Category Archives: Insurers and the Economy

Insurers and the Economy, Legal Environment, Market Conditions, Regulation

U.S. Study of 3rd-party litigation funding cites market growth and scarce transparency

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At the end of 2022, the U.S. Government Accountability Office (GAO) released a report, Third-Party Litigation Financing: Market Characteristics, Data and Trends. Defining third-party litigation financing or funding (TPLF) as “an arrangement in which a funder who is not a party to the lawsuit agrees to help fund it,” the investigative arm of Congress looked at the global multibillion-dollar industry, which is raising concerns among insurers and some lawmakers.  

The GAO findings summarize emerging trends, challenges for market participants, and the regulatory landscape, primarily focusing on the years between 2017 and 2021. 

Why a regulatory lens on TPLF is important 

The agency conducted this research to study gaps in public information about the industry’s practices and examine transparency and disclosure concerns. Three Republican Congress members – Sen. Chuck Grassley (IA), Rep. Andy Barr (KY), and Rep. Darrell Issa (CA) — led the call for this undertaking.  

However, as GAO exists to serve the entire Congress, it is expected to be independent and nonpartisan in its work. While insurers, TPLF insiders, and other stakeholders, including Triple-I, have researched the industry (to the extent that research on such a secretive industry is possible), the legislative-based agency is well positioned to apply a regulatory perspective.  

Example of Third-Party Litigation Financing for Plaintiffs

The report methodology involved several components, many of which other researchers have applied, such as analysis of publicly available industry data, reviews of existing scholarship, legislation, and court rules. GAO probed further by convening a roundtable of 12 experts “selected to represent a mix of reviews and professional fields, among other factors,” and interviewing litigation funders and industry stakeholders. Nonetheless, like researchers before them, GAO faced a lack of public data on the industry.  

Third-party litigation funding practices differ between the consumer and the commercial markets. Comparatively smaller loan amounts are at play for consumer cases. The types of clients, use of funds, and financial arrangements can also vary, even within each market.  

While most published discussions of TPLF center on TPLF going to plaintiffs, as this appears from public data to be the norm, GAO findings indicate: 1) funders may finance defendants in certain scenarios and 2) lawyers may use TPLF to support their work for defense and plaintiff clients.

How the lack of transparency in TPLF can create risks 

Overall, TPLF is categorized as a non-recourse loan because if the funded party loses the lawsuit or does not receive a monetary settlement, the loan does not have to be repaid. If the financed party wins the case or receives a monetary settlement, the profit comes from a relatively high interest payment or some agreed value above the original loan. Thus, the financial strategy boils down to someone gambling on the outcome of a claim or lawsuit with the expressed intention of making a hefty profit.  

In some deals, these returns can soar as high as 220%–depending on the financial arrangements–with most reporting placing the average rates at 25-30 percent (versus average S&P 500 return since 1957 of 10.15 percent). The New Times documented that the TPLF industry is reaping as much as 33 percent from some of the most vulnerable in society, wrongly imprisoned people.

Usually, this speculative investor has no relationship to the civil litigation and, therefore, would not otherwise be involved with the case. However, the court and the opposing party of the lawsuit are typically unaware of the investment or even the existence of such an arrangement. On the other hand, as the GAO report affirms, knowledge about the defendant’s insurance may be one of the primary reasons third-party financers decide to invest in the lawsuit. This imbalance in communication and the overall lack of transparency spark worries for TPLF critics. GAO gathered information that highlighted some potential concerns. 

Funded claimants may hold out for larger settlements simply because the funders’ fee (usually the loan repayment, plus high interest) erodes the claimant’s share of the settlement. Attorneys receiving TPLF may be more willing to draw out litigation further than they would have – perhaps in dedication to a weak cause or a desire to try out novel legal tactics – if they had to carry their own expenses.  

Regardless, typically neither the court, the defendant, nor the defendant’s insurer would be aware of the factors behind such costly delays, so they would be unable to respond proactively. However, insurance consumers would ultimately pay the price via higher rates or no access to affordable insurance if an insurer leaves the local market. 

As the report acknowledges, a lack of transparency can lead to other issues, too. If the court does not know about a TPLF arrangement, potential conflicts of interest cannot be flagged and monitored. Some critics calling for transparency have cited potential national security risks, such as the possibility of funders backed by foreign governments using the funding relationship to strategically impact litigation outcomes or co-opting the discovery process for access to intellectual property information that would otherwise be best kept away from their eyes for national security reasons. 

Calls for TPLF Legislation 

GAO findings from its comparative review of international markets reveal that the industry operates globally, essentially without much regulation. The report points out that while TPLF is not specifically regulated under U.S. federal law, some aspects of the industry and funder operations may fall under the purview of the SEC, particularly if funders have registered securities on a national securities exchange. Some states have passed laws regulating interest charged to consumers, and, in rarer instances, requiring a level of TPLF disclosure in prescribed circumstances.  

Active, visible calls from elected officials for regulatory actions toward transparency come mostly from Republicans, but, nonetheless, from various levels of government. Sen. Grassley and Rep. Issa have tried to introduce legislation, The Litigation Funding Transparency Act of 2021, requiring mandatory disclosure of funding agreements in federal class action lawsuits and in federal multidistrict litigation proceedings. In December of 2022, Georgia Attorney General Chris Carr spearheaded a coalition of 14 state attorney generals that issued a written call to action to the Department of Justice and Attorney General Merrick Garland.  

“By funding lawsuits that target specific sectors or businesses, foreign adversaries could weaponize our courts to effectively undermine our nation’s interests,” Carr said. 

Triple-I continues to research social inflation, and we study TPLF as a potential driver of insurance costs. To learn more about third-party litigation funding and its implication for access to affordable insurance, read Triple-I’s white paper, What is third-party litigation funding and how does it affect insurance pricing and affordability? 

Insurers and the Economy, Legal Environment, Regulation

La. Insurance Regulator Issues Cease & Desist Order to Texas Law Firm

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Louisiana Insurance Commissioner Jim Donelon last week issued a cease-and-desist order against a Houston-based law firm, accusing it of fraud involving potentially hundreds of hurricane-related claims in his state.

“The size and scope of McClenny, Moseley & Associates’ illegal insurance scheme is like nothing I’ve seen before,” Donelon said in a press release. “It’s rare for the department to issue regulatory actions against entities we don’t regulate, but in this case, the order is necessary to protect policyholders from the firm’s fraudulent insurance activity.”

According to Donelon, the law firm filed more than 1,500 hurricane claim lawsuits in Louisiana over the span of three months last year.

The Louisiana property insurance market has been deteriorating since the state was hit by record hurricane activity in 2020 and 2021, to the extent that 11 insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and September 2022. Insurers have paid out more than $23 billion in insured losses from over 800,000 claims filed from the two years of heavy hurricane activity. The largest property-loss events were Hurricane Laura (2020) and Hurricane Ida (2021).

In addition to driving insurer insolvencies, the growing losses have caused a dozen insurers to withdraw from the market and more than 50 to stop writing new business in hurricane-prone parishes.

Louisiana’s troubles parallel those of another coastal state, Florida, but there are significant differences. Florida’s problems are largely rooted in decades of legal system abuse and fraud, whereas Louisiana’s have had more to do with insurers being undercapitalized and not having enough reinsurance coverage to withstand the claims incurred during the record-setting hurricane seasons of 2020 and 2021. In general, Louisiana insurers have not experienced the level of excessive litigation that Florida insurers have faced.

“It now appears some trial attorneys are trying to take a page out of the Florida playbook by engaging in litigation abuse against Louisiana property insurers,” said Triple-I Director of Corporate Communications Mark Friedlander. “We commend Commissioner Donelon for quickly addressing these fraudulent practices.”

According to reporting by the Times Picayune/New Orleans Advocate, an investigation by the Louisiana Department of Insurance found the Houston-based firm engaged in insurance fraud and unfair trade practices through Alabama-based Apex Roofing and Restoration and has faced accusations of potentially criminal behavior in courts across the state. In one such case, the paper reported, a woman testified that she had never intended to retain the law firm when she hired the roofing company to fix her hurricane-damaged roof.

“The firm told her insurance company that it represented her and even filed a lawsuit on her behalf, though she said she was unaware of it,” the paper said. 

Legal system abuse is a pervasive problem that contributes to higher costs for insurers and policyholders nationwide, as well as to rising costs generally, given the importance of insurance in development and commerce. Triple-I is committed to informing the discussion around this critical issue.

Learn More:

Hurricanes Drive Louisiana Insured Losses, Insurer Insolvencies

Florida Insurance Crisis Reforms Gain Momentum With Latest Proposal

Florida Auto Legislation, on Heels Of 2022 Reforms, Suggests State Is Serious About Insurance Crisis Fix

Florida And Legal System Abuse Highlighted at JIF 2022

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

A Piecemeal Approach Toward Transparency in Litigation Finance

Auto Insurance, Homeowners Insurance, Insurers and the Economy, Legal Environment

Florida Insurance Crisis Reforms Gain Momentum With Latest Proposal

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Florida Gov. Ron DeSantis’s proposed insurance fraud and legal system abuse reforms, announced this week for consideration during the legislative session that begins in March, would build on measures approved in the closing weeks of 2022 and go a long way toward fixing the state’s insurance crisis.

Legislation passed during the 2022 special session eliminated one-way attorney fees and assignment of benefits (AOB) arrangements for property insurance claims. Gov. DeSantis’s proposal would go further, eliminating these mechanisms and “attorney fee multipliers” for all lines of insurance.

“For decades, Florida has been considered a judicial hellhole due to excessive litigation and a legal system that benefitted the lawyers more than people who are injured,” DeSantis said in his announcement. “We are now working on legal reform that is more in line with the rest of the country and that will bring more businesses and jobs to Florida.”

Before the 2022 reforms, state law required insurers to pay the fees of homeowners insurance policyholders who successfully sued over claims, while shielding policyholders from paying insurers’ attorney fees when the policyholders lose. The legislation also eliminated AOBs – agreements in which property owners sign over their claims to contractors, who then work with insurers.

AOBs are a standard practice in insurance, but in Florida this consumer-friendly convenience has long served as a magnet for fraud. The state’s legal environment – including some of the most generous attorney-fee mechanisms in the country – has encouraged vendors and their attorneys to solicit unwarranted AOBs from tens of thousands of Floridians, conduct unnecessary or unnecessarily expensive work, then sue insurers that deny or dispute the claims.

As a result, Florida accounts for nearly 80 percent of the nation’s homeowners’ insurance lawsuits, but only 9 percent of claims, according to the state’s Office of Insurance Regulation.

Eliminating these two mechanisms for property claims addresses much of the insurance fraud in the state. Eliminating them for all lines would be a promising sign that the state is truly committed to addressing the root causes of the crisis.

Florida’s insurance crisis didn’t happen overnight, and it will take years for the impacts of fraud and legal system abuse to be wrung out of the system.  Policyholders won’t see premium benefits any time soon. Job 1 is to “stop the bleeding” as insurers fail, leave the state, or stop writing critical personal lines coverages like auto and homeowners.

Triple-I has published a new Issues Brief about the crisis and the state’s efforts to repair it.

Learn More:

Florida Auto Legislation, on Heels of 2022 Reforms, Suggests State Is Serious About Insurance Crisis Fix

Florida and Legal System Abuse Highlighted at JIF 2022

Fraud, Litigation Push Florida Insurance Market to Brink of Collapse

Florida Dropped From 2020 “Judicial Hellholes” List

Florida’s AOB Crisis: A Social-Inflation Microcosm

Auto Insurance, Homeowners Insurance, Insurers and the Economy, Legal Environment

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

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Legislation being considered in Illinois underscores the need for legislators and other policymakers to become better educated about the importance of risk-based pricing and how it works.

The Motor Vehicle Insurance Fairness Act would bar insurers from considering nondriving factors, such as credit scores, when setting premium rates. The prohibitions include factors that actuaries have demonstrated correlate strongly with the likelihood of a driver eventually submitting a claim, as well as ones insurers already are prohibited from using.

This suggests a lack of understanding about risk-based pricing that is not isolated to Illinois legislators – indeed, similar proposals are submitted from time to time at state and federal levels.  

Confusion is understandable

Risk-based pricing means offering different prices for the same coverage, based on risk factors specific to the insured person or property. If policies were not priced this way, lower-risk drivers would subsidize riskier ones. Charging higher premiums to higher-risk policyholders helps insurers underwrite a wider range of coverages, improving both availability and affordability of insurance.

The concept becomes complicated when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory. For example, concerns are raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say this can lead to “proxy discrimination,” with people of color in urban neighborhoods being charged more than their suburban neighbors for the same coverage.

Confusion is understandable, given the complex models used to assess and price risk. To navigate this complexity, insurers hire actuaries and data scientists to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.

Appropriate protections are in place

It’s important to remember that insurers don’t make money by not insuring people. They are in the business of pricing, underwriting, and assuming risk.

Because of the critical role insurers play in facilitating commerce and protecting the lives and property of individuals, insurance is one of the most heavily regulated industries on the planet. To ensure that sufficient funds are available to pay claims, regulators require insurers to maintain a cushion called policyholder surplus.

Credit rating agencies, such as Standard & Poor’s and A.M. Best, expect insurers to have surpluses exceeding what regulators require to keep their financial strength ratings. A strong financial strength rating enables insurers to borrow money at favorable rates – further promoting insurance availability and affordability.

On top of these constraints, state regulators have the authority to limit the rates insurers can charge within their jurisdictions.

No profit, no insurers — no insurers, no coverage

Like any other business, insurers must make a reasonable profit to remain solvent. Because they can’t just move money around as more lightly regulated industries can, the only way to generate underwriting profits is through rigorous pricing and expense and loss controls. Insurers don’t want to overcharge and send consumers shopping for a better price, or undercharge and experience losses that erode their ability to pay claims.

In this context, it’s important to note that personal auto and homeowners insurance premium rates have remained relatively flat as inflation and replacement costs have soared through the pandemic and supply-chain issues related to Russia’s invasion of Ukraine (see chart below).

During this period, writers of these coverages have struggled to turn an underwriting profit. Personal auto has been a primary driver of the overall industry’s weak underwriting results.  Dale Porfilio, Triple-I’s chief insurance officer, recently said the 2022 net combined ratio for personal auto insurance is forecast at 111.8, 10.4 points worse than 2021 and 19.3 points worse than 2020.  Combined ratio represents the difference between claims and expenses paid and premiums collected by insurers. A combined ratio below 100 represents an underwriting profit, and one above 100 represents a loss. 

Even as inflation moderates, loss trends in both of these lines – associated with increased accident frequency and severity in auto and extreme-weather trends in homeowners and auto – will require premium rates to rise. The question is: Will the cost fall evenly across all policyholders, or will rates more accurately reflect policyholders’ risk characteristics?

Protected classes

The United States recognizes “protected classes” – groups who share common characteristics and for whom federal or state laws prohibit discrimination based on those traits. Race, religion, and national origin are most commonly meant when describing protected classes in the context of insurance rating, and insurers generally do not collect information on these “big three” classes. Any discrimination based on these attributes would have to arise from using data that might serve as proxies for protected classes.

Algorithms and machine learning hold great promise for ensuring equitable pricing, but research shows these tools can amplify implicit biases.

The insurance industry has been responsive to such concerns. For example, recent Colorado legislation requires insurers to show that their use of external data and complex algorithms does not discriminate against protected classes, and the American Academy of Actuaries has offered extensive guidance to the state’s insurance commissioner on implementation. The Casualty Actuarial Society also recently published a series of papers (see links at end of post) on the topic.

Correlation matters

Certain demographic factors have been shown to correlate with increased risk of submitting a claim. Gender and age correlate strongly with crash involvement, as the National Highway Traffic Safety Administration (NHTSA) data illustrated at right shows.  

Likewise, National Association of Insurance Commissioners (NAIC) data below clearly shows higher credit scores correlate strongly with lower crash claims.

Similar correlations can be shown for other rating factors. It’s important to remember that no single factor is determinative – many are used to assess a policyholder’s risk level.

Consumers “get it” – when it’s explained to them

A recent study by the Insurance Research Council (IRC) found consumer skepticism about the connection between credit history and future insurance claims appears to decline when the predictive power of credit-based insurance scores is explained to them. Through an online survey with more than 7,000 respondents, IRC found that:

  • Nearly all believe it is important to maintain good credit history, and most believe it would be “very” or “somewhat” easy to improve their credit score;
  • Consumers see the link between credit history and future bill paying but are less confident about the link between credit history and future insurance claims.
  • After reading that many studies have demonstrated its predictive power, most agree with using credit-based insurance scores to rate insurance, especially for drivers with good credit who could benefit.

If consumers “get it” when you share the data with them, perhaps policymakers and legislators can, too.

Learn More:

Triple-I Issues Briefs

Risk-Based Pricing of Insurance

Race and Insurance Pricing

Personal Auto Insurance Rates

Drivers of Homeowners Insurance Rate Increases

How Inflation Affects P/C Insurance Premium Rates – And How It Doesn’t

The Triple-I Blog

Inflation Trends Shine Some Light For P&C, But Underwriting Profits Still Elude Most Lines

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

Matching Price to Peril Helps Keep Insurance Available & Affordable

Bringing Clarity to Concerns About Race in Insurance Pricing

Delaware Legislature Adjourns Without Action on Banning Gender as Auto Insurance Factor

Triple-I: Rating-Factor Variety Drives Accuracy of Auto Insurance Ratings

Auto Insurance Rating Factors Explained

The Casualty Actuarial Society

• Defining Discrimination in Insurance

• Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance

• Understanding Potential Influences of Racial Bias on P&C Insurance: Four Rating Factors Explored

• Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry

Insurers and the Economy

How Inflation Affects P&C Rates & How It Doesn’t

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Triple-I fields a lot of questions from consumers and the media as to exactly how inflation affects insurance premium rates. As we explain in a new Issues Brief, the relationship between inflation and rates is, in one sense, straightforward – and yet the outcomes are not necessarily what you might expect.

As material and labor costs rise, the cost to repair and replace damaged homes and vehicles increases. If premium rates didn’t reflect these increased costs, insurers would quickly exhaust the funds they set aside – “policyholder surplus” – to ensure that they can afford to keep their promises to pay all claims. If losses and expenses exceed revenues by too much for too long, they risk insolvency.

But insurers do more than pay claims: They employ people (labor costs) and conduct business operations (supplies and energy costs); and, if they are to remain in business, they have to earn a reasonable profit.

So, when inflation and replacement costs rise, one might reasonably expect a proportionate increase in auto and homeowners insurance premium rates. But, as the charts below show, rates remained relatively flat during 2021’s sharply higher costs that coincided with the height of the COVID-19 pandemic.

Chart, bar chart Description automatically generated

In addition to not increasing rates proportionately to rising costs, personal auto insurers – expecting reduced losses as fewer drivers were on the road during lockdown – returned about $14 billion to policyholders through cash refunds and account credits. While loss ratios fell briefly and sharply in 2020, they have since climbed steadily to exceed pre-pandemic levels.

With drivers fully on the road again, this loss trend is expected to continue.

It’s important to remember that the decreases in CPI and replacement costs indicated above do not represent cost declines but, rather, reduced rates of growth. These and other forces – such as unfavorable accident fatality trends and population shifts into disaster-prone regions – will continue to apply upward pressure on premium rates.

Learn More:

Inflation Trends Shine Some Light for P&C, But Underwriting Profits Still Elude Most Lines

Monetary Policy Drives Economic Prospects; Geopolitics Limits Infation Improvement

Industry Financials, Insurers and the Economy

Inflation Trends Shine Some Light for P&C, But Underwriting Profits Still Elude Most Lines

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Moderating inflation and replacement costs provide glimmers of hope for property & casualty insurers, but underwriting profitability will remain a challenge for most lines of business for the foreseeable future, according to actuaries at Triple-I and Milliman, a risk-management, benefits, and technology firm. Their findings were presented at a Triple-I’s quarterly members-only webinar.

Dr. Michel Léonard, Triple-I chief economist and data scientist, forecast that costs of materials and labor involved in replacing or repairing insured property will decline from 8.1 percent at year-end 2022 to 4.5-6.5 percent at the end of 2023 on the way to 0.9 percent in 2024.  Supply-chain issues since the start of the COVID-19 pandemic and Russia’s invasion of Ukraine have kept replacement costs at historic highs.

When the cost to repair or replace damaged cars or homes is high, premium rates that determine how much policyholders pay for coverage should rise proportionately. As Triple-I has previously reported, though, this has not been the case for homeowners and auto insurance.  Premium rates for both of these lines of insurance have not kept up with rising costs. As a result of these and other factors, insurers have struggled to remain profitable.

Personal auto replacement costs, Dr. Léonard projected, will fall from nearly 10 percent to near 0 percent by 2024. Homeowners replacement costs are predicted to fall from 7.6 percent to below 2 percent by 2024.

Worsening profitability generally

The P&C industry’s 2022 combined ratio – a measure of underwriting profitability – is estimated at 105.8, a 6.3-point worsening from 2021. Combined ratio represents the difference between claims and expenses paid and premiums collected by insurers. A combined ratio below 100 represents an underwriting profit, and one above 100 represents a loss. 

For the overall P&C industry underwriting projections, Porfilio said, “We forecast premium growth of 8.4 percent in 2022 and 8.5 percent in 2023, primarily due to hard market conditions and exposure growth.”

The personal auto line of insurance has been a primary driver of the industry’s weak underwriting results. Dale Porfilio, Triple-I’s chief insurance officer, said the 2022 net combined ratio for personal auto insurance is forecast at 111.8, 10.4 points worse than 2021 and 19.3 points worse than 2020. He said supply-chain disruption, labor shortages, and costlier replacement parts all contribute to current and future loss pressures.

For the commercial multi-peril line, Jason B. Kurtz, a principal and consulting actuary at Milliman, said underwriting losses are expected to continue.

“Insurers will need to consider rate increases to offset economic and social inflation loss pressures,” Kurtz said.

Dave Moore, president of Moore Actuarial Consulting, said the 2022 combined ratio for commercial auto is forecast to have worsened in 2022. Moore also stated that general liability is deteriorating.

“We forecast a small underwriting profit for 2023 and 2024, but inflation and geopolitical risk put pressure on these forecasts,” he said, adding, “premium growth from the hard market is forecast to slow in 2022 to 2024.”  

For the commercial property line, Kurtz noted that the industry is seeing strong premium growth and that rate increases should help alleviate some of the pressure from catastrophe losses. Despite Hurricane Ian, he said he expects an underwriting profit in 2022, continuing into 2023 and 2024.

Donna Glenn, chief actuary at the National Council on Compensation Insurance, noted that the workers compensation line of business has seen declines in rates and loss costs for several years, partially driven by reductions in on-the-job accident frequency. This line, Glenn added, is expected to continue its profitability.

Learn More:

Drivers of Homeowners Rate Increases (Triple-I Issues Brief)

Personal Auto Insurance Rates (Triple-I Issues Brief)

Risk-Based Pricing of Insurance (Triple-I Issues Brief)

Industry Financials, Insurance Industry, Insurers and the Economy

Monetary Policy Drives Economic Prospects; Geopolitics Limits Inflation Improvement

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Inflation, interest rates, and recession will dominate the U.S. economic narrative in the first quarter of 2023, shifting in the second and third to a focus on timing of recovery and a more neutral monetary policy and, in the fourth, whether and when the Fed will signal the start of a new easing cycle, according to Triple-I Chief Economist and Data Scientist Dr. Michel Léonard.

“We forecast the U.S. economy to grow 3.2 percent in 2023, up from 2.6 percent in 2022,” Léonard says. The U.S. Consumer Price Index (CPI) ended 2023 at 6.5 percent year over year, down from a high of 9.1 percent year over year in June. “Triple-I expects inflation to continue to decline throughout 2023, though not equally from one to the next quarter. The pace and extent of any inflation slowdown are predicated on improvements in global geopolitical risk.”

P&C underlying growth, which has been below overall GDP since the start of the pandemic, is likely to grow at a faster pace than the rest of the U.S. economy throughout the year.

“We remain cautious and forecast insurance underlying growth for 2023 to be around 3 percent, up from 2 percent in 2022,” Léonard says. “We forecast P&C replacement costs to increase by between 4.5 percent and 6.5 percent year-over-year in 2023. P&C replacement costs increased on average 25 percent since the beginning of the COVID-19 pandemic in 2020.”

Even though Triple-I expects economic fundamentals to improve throughout 2023, line-specific underwriting considerations will continue to depress performance, Léonard says.

Triple-I members can access the Triple-I’s Economic Dashboard, available at the organization’s members-only website. The Dashboard’s ongoing updates allow insurance industry professionals to follow key economic reports (e.g., federal governmental updates on interest rate, unemployment, and housing trends) in real time, adjust forecasts, and recalibrate strategy. Each quarter, the Triple-I’s Outlook provides a road map about which key economic reports will most impact insurance industry performance.

To learn about the benefits of Triple-I membership, click here.

Insurance Industry, Insurers and the Economy, Regulation

Data Call Would Hinder Climate-Risk EffortsMore Than It Would Help

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A new data-reporting mandate the U.S. Treasury Department’s Federal Insurance Office (FIO) is considering imposing on certain property/casualty insurers raises a variety of concerns both for insurers and their policyholders.

In response to a request for comments on the proposed data call, Triple-I has told FIO that 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.”

President Biden’s Executive Order on Climate-Related Financial Risk, issued in May of 2021, emphasized the important role insurers can play in addressing these risks. The order authorizes FIO “to assess climate-related issues or gaps in the supervision and regulation of insurers” and to assess “the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts.”

Triple-I argues that these objectives can be met by using the information insurers already are required to report, as well as other publicly available data. It also suggests that “assessing the potential” for disruptions might not be as productive an endeavor as working to prevent such disruptions by collaborating with the insurance industry to reduce their likelihood.

“There is no dearth of information to help FIO and policymakers address the conditions contributing to climate risk and drive the behavioral changes needed in the near, intermediate, and long term,” Triple-I wrote, reminding FIO that catastrophe-modeling firms prepare their industry exposure data bases from public sources, not insurer data calls. Similarly, abundant public data exists regarding the needs of vulnerable populations and the risks to which they are subject. “What is needed is to build on existing efforts and draw on the voluminous data and analysis already extant to target problem areas that are well understood.”

Insurance availability and affordability are inextricably linked to reducing damage and losses. The best way to keep insurance available and affordable is to reduce the amounts insurers have to pay in claims.

“Less damage leads to reduced claims, helping to preserve policyholder surplus and enabling insurers to limit premium rate increases over time,” Triple-I wrote.

The importance of collaboration with the industry was a major theme of the National Association of Insurance Commissioners (NAIC) response to FIO’s request for comments.

“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.”

NAIC contrasted Treasury’s approach to prior data-gathering efforts, such as after Superstorm Sandy, when Treasury initially asked the states for a wide-ranging data set but ultimately agreed to a more focused call. In the current case, NAIC wrote, “The unilateral process Treasury employed thus far is a missed opportunity to work collaboratively with regulators on an issue we have both identified as a priority.”

Insurers are responsibly promoting a more sustainable and resilient environment and economy. The most pressing need now is to help communities adapt and make sure they are adequately insured against events that can’t be prevented.  The NAIC, as well as residual-market administrators in Florida, Louisiana, and California – states where the impacts of climate risk already are playing out – can provide relevant data and insights and help FIO translate them into actionable policy proposals.

Triple-I agrees with the NAIC that FIO should use publicly available data and work with state insurance regulators, who fully understand the risks, market and operational dynamics, and policy structures. Such an approach would spare FIO and insurers unnecessary work and the public unnecessary confusion.

Industry Awards & Events, Insurance Industry, Insurers and the Economy

JIF 2022 Wrap-Up:From Risk Transferto “Predict & Prevent”

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Among the themes running through Triple-I’s 2022 Joint Industry Forum (JIF), a dominant one was the growing importance of predicting and preventing losses, versus the property/casualty insurance industry’s traditional emphasis on transferring risk from policyholders to insurers and assessing and paying claims when they arise.

Increasing severity of weather- and climate-related events, compounded by rising numbers of people moving into the most vulnerable geographies; cyber criminals shifting their targets and evolving their strategies, often protected by nation-state hosts; and legal-system abuse, pushing up litigation costs in ways that ultimately hurt all policyholders are among the factors contributing to the need for this shift in focus.

Against this backdrop, insurers still must price coverage and appropriately reserve for these costly risks while ensuring that their business practices remain equitable and insurance is available and affordable for all who need it. This means financial and economic issues and diversity, equity, and inclusion considerations are always part of the conversation.

Predicting and preventing requires strategy, effective use of data and technology, and partnerships across diverse disciplines and stakeholder groups – along with a focus on educating consumers, policymakers, media, academia, businesses, communities, and others about the complexities of risk and risk management.

Triple-I plays this educational role every day, through its research and media outreach and support; continuous contact with its members, regulators, content partners, and data providers; and participation in and sponsorship of events like JIF.

JIF-Related Blog Posts:

Leaning Forward into a Changed World

JIF 2022 Climate Panel Focused on Wildfire Risk

Cyber Criminals Shift to Softer Targets and Reputation Threats

Combined Ratio Takes Center Stage

State Farm CEO Talks About the Power and Promise of Mutuality

Florida and Legal System Abuse Highlighted at JIF 2022

Progress And Challenges in Diversity, Equity, and Inclusion

Industry Awards & Events, Insurance Industry, Insurers and the Economy

JIF 2022: State Farm CEO Talks About the Power and Promise of Mutuality

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Photo credit: Don Pollard

State Farm CEO Michael Tipsord discussed a wide range of insurance industry issues and trends with Triple-I CEO Sean Kevelighan at Triple-I’s 2022 Joint Industry Forum. A unifying thread throughout their conversation was the continued relevance of State Farm’s mutual ownership structure and “captive” agent network in today’s risk and operational environment.

State Farm is unusual among large U.S. insurers in that it has retained its mutual structure and continues to rely primarily on a network of more than 19,000 captive agents to sell its products. Founded in 1922 by a farmer who believed farmers shouldn’t have to pay the same auto insurance rates as city dwellers, State Farm has grown to become the largest home and auto insurer in the United States, in terms of market share and premiums written.

The mutual structure – in which policyholders own the insurer – was popular at the time, but in recent decades many mutuals have converted to stockholder-owned companies to access capital needed to grow more quickly.

“This mutual structure permeates everything we do, every decision we make,” Tipsord said. “My focus is always on what’s in the best long-term interests of that State Farm customer group as a whole.”

Mutuality “gives us the flexibility to make choices that our publicly traded counterparts may not think they have,” he explained. “That mutual structure has to be combined with financial strength. Annual operating results are just a means to that end. We’re not subject to the same pressures” as insurers that have to answer to external shareholders.

Similarly, State Farm’s captive agent workforce – located in all but two U.S. states – “are in their communities, day in and day out. They’re in a position to understand their customers because they’re living with their customers.”

Tipsord noted that 95 percent of State Farm’s business comes through its agents, and “we are investing back” into that workforce.

When the pandemic hit and lockdowns commenced, Tipsord said, “Our agents and team members proactively reached out to their customers – not to sell anything, just to check in, to see if they were okay. To see if they needed any help. There are hundreds of stories of agents identifying elderly who needed help buying groceries. It always comes back to our mission of helping people.”

But the success of State Farm’s mutual model and captive agency force doesn’t absolve the company from the need to evolve with changing conditions. State Farm is investing heavily in “digitally enabling our agents,” Tipsord said, “and our agents and their teams readily adapt” to their customers’ expectations.

Part of that digitization effort was State Farm’s recent investment of $1.2 billion in ADT for a 15 percent stake in the home-security company.

“What was most important in that transaction was the relationship that it created among State Farm, ADT, and Google,” Tipsord said. “This is what I call the $300 million opportunity fund. Let’s dedicate resource so we can look for ways in which you bring these three organizations that have very different skill sets together to help our customers.”