigation investment – will go a long way toward improving resilience and reducing losses.

Learn More:

Triple-I “Trends and Insights” Issues Brief: California’s Risk Crisis

Triple-I “Trends and Insights” Issues Brief: Proposition 103 and California’s Risk Crisis

Triple-I “State of the Risk” Issues Brief: Wildfire

Triple-I “State of the Risk” Issues Brief: Flood

JIF 2024: What Resilience Success Looks Like

By Lewis Nibbelin, Contributing Writer, Triple-I

The efficacy of collaboration and investment by “co-beneficiaries” in resilience initiatives was a dominant theme throughout Triple-I’s 2024 Joint Industry Forum – particularly in the final panel, which celebrated leaders behind recent real-world impacts of such investments.

Moderated by Dan Kaniewski, Marsh McLennan (MMC) managing director for public sector, the panelists discussed how their multi-industry backgrounds inform their innovative mindsets, as well as their knowledge on the profound ripple effects of targeted resilience planning.

The panel included:

  • Jonathan Gonzalez, co-founder and CEO of Raincoat;
  • Bob Marshall, co-founder and CEO of Whisker Labs;
  • Dawn Miller, chief commercial officer of Lloyd’s and CEO of Lloyd’s Americas; and
  • Lars Powell, director of the Alabama Center for Insurance Information and Research (ACIIR) at the University of Alabama and a Triple-I Non-Resident Scholar.

Productive partnership

Kaniewski – who spent most of his career in emergency management, previously serving as the second-ranking official at the Federal Emergency Management Agency (FEMA) and the agency’s first deputy administrator for resilience – kicked off the panel by raising the question “how do we define success?”

He characterized success as “putting theory into practice” and “having elected officials taking steps to reduce risk and transfer some of this risk from federal, state, or local taxpayers.”

But, as participants in earlier panels and this one made clear, government efforts can only go so far without private-sector collaboration. 

“It doesn’t matter who makes that investment, whether it’s the homeowner, the business owner, or the government,” Kaniewski explained. “The reality is we all benefit from that one investment. If we can acknowledge that we benefit from those investments, we should do our best to incentivize them.”

Kaniewski and Raincoat’s Gonzalez were both integral in the development of community-based catastrophe insurance (CBCI), developed in the wake of Superstorm Sandy in 2012.

“A lot of the neighborhoods that experienced flooding due to Sandy didn’t have access to insurance prior to the flooding – and then, post flooding, the government really had to step up to figure out how to keep those families in those houses,” Gonzalez said.

In collaboration with the city, a nonprofit called the Center for NYC Neighborhoods developed the concept of buying parametric insurance on behalf of these communities, with any payouts going toward helping families stay in their homes after disasters. Unlike traditional indemnity insurance, a parametric policy pays out if certain agreed-upon conditions are met – for example, a specific wind speed or earthquake magnitude in a particular area – regardless of damage.  Parametric insurance eliminates the need for time-consuming claim adjustment. Speed of payment and reduced administration costs can ease the burden on both insurers and policyholders.

In this case, Kaniewski said, success was reflected in the fact that the pilot program received sufficient funding not only for renewal but expansion, bringing needed protection to even more vulnerable communities.

Powell reinforced this sentiment in explaining ACIIR’s research on the FORTIFIED method, a set of voluntary construction standards created by the Insurance Institute for Business and Home Safety (IBHS) for durability against severe weather. The insurance industry-funded Strengthen Alabama Homes program issues grants and substantial insurance premium discounts to homeowners to retrofit their houses along these guidelines, prompting multiple states to replicate the program.

Such homes in Alabama sustained 54 to 76 percent reduced loss frequency from Hurricane Sally compared to standard homes, Powell reported, and an estimated 65 to 73 percent could have been saved in claims if standard homes were FORTIFIED.

Incentivizing contractors to learn FORTIFIED standards was especially critical, Powell explained, because they further advertised these skills and expanded the presence of FORTIFIED homes beyond the grant program.

“A lot of companies have said for several years, ‘we don’t know if we’re comfortable writing these…we haven’t seen it on the ground,’” Powell said. “Well, now we’ve seen it on the ground. We need to have houses that don’t burn down or blow over. We know how to do it, it’s not that expensive.”

Addressing concerns to drive adoption

Miller described how Lloyd’s Lab works to ease that discomfort by creating a space for businesses to nurture and integrate novel insights and products without fear. With mentor support, companies are encouraged to test new ideas while free from the usual degree of financial and/or intellectual property risks attached to innovation investments.

“It’s about having an avenue out to try,” Miller said. “Having that courage, as we continue to work together, to try to understand what’s working, what’s not, and being brave to say, ‘this isn’t working, but we can course correct.’”

Whisker Labs’ Marshall noted that numerous insurance carriers have taken a chance on his company’s front-line disaster mitigation devices, Ting, by paying for and distributing them to their customers.

Ting plug-in sensors detect conditions that could lead to electrical fires through continuous monitoring of a home’s electrical system. Statistically preventing more than 80 percent of electrical fires, communities benefit – not only by preventing individual home fires but also by providing data about the electrical grid and potentially heading off grid-initiated wildfires.

“There are so many applications for the data,” Marshall said, but “to have a true impact on society…we have to prove that we’re preventing more losses than the cost, and we have to do that in partnership with insurance carriers.”

Everyone wins if everyone plays

Cultivating innovative solutions is pivotal to enhancing resilience, the panelists agreed – but driving them forward requires more than just the insurance industry’s support.

He pointed to a project last year – funded by Fannie Mae and developed by the National Institute of Building Science (NIBS) – that culminated in a roadmap for resilience investment incentives, focusing on urban flooding. 

The co-authors of the project, including Triple-I subject-matter experts, represented a cross-section of “co-beneficiary” groups, such as the insurance, finance, and real estate industries and all levels of government, Kaniewski said.

Implementation of the roadmap requires participation from communities and multiple co-beneficiaries. Triple-I and NIBS are exploring such collaborations with potential co-beneficiaries in several areas of the United States.

Learn More:

Outdated Building Codes Exacerbate Climate Risk

Rising Interest Seen in Parametric Insurance

Community Catastrophe Insurance: Four Models to Boost Resilience

Attacking the Risk Crisis: Roadmap to Investment in Flood Resilience

Mitigation Matters – and Hurricane Sally Proved It