Category Archives: Insurers and the Economy

Business Insurance, Insurers and the Economy, Market Conditions, Risk Management, Workers Compensation

NCCI Event Shines a Light on Workers Comp

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William Nibbelin, Senior Research Actuary, Triple-I

The recent National Council on Compensation Insurance (NCCI) Annual Insights Symposium (AIS) in Orlando, Fla., provided important context and clarity around the state of the workers compensation line of business. As a new senior research actuary for Triple-I, my prior knowledge of this line could best be summarized by the following words from one peer-reviewed study of a reserving project I conducted more than two decades ago: Long-tail, unprofitable.

I recently assumed responsibility for forecast modeling of the property/casualty industry, which includes workers comp. In this role, I’d seen the line’s 2023 net combined ratio at 87 – the lowest (ie., most profitable) in the past five years. But I did not yet have deep understanding of the underlying trends driving these numbers.

I saw the AIS as an opportunity to gain that knowledge, and the event delivered.

The net combined ratio of 87 – as reported by Triple-I using National Association of Insurance Commissioners (NAIC) data sourced by S&P Global Market Intelligence – was also the ninth straight calendar year in a row under 100. According to NCCI, the success of the workers comp line in recent years represents the convergence of three factors:

  • Payroll increases
  • Moderate severity increases, and
  • Larger-than-expected frequency declines.

 “The overall numbers for workers compensation show a financially healthy system,” said Donna Glenn, NCCI’s chief actuary.

Payroll increases

The line’s 2023 direct written premium (DWP) increased 2.6 percent nationally – due primarily to another strong year of payroll growth at 6.2 percent, according to NCCI.Rising wages contributed the most to that figure, with increases in all industry sectors resulting in a combined wage growth of 3.9 percent.  Improved job creation contributed 2.3 percent, with all sectors except transportation and warehousing seeing increased employment. Payroll growth was partially offset by state-approved premium rate decreases.

Moderate severity increases

Claim severity remains moderate year over year, at 3 percent in 2023, despite indemnity claim severity at 5 percent. Medical claim severity for 2023 trended at a low 2 percent, in line with the 20-year trend of 1.8 percent and below the 3.5 percent in 2022. Medical claims less than $500,000 increased 5 percent; however, claims above $500,000 decreased 16 percent, driven primarily by several large losses in 2022.

Also, more states have adopted physician medical fee schedules from 2012 to 2022, which has shifted medical cost category shares from more expensive inpatient claims to outpatient claims, as well as lower drug claims. Outpatient claims increased from 23 percent of all claims to 27 percent and drug claims decreased from 12 percent to 7 percent of all claims.

Larger-than-expected frequency declines

Overall claim frequency decreased 8 percent in 2023, compared to the 20-year average decrease of 3.4 percent. Workers compensation claims frequency has only increased twice in the past 20 years – once in 2010 from the destabilization in the construction sector in 2009 and again in 2021 from COVID-19 impacts in 2020.

From 2015 to 2022, workers comp claims frequency benefited from workplace safety improvements and technology advances, which helped the decline in all cause of injury categories, including the two largest shares of strain and slip/falls. During this same period, the largest decline in claim frequency by part of the body was in lower-back claims. Finally, the recent slowing employment market churn has also improved claim frequency as claims decline when job tenure rises.

Stephen Cooper, senior economist at NCCI, speaking on the state of the economy and its impact on workers comp, said job growth and steadily increasing wage rates continue to favor the workers compensation system. He also gave an overview of the contribution to labor force by age and generation from 1980 to 2030, including changes in claim share from 2020 actuals to 2030 forecasts. Overall, the double-digit growth in labor force of 24 percent in 2000 over 1980 and 18 percent in 2020 over 2000 is expected to fall to only 4 percent in 2030 over 2020.

The only age group with an expected increasing contribution to the labor force from 2020 to 2030 are those age 65 and older. The contribution to labor force for the age group 16 to 24 is expected to remain flat from 2020 to 2030 however their representative share of Workers Compensation claims has the largest expected increase from 9% to 11 percent.

Beyond the numbers

 The symposium provided valuable insight into several factors affecting workers comp, including the role of AI and innovation in workplace safety technology. In a panel moderated by Damian England, NCCI’s executive director of affiliate services, the audience got to see a demonstration of AI camera monitoring of warehouse employee activity and the use of wearable technology to highlight improper lifting techniques.

“It is clear that safety technologies will be a vital part of future safety initiatives,” England said. “They may even be a gamechanger for evaluating and improving workplaces and reducing injuries.”

AIS also touched on challenges facing today’s workers, from climate to mental health.

“Our new NCCI research shows worker injuries increase by as much as 10 percent on very hot days, as well as on wet and freezing days, compared to mild weather,” said Patrick Coate, NCCI senior economist. “High temperatures impact construction and other outdoor workers most, while cold and wet weather leads to a lot more slip and fall injuries.”

Anae Myers, assistant actuary at NCCI, focused on the difference between claims that include mental health diagnosis versus those that do not.

“New research from NCCI shows that claims exceeding $500,000 are 12 times more likely to be diagnosed with an associated mental condition during the course of treatment, underscoring the potential for the impact of mental health in large claims,” Myers said.

I left the conference with a better understanding of workers comp rate making and the indices to track for future forecasts. Many thanks to Cristine Pike and Madison White at NCCI for their hospitality and guidance, as well as to all the attendees who patiently provided their expertise and generously offered their support when I introduced myself to them and to this stunning line of insurance.

Auto Insurance, Industry Financials, Insurers and the Economy

Personal Auto Line Propels Strong 1Q
P&C Insurance Results

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Strong improvements in personal auto insurance results helped drive the U.S. property and casualty insurance industry to its second-highest net underwriting gain in any quarter since at least 2000, according to an S&P Global Market Intelligence analysis.

Just 12 months from its worst-on-record start to a calendar year – with a combined ratio of 102.2 – the industry generated a ratio of approximately 94.0. Combined ratio is a measure of underwriting profitability in which a ratio under 100 indicates a profit and one above 100 represents a loss.

While quarterly statutory data is insufficient to calculate combined ratios at the line-of-business level, S&P previously estimated that a direct incurred loss ratio of approximately 71.3 percent in the personal auto sector would have produced break-even underwriting results in the first quarter.

“Applying the same methodology to the first-quarter result of 66.7% yields an estimated combined ratio of 95.6,” S&P said. The industry’s full-year 2023 private auto combined ratio was 104.9.

On a consolidated basis across business lines, incurred losses increased only modestly, while net premiums earned continued to rise rapidly. This reflects the combination of continued top-line strength in many commercial lines of business and what S&P called “the hardest private auto pricing environment in 47 years.”

The industry also benefited from relatively mild catastrophe activity compared with the comparable prior-year period.

While these strong first-quarter results are noteworthy, it will take time to know whether they represent the start of a trend. Multiple severe convective storm events already have occurred in the second quarter, and the 2024 Atlantic hurricane season is forecast to be “extremely active.”

Personal auto’s recent improvements follow 2022 results that were among the worst in recent years.  The number of drivers on the road has returned to pre-pandemic levels, and the risky driving behavior that led to high losses during the pandemic has not improved. More accidents with severe injuries and fatalities have driven up claims and losses in terms of both vehicle damage and liability, attracting greater attorney involvement and legal system abuse.

Compounding these loss drivers has been historically high inflation, which puts upward pressure on the material and labor costs for both the auto and property lines.

Favorable first-quarter results are good news, but it’s important for policyholders and policymakers to remember that the current hard market wasn’t created overnight. It will take time for insurers’ performance and drivers’ rates to stabilize.

Industry Financials, Insurers and the Economy, Market Conditions

Triple-I/Milliman: Personal Lines Drag
on Underwriting Profitability Continues

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By Max Dorfman, Research Writer, Triple-I

The property and casualty insurance industry posted its second consecutive year of underwriting losses, driven primarily by personal lines, according to the latest industry underwriting projections by actuaries at Triple-I and Milliman.

The net combined ratio for 2023 was 101.6, according to Insurance Economics and Underwriting Projections: A Forward View, a Triple-I members-only webinar. 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. 

The newest results are an improvement from 2022. Additionally, premium growth is expected to further improve underwriting results in 2024, with the 2024 industry net combined ratio forecast at 100.2.

Michel Léonard, PhD, CBE, Triple-I’s chief economist and data scientist, discussed how P&C replacement costs are increasing more slowly than the consumer price index (CPI).

“P&C replacement costs benefited from greater deceleration of key CPI components, such as construction material and used auto costs,” he said. “We expect this trend to continue until early 2026.”

Léonard noted that personal and commercial auto replacement costs decreased in the first four months of 2024, continuing their 2023 trend, largely due to double-digit declines in used auto prices.

“Even homeowners’ replacement cost changes – the segment subject to some of the highest replacement cost increases over the past few years – is now lower than overall CPI,” Léonard said.

Dale Porfilio, FCAS, MAAA, Triple-I’s chief insurance officer, discussed the overall P&C industry underwriting projections and premium growth.

“The overall picture from prior quarters remains the same with commercial lines performing better than personal, but to a lesser extent,” Porfilio said.

The 2023 commercial lines net combined ratio was 96.2, 1.4 points worse than the 2022 result. While still unprofitable, personal lines improved 3.2 points relative to 2022. For 2023, the personal lines expense ratio improved by almost 2 points over 2022, most dramatically in personal auto. The net written premium growth rate for personal lines surpassed commercial lines by over 7 points in 2023.

“Continued personal lines premium growth should lead to further convergence in underwriting performance in 2024,” Porfilio said.

Jason B. Kurtz, FCAS, MAAA, a principal and consulting actuary at Milliman – a global consulting and actuarial firm – said that for commercial auto, the 2023 net combined ratio of 109.2 is 3.8 points higher than 2022, and 10.3 points higher than 2021​. 

“The improved underwriting results following the COVID-19 pandemic appear to have been short-lived, as the commercial auto underwriting results have once again deteriorated and adverse prior year development has returned to pre-COVID levels,” Kurtz said.

Looking at the workers compensation line, Kurtz noted that the 2023 net combined ratio of 87.3 is nearly identical to 2022 and the second lowest in over 15 years​. 

“2023 net written premium growth rate of 1 percent is expected to increase to 2 percent in 2024 and remain at that level of growth through 2026,” Kurtz said. “Favorable underwriting results are expected for our forecast horizon​, which in turn will dampen premium growth going forward.”

Donna Glenn, FCAS, MAAA, chief actuary at the National Council on Compensation Insurance (NCCI), said the workers comp system is in a period of extraordinary performance. 

“WC leads the P&C industry with the lowest combined ratio compared to all other lines of business,” Glenn said. 

Further highlighting the strong results, she said, 2023 is the tenth straight year of underwriting gains and seventh consecutive year with combined ratios under 90.

Homeowners Insurance, Insurers and the Economy, Market Conditions

IRC: Homeowners Insurance Affordability Worsens Nationally, Varies Widely by State

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By Max Dorfman, Research Writer, Triple-I

Average U.S. homeowners insurance premiums have increased at a rate that has outpaced household income from 2001 to 2021, according to a new report by the Insurance Research Council (IRC). In 2021 – the latest year for which data is available – homeowners spent an average of 1.99 percent of their income on homeowners insurance, up from 1.54 percent in 2001.

Affordability varies widely from state to state, and affordability rankings have fluctuated over time. In 2021, Utah was the most affordable state and Florida was the least affordable. Kansas, New York, and Washington, D.C., have demonstrated improvements from 2015 to 2021, and California, Montana, and Wyoming saw the greatest deterioration during the same period. Florida and Louisiana have consistently been the least-affordable states in the nation.

The analysis by IRC – like Triple-I, an affiliate of The Institutes – looks at homeowners insurance affordability at national and state levels and examines underlying cost drivers by state. It does not address affordability for specific demographic or geographic risk profiles. The report found that frequency and severity of natural disasters, economic conditions, rising construction costs, and litigation all significantly contributed to rising homeowners insurance costs.

“An understanding of what drives the cost of insurance is essential for consumers navigating the current insurance market,” said Dale Porfilio, FCAS, MAAA, IRC president and chief insurance officer for Triple-I. “Efforts to promote homeowner awareness and adoption of protective measures, strengthen state and local building codes, and encourage community resilience programs can all improve insurance affordability.”

Learn More:

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

Homeowners Claims Costs Rose Faster Than Inflation for 2 Decades

As Building Costs Grow, Consider Your Homeowners Coverage

Business Risk, Insurers and the Economy

Inflation is Top Challenge for Middle-Market Firms, Chubb Study Finds

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By Max Dorfman, Research Writer, Triple-I 

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.  

Learn More:

Triple-I “Trends and Insights” Issues Brief: How Inflation Affects P/C Insurance Premium Rates — And How It Doesn’t

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

Homeowners Claim Costs Rose Faster Than Inflation for Two Decades

Group Captives Offer Cost-Sensitive Companies Opportunities to Save in Face of Inflation

Catastrophes, Disaster Preparedness, Disaster Resilience, Insurers and the Economy, Regulation, Risk Management

NAIC, FIO to Collaborate on Data Collection Around Climate Risk

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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.”

In its own response, the National Association of Insurance Commissioners (NAIC) emphasized the importance of collaboration with the industry to avoid such unintended consequences.

“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.”

Learn More:

Federal “Reinsurance” Proposal Raises Red Flags

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

NAIC Seeks Granular Data From Insurers to Help Fill Local Protection Gaps

Data Call Would Hinder Climate-Risk Efforts More Than It Would Help

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

Complex Risks in a Complicated World: Are Federal Backstops the Answer?

Triple-I Responds to SEC’s Proposed Climate-Risk Disclosure Requirements

Triple-I CEO: Insurance Leading on Climate Risk

Auto Insurance, Catastrophes, Disaster Resilience, Earthquakes, Floods, Homeowners Insurance, Industry Financials, Insurers and the Economy

Calif. Risk/Regulatory Environment Highlights Role of Risk-Based Pricing

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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.

Learn More:

Triple-I Issues Brief: Wildfire

Triple-I Issues Brief: Flood

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

How Proposition 103 Worsens Risk Crisis in California

Is California Serious About Wildfire Risk?

Dear California: As You Prep for Wildfire, Don’t Neglect Quake Risk

Catastrophes, Disaster Resilience, Flood Insurance, Insurers and the Economy

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Learn More:

Triple-I Issues Brief: Flood

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

Milwaukee District Eyes Expanding Nature-Based Flood-Mitigation Plan

Attacking the Risk Crisis: Roadmap to Investment in Flood Resilience

Proposed Flood Zone Expansion Would Increase Need for Private Insurance

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

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

Shutdown Threat Looms Over U.S. Flood Insurance

Industry Financials, Insurers and the Economy, Market Conditions, Webinars

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

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By Max Dorfman, Research Writer, Triple-I

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catastrophes, Disaster Resilience, Insurers and the Economy, Regulation, Risk Management

Federal “Reinsurance” Proposal Raises Red Flags

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By Sean Kevelighan, Triple-I CEO

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

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

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

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

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

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

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

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

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

Sean Kevelighan, CEO, Triple-I

Learn from history

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

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

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

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

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

Time-tested principles

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

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

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

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

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

Consumers deserve real solutions

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

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

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

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

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

Learn More:

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

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

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

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

Matching Price to Peril Helps Keep Insurance Available and Affordable

Policyholder Surplus Matters: Here’s Why

Triple-I Issues Brief: Flood

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

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

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

Triple-I Issues Brief: Race and Insurance Pricing